Understanding ETF Fees: MER vs ICR Explained
When investing in Exchange Traded Funds (ETFs), understanding fees is crucial. Two key terms you'll encounter are MER (Management Expense Ratio) and ICR (Indirect Cost Ratio). While they may seem similar, they represent different aspects of ETF costs and can significantly impact your investment returns.
What is MER (Management Expense Ratio)?
The Management Expense Ratio (MER) is the total annual cost of owning an ETF, expressed as a percentage of the fund's assets. It includes all ongoing fees and expenses, such as:
- Management fees paid to the ETF provider
- Administrative costs
- Marketing and distribution expenses
- Legal and audit fees
- Other operational expenses
The MER is deducted from the ETF's assets before returns are calculated, meaning it directly reduces the net asset value (NAV) of the fund.
What is ICR (Indirect Cost Ratio)?
The Indirect Cost Ratio (ICR) represents only the indirect costs of the ETF, excluding the management fee. These indirect costs include:
- Administrative expenses
- Custodian fees
- Audit and legal fees
- Other operational costs
The ICR is typically lower than the MER because it doesn't include the management fee component.
Key Differences
Scope of Costs
MER includes everything: management fees plus all indirect costs. It's the total cost of ownership.
ICR includes only indirect costs, excluding the management fee. It represents the operational overhead.
Transparency
For Australian ETFs, you'll often see both figures disclosed:
- Management Fee: The fee paid to the ETF provider (e.g., 0.10% for VAS)
- ICR: Additional indirect costs (often very low, sometimes 0%)
- Total MER: Management Fee + ICR
Impact on Returns
Both fees reduce your returns, but MER gives you the complete picture. For example:
- An ETF with a 0.10% management fee and 0.00% ICR has a total MER of 0.10%
- An ETF with a 0.05% management fee and 0.03% ICR has a total MER of 0.08%
Real-World Examples
Vanguard Australian Shares Index ETF (VAS)
- Management Fee: 0.10%
- ICR: 0.10% (includes management fee in this case)
- Total Cost: 0.10% per annum
iShares Core S&P/ASX 200 ETF (IOZ)
- Management Fee: 0.05%
- ICR: 0.05% (total cost)
- Total Cost: 0.05% per annum
BetaShares Australia 200 ETF (A200)
- Management Fee: 0.04%
- ICR: 0.04% (total cost)
- Total Cost: 0.04% per annum
Why Fees Matter
Fees compound over time, significantly impacting long-term returns. Consider a $10,000 investment over 20 years:
- 0.10% fee: After 20 years at 8% return = ~$45,000
- 0.05% fee: After 20 years at 8% return = ~$46,000
- 0.04% fee: After 20 years at 8% return = ~$46,200
The difference may seem small, but on larger investments or longer timeframes, it becomes substantial.
How to Find Fee Information
ETF providers must disclose fees in:
- Product Disclosure Statement (PDS): Look for the "Fees and Costs" section
- Factsheet: Usually includes a fees summary
- ETF provider website: Often displayed prominently
- Best ETFs Australia: We display fees on every ETF page
What to Look For
When comparing ETFs:
- Compare Total MER: This is the most important figure
- Consider the Value: Lower fees aren't always better if the ETF doesn't meet your investment goals
- Check for Fee Changes: Some providers reduce fees over time
- Understand What's Included: Ensure you're comparing like-for-like
Conclusion
Understanding MER and ICR helps you make informed investment decisions. While fees are important, they're just one factor to consider alongside:
- Investment strategy and objectives
- Index tracking accuracy
- Liquidity and trading costs
- Tax efficiency
- Provider reputation
For most investors, focusing on the total MER provides the clearest picture of an ETF's cost. Lower fees generally mean more of your investment returns stay in your pocket, but always consider the full picture when making investment decisions.
Remember, even small fee differences can compound significantly over time, making fee comparison an essential part of ETF selection.