ETFs and mutual funds report their Management Expense Ratio (MER) semi-annually in their Management Report of Fund Performance (MRFP). The reported MER is the sum of the fund’s total management fees plus total operating expenses plus sales tax for the last year, all divided by the fund’s average assets for the period. Management fees cover the cost of managing the funds, whereas operating expenses cover the cost of audit, accounting and legal fees, custodial, valuation, and recordkeeping. The MER has become one of the key metrics on which investors evaluate their investment product options, but it can be misleading in cases where funds have changed their fees because the MER is a trailing metric.

When a fund company releases an MRFP, it is basing the MER calculation on historical data for the past 12 months. If the fund reduces its management fee on the date that their MRFP reporting period ends, investors will not see the fee reduction fully reflected in the MER until the second next MRFP, one year later. If a fee change occurs prior to an MRFP release date, the MRFP will report a blend of the old and new fees charged to the fund. This creates a lag between the announcement of fee reductions and the time when the posted MER fully reflects the changes.

Fortunately, it is possible for investors to estimate an updated, forward-looking MER at the time that fund fee reductions are announced by looking at the MER over a period where management fees did not change, separating out the management fees to estimate operating expenses and sales tax, and then adding those estimates to the new management fee. For example, the Dimensional Global 60EQ-40FI Portfolio had a management fee of 0.30% and an MER of 0.40% in 2019 for an estimated operating cost of 0.10%. Based on the June 23rd, 2021 press release this fund’s management fee has been reduced to 0.24% as of July 1st, 2021. The estimated MER going forward, then, is 0.34%. As the MER includes sales tax, which is based on management fees, this estimate is likely to land on the high side due to management fees being reduced. Following the same estimation procedure, we can observe the estimated MERs for all Dimensional Global Portfolios based on the July 2021 management fee reductions.


Dimensional Fund Estimated Operating Costs + Sales Tax* Plus:

Management Fee as of July 1, 2021

Equals:

Forward-looking MER Estimate

Posted

MER

Global 40EQ-60FI Portfolio (F) 0.11% 0.24% 0.35% 0.39%
Global 50EQ-50FI Portfolio (F) 0.12% 0.24% 0.36% 0.39%
Global 60EQ-40FI Portfolio (F) 0.10% 0.24% 0.34% 0.38%
Global 70EQ-30FI Portfolio (F) 0.11% 0.24% 0.35% 0.39%
Global 80EQ-20FI Portfolio (F) 0.11% 0.25% 0.36% 0.41%
Global Equity Portfolio (F) 0.10% 0.25% 0.35% 0.40%

* This figure represents the difference between the fund management fee and its MER over a reporting period where the management fee remained unchanged.

Source: PWL Capital, Dimensional Fund Advisors Canada