Question

Mutual fund expense ratios include different fees such as management fees, 12b-1 fees, operating fees, etc. Comparing an index fund versus a sector fund, explain why a sector fund has a higher expense ratio.

Answer 1

An index fund is a passive fund which mimics the return on the underlying index. It simply tries to achieve a return identical to it's benchmark index. Hence, there is no research or active management required. Thus, the cost of portfolio managers / research analysts is low since their job is cut out. Most of the costs are incurred on commissions, distribution fees. etc., and the management fee is nearly zero for most index funds.

On the other hands, sector funds have an objective to beat the return of their benchmark index. Thus, many analysts/portfolio managers have to employed to achieve this objective. Therefore, the management fee is high compared to index funds, resulting in a higher expense ratio