The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to explain some common mutual fund and exchange-traded fund (ETF) fees and expenses.

Fees and Expenses Reduce Your Investment Returns

As with any business, running a mutual fund or ETF involves costs. Funds pass along these costs to investors in the form of fees and expenses. Fees and expenses reduce the value of your fund’s investment returns.

A fund with higher costs must perform better than a lower-cost fund to generate the same returns for you. You can use FINRA’s Fund Analyzer to compare the fees and expenses of different mutual funds and ETFs. To learn more about how fees and expenses impact the value of an investment, see How Fees and Expenses Affect Your Investment Portfolio – Investor Bulletin.

The Prospectus Fee Table

Mutual funds and ETFs are required to provide a standardized table of fees and expenses in their prospectuses. There are two main categories of fees and expenses required to be disclosed: annual operating expenses and shareholder fees.

You will find some or all of the following annual operating expenses in a fund’s prospectus fee table:

“Distribution [and/or Service] (12b-1) Fees” are often simply called 12b-1 fees based on the SEC rule that authorizes them. Typically, 12b-1 fees apply to mutual funds but not to ETFs.

Fund expenses can also be found in the fund’s shareholder reports, which the fund must deliver to investors twice a year. For more information about mutual fund and ETF shareholder reports, see Updated Investor Bulletin: How to Read a Mutual Fund or ETF Shareholder Report.

If a fund charges shareholder fees, you will find some or all of the following shareholder fees in the prospectus fee table:

While it is uncommon for ETFs to charge shareholder fees, some mutual funds do.

Fees and expenses vary from fund to fund. Your fund may charge some or all of the above fees and expenses. In addition, the prospectus fee table does not show other fees you may pay, such as brokerage commissions and other fees to financial intermediaries.

You can obtain a fund’s prospectus by: visiting the fund’s website; contacting the fund; contacting a broker that sells the fund’s shares; or accessing the SEC’s EDGAR database.

More About Operating Expenses

Operating expenses are regular and recurring fund-wide costs associated with, for example, the management and marketing of the fund. Instead of making you pay for these fees directly, both mutual funds and ETFs pay for operating expenses out of fund assets. Fund assets mean the money shareholders invest in the fund. When fund fees are paid out of fund assets, the value of the fund decreases and the value of all the investors’ shares decreases.

Mutual fund and ETF operating expenses included in the prospectus fee table are:

Management Fees

Management fees are paid to the fund’s investment adviser (or its affiliates) for managing the fund’s investment portfolio. Management fees may also include administrative fees payable to the investment adviser that are not included in the Other Expenses category (discussed below).

Distribution [and/or Service] (12b-1) Fees

This category, often simply called 12b-1 fees, includes distribution fees and sometimes shareholder service fees. Typically, these types of fees apply to mutual funds but not to ETFs.

• Distribution fees. Distribution fees cover the marketing and selling of fund shares, such as compensating brokers and others who sell fund shares. These fees also pay for advertising, printing, and mailing prospectuses to new investors, and for printing and mailing sales literature.
• Shareholder service fees. These fees compensate individuals who respond to investor inquiries and provide investors with information about their investments. Shareholder service fees can be paid outside of 12b-1 fees, and if they are, will be included in the Other Expenses category (discussed below).

Other Expenses

This category covers mutual fund or ETF expenses other than management fees and 12b-1 fees. Examples include: certain shareholder service expenses; custodial expenses; legal expenses; accounting expenses; transfer agent expenses; and other administrative expenses.

More About Shareholder Fees

While it is uncommon for ETFs to charge shareholder fees, some mutual funds do. Shareholder fees are mutual fund costs charged directly to you. They include fees for specific investor transactions (charged at the time of the transaction) and account maintenance (charged periodically).

Mutual fund shareholder fees included in the prospectus fee table are:

Sales Loads

A sales load or sales charge is a fee mutual funds typically use to compensate brokers who sell their shares. Sales loads can be front-end or back-end. You may be able to choose which type of sales load you pay.

• Front-end sales load. You might pay this fee when you purchase mutual fund shares. Typically, a mutual fund calculates the amount of a front-end sales load based on a percentage of the sales price. A front-end sales load is paid out of the amount of money you have to purchase mutual fund shares. Thus, it decreases the amount of money you have to invest.
   
  • Example of a front-end sales load. You write a $10,000 check to purchase shares of a mutual fund with a 5% front-end sales load. The total amount of the sales load is $500. The $500 sales load is deducted from your $10,000 check (and paid to the selling broker). There are no other front-end fees, so your remaining $9,500 is used to purchase shares.
     
  • Sales charge discounts. Sometimes, mutual funds offer discounts for larger investment amounts in which the sales load is reduced if more than a certain amount of money is invested. In the prospectus fee table, these discounts are referred to as sales charge discounts. The investment levels required to obtain the discounts are commonly called breakpoints.
• Back-end, or deferred, sales load. You might pay this fee when you redeem your mutual fund shares (that is, sell your shares back to the mutual fund). When you purchase shares that have a back-end sales load instead of a front-end sales load, no sales load is deducted at the time of your purchase. That means all of your money is used immediately to purchase shares (if no other fees or charges apply at the time of purchase). However, the fee will be paid out of the money you receive when you exit the fund. Typically, a mutual fund calculates the amount of a back-end sales load based on the lesser of the value of the initial investment or the value of the investment at redemption. Read the prospectus carefully to determine whether a fund calculates its fee in this manner.
   
  • Example of a back-end sales load. You invest $10,000 in a mutual fund with a 5% back-end sales load. There are no other purchase fees, so the entire $10,000 is used to purchase shares. After some time, you wish to redeem. If your investment has appreciated to $12,000 at redemption, the back-end sales load is based on your $10,000 initial investment and equals $500 (so you receive $11,500 when you sell your investment). If, on the other hand, your investment has declined in value to $8,000 at redemption, the back-end sales load is based on the $8,000 value and equals $400 (so you receive $7,600 when you sell your investment).
     
  • Contingent deferred sales load (CDSL). Also referred to as a contingent deferred sales charge (CDSC), this is the most common type of back-end sales load. The amount of this type of fee depends on how long you hold your shares and may gradually decline to zero if you hold your shares long enough. The rate at which this fee declines is disclosed in the mutual fund’s prospectus. A mutual fund with a CDSL or CDSC typically also has an annual 12b-1 fee.

Redemption Fee

A mutual fund may charge a redemption fee, which is used to defray fund costs associated with a shareholder’s redemption. If charged, you pay this fee when you redeem your shares (that is, sell your shares back to the mutual fund). Typically, the redemption fee is a percentage of the sales amount and will be paid out of the money you receive when you sell shares of the fund. The redemption fee is paid directly to the mutual fund, not to a broker.

Exchange Fee

Some mutual funds may charge this fee if you exchange your shares in one mutual fund for shares of another mutual fund within the same mutual fund family. A mutual fund family is a group of mutual funds that share administrative and distribution systems. They often also share the same brand name or fund family name.

Account Fee

This fee helps pay for the maintenance of your accounts. For example, some mutual funds charge this fee on accounts valued at less than a certain dollar amount, like $10,000.

Mutual Fund Share Classes

Many mutual funds offer multiple share classes that all invest in the same underlying securities but that each have different sales loads and operating expenses. This means that owning a different class of the same mutual fund may result in different investment returns.  

If a mutual fund offers multiple classes, it may describe them all in a single prospectus or in separate prospectuses. If the mutual fund describes all of its share classes in a single prospectus, the fee table will show the fees and expenses for every share class offered. Note that shareholder reports are prepared separately for each share class of a mutual fund. Always confirm you are looking at the correct information for your mutual fund share class.

For more information about mutual fund share classes and what to consider when selecting one, see Updated Investor Bulletin: Mutual Fund Classes.

ETF Transaction Costs Not Shown in the Fee Table

When you buy and own shares of an ETF, you may pay transaction fees and costs that are not shown in the ETF’s prospectus fee table. These include:

• Brokerage commissions. ETF investors may pay their brokers sales commissions with each purchase or sale of ETF shares. A brokerage commission is often structured as a flat fee charged every time an investor trades. With a flat fee, the smaller the amount traded, the larger the percentage cost per trade is. Investors should consider the fee structure of a commission when purchasing or selling ETF shares. Check with your broker regarding these fees. Brokers should provide written notice to customers of these charges when accounts are opened and when any of the charges change.
• Changes in discounts and premiums to NAV. For a variety of reasons, an ETF’s market price may reflect a premium or a discount to the ETF’s underlying value or net asset value (NAV) per share. This is a potential cost but also a potential gain. An ETF share is trading at a premium when its market price is higher than the NAV per share. An ETF share is trading at a discount when its market price is lower than the NAV per share. An investor may, therefore, pay more or less than the NAV per share when buying shares or receive more or less than NAV per share when selling shares.

Other Terms to Know

Other terms you may see when you invest in a mutual fund or ETF include:

• Fee Waiver and/or Expense Reimbursement. This item will appear in the prospectus fee table when the fund has agreed to reduce fees or expenses, temporarily or indefinitely. A fund may do this to attract or maintain investors. These fees or expenses may be recouped in the future.
• Acquired Fund Fees and Expenses. This item is required in the prospectus fee table if your fund invests in the shares of another fund. It represents the fees and expenses of the underlying fund, which are paid by your fund.

• Purchase fee. This is another type of fee some mutual funds charge when you purchase shares. Unlike a front-end sales load, which is paid to a selling broker, a purchase fee is paid to the mutual fund.

Before Investing in a Mutual Fund or ETF

• Review fund documents. Before investing in a mutual fund or ETF, you should read the fund’s available information, including its prospectus and most recent shareholder report. Carefully review the fund’s prospectus fee table and compare the fund’s fees and expenses to those of other investment options.
• Ask questions. If you are purchasing a mutual fund or ETF through an investment professional, ask that person to explain all the charges that may apply to your investment in the fund. Also ask questions about how your investment professional will be compensated. For more specific questions to ask about fees and expenses, see How Fees and Expenses Affect Your Investment Portfolio – Investor Bulletin.

Additional Information

How Fees and Expenses Affect Your Investment Portfolio – Investor Bulletin

Using EDGAR to Research Investments | Investor.gov

Information Available to Investment Company Shareholders

Investor Bulletin: How to Read a Mutual Fund Prospectus (Part 2 of 3: Fee Table and Performance)

Updated Investor Bulletin: How to Read a Mutual Fund or ETF Shareholder Report

Updated Investor Bulletin: Mutual Fund Classes

Updated Investor Bulletin: Exchange-Traded Funds (ETFs)

Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs) – Investor Bulletin