Are mutual fund performance numbers reported net of fees?

The answer depends on how you define "operating expenses."

Let's look at a cinematic metaphor to clear up this apparent ambiguity. A mutual fund's cost is similar to the cost of going to your local movie theater. Let's assume that the price of a movie ticket is $9. Snacks like popcorn, soft drinks and candy can easily add another $4 to the total cost of this entertainment, which means that it really costs you $13 to go to the movies.

A similar situation applies when it comes to the total costs for a mutual fund investor. First you must consider the fund's total return, which is calculated by deducting its operating expenses (investment management, record keeping, custodial services, taxes, legal, accounting and auditing), expressed as the expense ratio, and a marketing/distribution fee (referred to as a 12b-1 fee, if there is one). Total return is a net figure: the net return minus these other figures.

Also in the mix are the fund's transactional costs – brokerage fees for buying and selling portfolio securities and spread differences between the bid and ask prices – which are not included in the expense ratio but certainly seem to qualify as operational expenses. These can be a significant expense item for a fund with a high portfolio turnover. Lastly, if your fund has a sales charge (load), that fee is also not included in its expense ratio.

In view of the above, a mutual fund's expense ratio is much like the price of a movie ticket in our example, while the transactional costs and sales charges are the equivalent to what a moviegoer spends at the refreshment counter. Obviously, neither the movie ticket price nor the expense ratio captures the respective total cost of a trip to the movies or a mutual fund investment.


When considering costs and expenses, a mutual fund's investment quality increases with the absence of sales charges and 12b-1 fees and the presence of low expense and portfolio turnover ratios. It is a matter of record that low-cost funds outperform high-cost funds.

The reader should note that because redemption fees for early withdrawals from a fund are controlled by the investor, not the fund company, they do not figure into this discussion.

To learn more, see Picking The Right Mutual Fund.

Advisor Insight

Dan Stewart, CFA®
Revere Asset Management, Dallas, TX

There are too many low-cost, no-load mutual funds that can replicate, or at least are very similar to, load funds. There is no reason to pay a load. If you plan on using mutual funds, choose wisely. Another alternative is an exchange-traded fund (ETF). Think of this as a hybrid mutual fund where you can get immediate diversification, a low cost structure, and also trade throughout the day.

This is in contrast to a mutual fund where you can only buy or sell at the end of the day at net asset value.

Just like a mutual fund though, you must do your research and see how and what the underlying investments are within the ETF. If you are passively investing, index funds will work just fine. If you are more active, ETFs are normally a better choice.

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