Could somebody please explain these fees attached to FSEMX?

  • Annual Report Expense Ratio (net)
  • Prospectus Net Expense Ratio
  • Prospectus Gross Expense Ratio

Finance.yahoo.com indicates that they are each .10%. Does that mean that if I add them all up, that the total expense ratio is .30%?

Also, if I was trying to decide between FSEMX and VXF, and VXF has a tracking error of .11%, which one is a better buy?

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    The annual expense ratio is required to be stated the same way by all investment companies. Have you tried going to the fund website and looking there? Also, do you have a tracking error for FSEMX to compare to the tracking error of VXF, or is the tracking error of FSEMX zero but it has larger expense ratio (say), and so you are asking is it better to pay more to FSEMX and get accurate tracking, or pay less to VXF and live with the tracking error? Is tracking error cumulative so that after two years VXF will be 0.22% off the mark? The annual expenses charged will add up year after year. – Dilip Sarwate Mar 22 '12 at 10:56

Annual-report expense ratios reflect the actual fees charged during a particular fiscal year.

Prospectus Expense Ratio (net) shows expenses the fund company anticipates will actually be borne by the fund's shareholders in the upcoming fiscal year less any expense waivers, offsets or reimbursements.

Prospectus Gross Expense Ratio is the percentage of fund assets used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not included in the expense ratio.

All of these ratios are gathered from a fund's prospectus.

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    Yes, but do they add up so that if each is 0.1% as the OP says they are, then the investor pays 0.3% of assets per annum? – Dilip Sarwate Mar 22 '12 at 18:14
  • I think the total expense ratio that the OP would end up paying is 0.1%. The three figures are all expense ratios, and it is possible that they could differ because some expenses can be waived when calculating the figures. But, since they are all the same in this case, there are no such exclusions, so the expense ratio is 0.10%. – Jason R Mar 23 '12 at 13:16

FSEMX has an annual expense ratio of 0.1% which is very low. What that means is that each month, the FSEMX will pay itself one-twelfth of 0.1% of the total value of all the shares owned by the shareholders in the mutual fund. If the fund has cash on hand from its trading activities or dividends collected from companies whose stock is owned by FSEMX or interest on bonds owned by FSEMX, the money comes out of that, but if there is no such pot (or the pot is not large enough), then the fund manager has the authority to sell some shares of the stocks held by FSEMX so that the employees can be paid, etc. If the total of cash generated by the trading and the dividend collection in a given year is (say) 3% of the share value of all the outstanding mutual fund, then only 2.9% will be paid out as dividend and capital gain distribution income to the share holders, the remaining 0.1% already having been paid to FSEMX management for operating expenses.

It is important to keep in mind that expenses are always paid even if there are no profits, or even if there are losses that year so that no dividends or capital gains distributions are made. You don't see the expenses explicitly on any statement that you receive. If FSEMX sells shares of stocks that it holds to pay the expenses, this reduces the share value (NAV) of the mutual fund shares that you hold. So, if your mutual fund account "lost" 20% in value that year because the market was falling, and you got no dividend or capital gains distributions either, remember that only 19.9% of that loss can be blamed on the President or Congress or Wall Street or public-sector unions or your neighbor's refusal to ditch his old PC in favor of a new Mac, and the rest (0.1%) has gone to FSEMX to pay for fees you agreed to when you bought FSEMX shares.

If you invest directly in FSEMX through Fidelity's web site, there is no sales charge, and you pay no expenses other than the 0.1% annual expense ratio. There is a fee for selling FSEMX shares after owning them only for a short time since the fund wants to discourage short-term investors. Whatever other fees finance.yahoo.com lists might be descriptive of the uses that FSEMX puts its expense ratio income to in its internal management, but are not of any importance to the prudent investor in FSEMX who will never encounter them or have to pay them.

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