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Suppose a mutual fund invests only in other mutual funds, instead of investing in stocks or bonds directly. Does the reported expense ratio of that fund include the expense ratios of the funds it holds, or is it an expense over and above those of the funds it holds?

For example, consider the Vanguard Target Retirement 2045 Fund (VTIVX), which invests solely in three other funds:

  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) - 63.4%
  • Vanguard Total International Stock Index Fund Investor Shares (VGTSX) - 26.4%
  • Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX) - 10.2%

VTIVX has an expense ratio of .19%. But the three funds it invests in also have their own expense ratios: .18%, .22%, and .12%, respectively. If I invested in those three funds directly, in the same proportion as VTIVX does, my investment would have an effective expense ratio of .18% x 63.4% + .22% x 26.4% + .12% x 10.2% = .18%.

So, does that mean an investment in VTIVX effectively loses .19% + .18% = .37% per year in expenses overall, or does VTIVX's expense ratio of .19% include the .18% expense ratio of its holdings, plus .01% to cover its own costs?

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1 Answer 1

up vote 8 down vote accepted

From The Prospectus for VTIVX;

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as compared to the Total Stock Market Fund;

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You can see how the Target date fund is a 'pass through' type of expense. It's not an adder. That's how I read this.

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My understanding is that normally Fund of Funds have their own expense fees that is over and above the expenses charged by the respective fund. I am not sure about VTIVX. –  Dheer Jun 28 '12 at 3:15
Agreed, but here, those zeros say otherwise. –  JoeTaxpayer Jun 28 '12 at 3:20
+1 Funds-of-funds usually have a small amount of added-on expense fee; if it is more than 0.1% you are paying far too much. One advantage of using funds-of-funds instead of investing directly in the same proportions in the individual funds is that re-balancing to maintain the same proportions will not result in (possibly taxable) realized gains and losses if you are in a fund-of-funds. –  Dilip Sarwate Jun 28 '12 at 11:44
Investopedia says "Acquired Fund Fees and Expenses" accounts for the expense ratios of the fund's holdings, and is required to be included in the reported expense ratio of the fund-of-funds. investopedia.com/terms/a/acquiredfundfeesandexpenses.asp –  Paul Kuliniewicz Jun 28 '12 at 21:15
@PaulKuliniewicz - I think you are confirming the accuracy of my response. It's a passthrough, and first three lines showing "none" mean no additional fees. –  JoeTaxpayer Jun 28 '12 at 21:44

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