• Handlebar Stache
• Posts: 2435
• Location: Kansas
« on: November 10, 2015, 09:59:14 PM »
Hi all, I have a question on expense ratios.  I know what they are, but nobody has ever told me how they exactly work.  I called up Vanguard and even they didn't give me an answer that was totally to my understanding.  Let's use VTSAX for an example with its 0.05% ER.  How does Vanguard factor the ER into the fund?  Does Vanguard:

1)  Multiply the ER against the total amount invested in the fund and subtract that amount from the total amount invested?
2)  Multiply the ER against the total market value of the fund and substract that amount?
3)  Multiply the ER against the total gains of the fund for the calendar year and then take their cut?
4)  Multiply the ER against the amount invested in that calendar year and then take their cut?

Heckler

• Handlebar Stache
• Posts: 1347
« Reply #1 on: November 10, 2015, 10:24:57 PM »

This might clear it up if you know accounting speak.

Heckler

• Handlebar Stache
• Posts: 1347
« Reply #2 on: November 10, 2015, 10:26:37 PM »
They have a cost of running a business vs profits resulting from the business.  I think thats the ratio of thier expenses.

seattlecyclone

• Walrus Stache
• Posts: 5132
• Age: 35
• Location: Seattle, WA
« Reply #3 on: November 11, 2015, 08:45:40 AM »
To the best of my knowledge, it's pretty simple. They have expenses to run the fund. They remove this money from the fund as needed to pay their bills. At the end of the year they add up the amount they removed, divide it by the assets in the fund, and that's the expense ratio.

• Handlebar Stache
• Posts: 2435
• Location: Kansas
« Reply #4 on: November 11, 2015, 09:50:07 AM »
I found the answer I am looking for at the link below.  I quoted the part that provided the exact answer I sought:

"Expense Ratio Percentage

The expense ratio of a fund is expressed as a percentage of the fund's total assets. For example, one fund may have expenses of 1.5 percent while another may report 0.95 percent. Total expense ratios can range from less than one-quarter of a percent -- 0.25 percent -- to 2 percent or higher. The listed expense percentage is the portion of a fund's total assets the management company will charge to run the fund for a full year.

Paying Expenses

An investor is not charged directly for the expenses of a fund. The fund management company pulls the fund expenses from the assets of the fund. The result is a lower share price or dividend rate than if the fund did not have an expense ratio. Consider a hypothetical bond mutual fund. The fund portfolio earns total interest at a rate of 7 percent per year. The fund has a total expense ratio of 1 percent. The dividend yield to investors will net out to 6 percent as the fund management takes the funds expenses from the income earned by the fund's portfolio.

http://wiki.fool.com/How_Am_I_Charged_for_Total_Expense_Ratio%3F