Nobody likes paying extra fees, especially when investing. You’re doing it to make money, not pay money, right? So when choosing an exchange-traded fund (ETF) , costs matter. One of the key costs to watch is the management expense ratio (MER).

The MER tells you how much a fund charges to cover management and operating costs. While a lower MER usually means lower costs, it doesn’t mean the cheapest ETF is always the best choice. Some funds charge more for specialised strategies, active management, or extra features. The key is knowing when a higher MER is worth it – and when it’s not.

In this article, we’ll break down how the MER works, why it matters, and what else to consider when comparing ETFs.

What is a management expense ratio?

The management expense ratio is the ongoing cost of running an exchange-traded fund. It’s an annual fee expressed as a percentage of the fund’s total assets and is deducted automatically, so investors don’t pay it directly.

A lower MER generally means fewer costs, but some ETFs justify a higher MER with unique exposure, targeted strategies, or potential outperformance.

What costs are included in the MER?

The MER accounts for several expenses that keep the fund running, including:

• Fund management fees – Payments to the investment team overseeing the ETF.
• Administrative expenses – Costs for legal, accounting, and regulatory compliance.
• Operating costs – Fees for custodial services, reporting, and marketing.

These costs are factored into the fund’s performance, reducing overall returns.

What costs aren’t included in the MER?

While the MER covers most fund expenses, some costs fall outside of it, such as:

• Brokerage commissions – Fees paid when buying or selling ETF units.
• Bid-ask spreads – The difference between the buying and selling price of ETF units.
• Tax implications – Capital gains tax on profits and taxes on distributions.

Understanding what’s included – and what’s not – can help you make more complete comparisons when choosing ETFs .

How is the MER calculated?

The management expense ratio is calculated using a simple formula:

Formula breakdown

MER (%) = (Total fund expenses ÷ Average net assets) × 100

This formula divides the ETF’s total annual costs by its average assets under management. The result is expressed as a percentage, showing how much of the fund’s assets go towards expenses each year.

How it’s expressed as a percentage

An MER of 0.10% means an investor pays $10 per year for every $10,000 invested. A 0.50% MER means the same investment would cost $50 per year. The fee is deducted from the ETF’s assets, reducing overall returns.

MERs vary between funds. A thematic ETF or actively managed ETF with more fund manager involvement would charge a higher MER than a broad market ETF that passively tracks an index.

Why does the MER matter?

The MER matters because it directly affects investment returns. While the percentage may seem small, costs compound over time.

The long-term impact of fees on investment returns

A lower MER generally means fewer fees eating into your returns. Consider two ETFs tracking the same index:

• ETF A has an MER of 0.10% .
• ETF B has an MER of 0.80% .

If both grow at 7% per year (before MER deductions), over 10 years a $10,000 investment would cost:

• $195 in fees with ETF A.
• $1,505 in fees with ETF B.

That’s without any additional contributions to the investment and excluding other costs like broker fees. As you can see, the impact of MERs is amplified by the compounding growth of the investment. Over 20+ years, even a small difference in MER can lead to thousands in extra costs.

Note: The above example is for illustrative purposes only and doesn’t guarantee future returns. Investment outcomes depend on various factors, including market conditions.

You can use financial calculators to help you model the long-term impact of different MERs on your investment growth. Remember that MERs are typically deducted daily from the fund's average net assets, not as a single annual charge. This can make precise long-term calculations harder to determine. And investment returns fluctuate, so the exact amount of the MER deducted each year will vary.

A higher MER generally means less money stays invested, reducing long-term growth. This is why many investors prefer ETFs with lower MERs, particularly for long-term investing.

Is a higher MER ever justified?

A low MER isn’t always the best option. Some ETFs charge higher fees for specific benefits.

Broad market ETFs tend to have lower MERs because they passively track well-established indexes, like the S&P 500 or ASX 200 . These indexes include large, widely traded companies, making it easier for ETFs to replicate their performance with minimal adjustments. Since passive ETFs don’t require frequent buying or selling of assets, they tend to have lower trading costs and fewer management expenses.

Thematic ETFs focus on specific trends or industries, such as technology, clean energy, or ESG (environmental, social, and governance) investing . These funds may require more frequent rebalancing as trends evolve or new companies emerge in the sector. This increases trading costs and management complexity.

Actively managed ETFs go a step further by employing professional fund managers who actively select investments. These managers aim to outperform the market, often adjusting the fund’s holdings based on research, analysis, and market conditions. This hands-on approach leads to higher expenses, which are reflected in a higher MER.

While higher MERs can be justified, the key is weighing costs against the fund’s potential value.

Comparing MERs across ETFs

Not all ETFs have the same management expense ratio. Some funds charge as little as 0.03%, while others have MERs above 1%. Comparing MERs helps investors understand the cost differences between ETFs and whether a higher fee is reasonable.

How to find an ETF’s MER

Knowing where to find fee information can make comparing ETFs easier. You can check an ETF’s MER in several places:

• ASX website – Lists key fund details, including costs.
• Fund provider fact sheets – Summarise the ETF’s strategy, holdings, and fees.
• Product disclosure statements (PDS) – Provide official documents with a full breakdown of costs.

What’s considered a low, average, or high MER?

As mentioned, MERs vary based on the ETF’s strategy. Here’s a general guide:

ETF type	Typical MER range
Broad market index ETFs (e.g., S&P 500, ASX 200)	0.03% – 0.20%
Sector-specific ETFs	0.25% – 0.60%
Thematic ETFs (e.g., ESG, tech)	0.50% – 1.00%
Actively managed ETFs	0.70% – 1.50%

An ETF with a higher MER should offer benefits that align with your goals. Other factors like performance and tracking accuracy also matter. We’ll cover that next.

Other considerations beyond MER

A low MER can be appealing, but it doesn’t always tell the full story. Other costs and fund characteristics can impact overall returns just as much, if not more.

Total cost of ownership

The MER is just one part of an ETF’s total cost. The total cost of ownership (TCO) includes other expenses that can affect net returns.

For example, bid-ask spreads represent the difference between the buying and selling price of ETF units. In ETFs with lower liquidity, these spreads can be wider, increasing the cost of trading. Portfolio turnover costs are another factor – funds that frequently rebalance may incur higher trading fees, which can impact performance. Tax efficiency also plays a role. Some ETFs distribute more capital gains than others, which can lead to higher tax liabilities for investors.

While an ETF with a low MER might seem cost-effective, if it has high bid-ask spreads, frequent portfolio turnover, or poor tax efficiency, the actual cost of investing could be higher than expected.

Other key factors to compare alongside MER

Focusing only on fees could mean missing out on ETFs that offer better tracking, liquidity, or alignment with investment goals. Also consider:

• Tracking error – Measures how closely an ETF follows its index. A low MER isn’t useful if the fund fails to track well. Some ETFs with higher fees track their index more accurately, reducing performance deviations.
• Liquidity – ETFs with low liquidity can have wider bid-ask spreads, making trades more expensive.
• Fund size and reputation – Larger ETFs often benefit from economies of scale, leading to lower costs and better efficiency.
• Additional fund features – Some ETFs include hedging or risk management, which can add value despite a higher MER.

While cost is a key factor, making a holistic assessment can help you assess whether an ETF offers value beyond its fees.

Costs matter, but so does value

The MER is a key cost factor when comparing ETFs, but it’s not the only one. Though a low MER can help reduce fees, it’s wise to consider factors like tracking accuracy, liquidity, and total cost of ownership.

Some ETFs charge more for active management, niche strategies, or built-in features like currency hedging. Others keep it simple and cheap by tracking broad market indexes. The right fit depends on what you're looking for and how you invest.

In the end, it comes down to balancing cost with value. Understanding MER is a great start – but looking at the bigger picture will help you make smarter decisions for the long run.