By now, most people have heard of the MER (Management Expense Ratio) in mutual funds and ETFs. Another term that gets bandied about is the TER, which is less well known and has a few different meanings depending on which country you are in.
Meaning 1: TER = Trading Expense Ratio (Canada)
When you look at a Canadian fund’s MRFP (Management’s Report on Fund Performance), it is now required to show the Trading expense ratio of the fund which represents the amount of trading commissions incurred to manage the portfolio as a percentage of the total assets of the fund. For example, if you had a $100 million fund and the trading commissions for the year incurred by the fund manager to manage the portfolio was $1 million then the Trading expense ratio is 1%. This is NOT reflected in the MER. Funds with higher portfolio turnover rates (meaning the manager buys and sells more often) or funds that invest in less liquid securities (like micro-caps for example) will have higher Trading expense ratios. Funds with low turnover and that invest in larger-cap names will have lower Trading expense ratios. Here is a screen-shot of an MRFP report which shows where you can find the Canadian TER:
In this case, you can see that the TER is 0.73%. If you add this to the fund’s MER of 2.46% you will get a truer sense of the total costs to run this fun.
Meaning 2: TER = Total Expense Ratio (US and UK)
Now to really throw a wrench into things: TER as the Total Expense Ratio means different things based on what country you are in. In the UK, the Total Expense Ratio is the same thing as the MER in North America. But in the US (predominantly) the Total Expense Ratio is the MER + Trading Costs.
Here’s a little breakdown…
In the UK the TER stands for Total Expense Ratio and is equal to the US or Canadian definition of MER
In Canada the TER stands for Trading Expense Ratio which is the cost of commissions paid in the fund as a percentage of the fund’s total assets.
In the US, TER stands for Total Expense Ratio and is equal to the US or Canadian MER + Trading Expense Ratio.
Yeah, I know.
To me, the US one obviously makes the most sense. You define a thing called “Total Expense Ratio” and then gradually legislate away deviousness by requiring more things to be reported in there. I like that model. At any given time, the TER would be the truest picture of expenses according to then-current laws.
The Canadian one is a stop-gap: what happens when another major unreported expense is encountered? (Defaults from securities lending perhaps?)