Skip to main content

The question investors never stop asking me: are returns for mutual funds and exchange-traded funds published on a before-fee or after-fee basis?

The latest query comes from a reader who uses online data to help choose funds for his registered retirement income fund. “Would you know if the performance data is gross or net of fees?” he asked.

Silly investors, right? How could they not know that the standard is for fund returns to be published on a net basis, which means after fees?

I take a different view. It’s on the investment industry that people so commonly don’t know whether they’re seeing net or gross returns. Fund companies could clear up the confusion in a second by putting a note under their performance numbers saying something along the lines of “these returns are shown after fees.”

Oh, wait. Mentioning fees is still painful in the fund industry. One mutual fund giant has produced a four-page explainer on fees. It’s not until Page 4 that you get to a note that investment returns reported on account statements, the company’s own website, and in the newspaper are shown after fees.

Fund Facts documents, designed to be a simple information summary for fund investors, are similarly ineffectual. I took a look at a Fund Facts document for one big Canadian equity fund and found no mention of fees in the section labelled “How has the fund performed?” Lower down, under “How much does it cost?” there’s a brief note that fund expenses “affect you because they reduce the fund’s returns.”

If you tell investors directly that they’re being shown after-fee returns, the natural question to ask is, “what are the fees?” If your business is selling funds, nothing good comes from questions like this. Investors start looking for the lowest cost products, and they may get angry at paying fees on funds that lose money.

Fund firms do a perfectly fine job of disclosing the management expense ratios of their products, which is industry jargon for the cost of ownership. The MER is almost all costs associated with owning a fund expressed as a percentage of assets. A fund that grosses 10 per cent and has an MER of 2 per cent will report returns of 8 per cent.

What’s missing from published data on fund returns and MERs is context that shows how the two are connected. Financial literacy can help here, but the best solution would be for regulators to mandate fund companies to tell investors upfront that returns are shown after fees.

One final note on fees: the total picture requires that you add a fund’s trading expense ratio to the MER. TERs are negligible or zero in many funds, but they can also be substantial. You can find TERs listed in Fund Facts documents, or fund management reports on fund performance.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.