Net Expense Ratio Vs. Gross Expense Ratio

Net expenses and gross expenses both refer to slightly different expense ratios of an investment fund. Specifically, these ratios demonstrate how much a fund must pay out in expenses and thus represent important information for any investor. Understanding the difference between the two ratios and knowing what to look for when researching a particular fund's expense ratios can help the investor better evaluate the investment fund.


The Expense Ratio
The net and gross expense ratios of a fund indicate the percentage of expenses that the fund must pay out. These expenses include both management fees and operating expenses. Additionally, these expenses include registration fees and administration, accounting and distribution costs. The expense ratio does not take into account brokerage fees or any sales charges imposed on the investor. One major difference between net and gross expense ratios is that the gross expense ratio does not take into account possible waivers of any of these fees.

The Basics of Net Vs. Gross
The traditional definition of these terms indicates that a gross calculation occurs before you subtract any kind of fee, tax or other deduction from the total. Net refers to the amount after subtracting these deductions. Thus, when talking specifically about investment funds, the terms gross expenses and net expenses would apply to the fund's yearly total amount of operating expenses and the amount of expenses after reimbursements, respectively.

Why Expense Ratios Matter
When considering investing in a particular fund, looking into the fund's expense ratios is an important part of the evaluation. This applies not only for the present or most recent fiscal year but also for the fund's expense ratio history over time. Tracking the changes, whether positive or negative, of how much a fund must pay out for fees and other expenses can help demonstrate the future direction of expenses for the fund.

Other Things To Look For
Investors prefer funds with low expenses compared to funds that have higher operating and maintenance costs. According to the book "Principles of Finance," in general, the funds with lower costs are less risky investments than those with higher costs, though this is not always the case. One of the reasons for this is that in an effort to maintain profits for higher-cost funds, a fund manager may take larger trading risks, which can also result in larger losses.