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When choosing investments, it’s important to understand the fees—and MERs aren’t the only ones. Find out what TER means and how it’s calculated.
As a Canadian investor, understanding the trading expense ratio—and how to calculate it—can give you insights into the fees in managing certain assets.
Trading expense ratio (TER) measures the annual transaction costs of a mutual fund or exchange-traded fund (ETF). TER is usually expressed as a percentage of the total fund value. Transaction costs include commissions paid when a fund manager buys or sells securities, as well as transaction fees paid to the fund’s custodian. TER is not included in a fund’s management expense ratio (MER) but reflects additional expenses borne by the fund. Here’s the basic formula:
TER (expressed as a %) = (total fund costs ÷ total fund assets) x 100
TERs can vary by the type of assets held in a fund, the manager’s style and other factors. For instance, trading costs are typically higher in emerging markets (such as India or Mexico) than in North American markets. Managers who hold a long list of stocks and trade frequently generally incur higher trading costs than those who own a concentrated portfolio and follow a buy-and-hold strategy. You can find it on the Fund Facts sheet.
Because trading commissions are embedded in bond prices, TERs for funds that invest exclusively in fixed income investments (bond funds, for example) are usually zero. As a result, when comparing TERs for balanced funds, be aware of the asset allocation of each fund. Funds with higher allocations to fixed income will naturally have lower TERs.
Example: “Annual TERs for Canadian mutual funds and ETFs are reported in both the Management Report of Fund Performance and Fund Facts disclosure documents.”
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