The TER represents the cost of trading the portfolio management team incurs for buying and selling equities (stocks and derivatives) within a given fund. Already published in regulatory documents like the Management Report of Fund Performance, the TER is also disclosed in the Fund Facts document which is required to be provided at point of sale.
The TER typically only applies to equity funds that hold stocks (or derivatives). Fixed income funds tend to have no TER at all, because trading costs for bonds are embedded in the price of a bond when it is bought or sold.
Most investors know the Management Expense Ratio (MER) as one of the costs of owning a mutual fund. Less familiar is a separate cost that sits alongside it: the Trading Expense Ratio (TER).
Trading
Expense Ratio
(TER)
Total trading
commisions
Total
assets
Example
If a fund had $200 million in assets under management and the portfolio managers incurred trading commissions of $200,000 for a given year, then the funds TER would be calculated as:
Trade frequency
The higher the trade frequency, the higher the TER. Trade frequencies can vary significantly from fund to fund and from year to year based on market conditions, the fund's investment strategy and asset class.Inflows or outflows in the fund
The larger a fund's inflows and outflows, the higher its TER is likely to be: incoming assets must be put to work in the market, and redemptions force the portfolio team to sell — both generate trading costs.Liquidity
An asset is liquid when it is readily available for purchase or sale, often defined by its trading volume and market accessibility. Assets with higher liquidity tend to have lesser trading commissions. On the other hand, illiquid assets tend to have higher trading commissions.Brokerage model
A well-resourced, efficient trading desk can help reduce the total amount of trading commissions a fund pays.Different asset classes have inherently different costs. For example, equity funds might have trading commissions of few cents, while funds that include commodities (including derivatives) may have more significant commissions associated with them. By contrast, a balanced fund would typically have a lower trading commission due to the inclusion of fixed income holdings within the portfolio.
Hypothetical Balanced Fund
Hypothetical Equity Fund
- Generally, TER applies to mutual funds with equity holdings and to funds holding derivatives.
- TER is accounted for in published fund performance: mutual fund performance is reported after both the MER and TER have been deducted from the fund prior to calculating and reporting the performance).
- TER may vary from year to year, as it is a reflection of the previous year’s trading activity within a fund.
- Generally, a fund with a higher TER reflects a higher level of trading activity in the fund’s portfolio.
For more information about the costs of investing in mutual funds, please speak with your advisor.