TER: The Trading Expense Ratio or Total Expense Ratio?

Posted by Preet on Mar 23, 2010 | 1 comment

By now, most people have heard of the MER (Management Expense Ratio) in mutual funds and ETFs. Another term that gets bandied about is the TER, which is less well known and has a few different meanings depending on which country you are in.

Meaning 1: TER = Trading Expense Ratio (Canada)

When you look at a Canadian fund’s MRFP (Management’s Report on Fund Performance), it is now required to show the Trading expense ratio of the fund which represents the amount of trading commissions incurred to manage the portfolio as a percentage of the total assets of the fund. For example, if you had a $100 million fund and the trading commissions for the year incurred by the fund manager to manage the portfolio was $1 million then the Trading expense ratio is 1%. This is NOT reflected in the MER. Funds with higher portfolio turnover rates (meaning the manager buys and sells more often) or funds that invest in less liquid securities (like micro-caps for example) will have higher Trading expense ratios. Funds with low turnover and that invest in larger-cap names will have lower Trading expense ratios. Here is a screen-shot of an MRFP report which shows where you can find the Canadian TER:

In this case, you can see that the TER is 0.73%. If you add this to the fund’s MER of 2.46% you will get a truer sense of the total costs to run this fun.

Meaning 2: TER = Total Expense Ratio (US and UK)

Now to really throw a wrench into things: TER as the Total Expense Ratio means different things based on what country you are in. In the UK, the Total Expense Ratio is the same thing as the MER in North America. But in the US (predominantly) the Total Expense Ratio is the MER + Trading Costs.

Here’s a little breakdown…

In the UK the TER stands for Total Expense Ratio and is equal to the US or Canadian definition of MER

In Canada the TER stands for Trading Expense Ratio which is the cost of commissions paid in the fund as a percentage of the fund’s total assets.

In the US, TER stands for Total Expense Ratio and is equal to the US or Canadian MER + Trading Expense Ratio.

Yeah, I know.

How do banks make money on Savings Accounts?

Posted by Preet on Jul 25, 2007 | 0 comments

You’ve all seen the adds for the “no fee” savings accounts being offered at various institutions. Have you ever wondered how the banks make money on those accounts? To really simplify it, it is basically as follows: When you deposit your money into a savings account, you agree to be paid interest from the bank, which for the purpose of this post we will say is 4%. Now the bank will take that money and turn around and give it to someone in the form of a mortgage so they can buy a house and charge them 6%. So the bank COLLECTS 6% from mortgage holders and PAYS 4% to savings account holders. The difference between the 6% and the 4% is known as “the spread”.

Of course it is not so cut and dry in that a bank can’t take $1 million in savings accounts deposits and then just go out and give $1 million in mortgages.  What happens when people need to access their savings? The banks have certain ratios they abide to with respect to how much they lend out as a proportion of the deposits they receive.

And of course the more traditional “bricks and mortar” banks also tack on monthly fees to your accounts – which REALLY ADD UP.  Remember: If you are continually amazed by how much profits banks are churning out, you can complain or you can buy their stock! :)