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Inside the Market Here’s a quick test to see how fee-savvy you are as an ETF investor

Can you tell the difference between the management fee for an exchange-traded fund and the management expense ratio?

A Globe reader was stumped by these two terms and had the good sense to ask for help. “Never before purchased ETFs,” he wrote. “Turning 80 and noticed both management and MER fees. How are they applied and at what frequency?”

The essence of ETF goodness is low fees – vastly lower than mutual funds. But it’s easy to get confused about ETF fees because of the way some companies disclose them on their websites.

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The management fee is what you pay the manager or issuer of an ETF for the work it does in managing and administering the fund. Take the management fee and add in a few extra costs, notably GST or HST, and you end up with the management expense ratio, or MER.

The MER is the percentage of a fund’s assets paid out to cover the costs of running the fund on an annual basis. Investors don’t actually pay the MER – it’s deducted from gross returns by the ETF company. Returns reported to investors have already had the MER deducted.

There’s a third fee to be aware of with ETFs, and mutual funds for that matter. It’s the trading expense ratio, or TER, which is an accounting of the costs a fund incurs in buying and selling securities. Basic ETFs – the kind that track the most popular indexes and have the lowest fees – tend to have TERs of zero or close to it. TERs can be more of a factor in ETFs that use active stock-picking.

ETF companies are generally, though not always, good about disclosing management fees and MERs in their online fund profiles. Some play the game of showing the management fee only, which seems evasive. If you don’t see the MER in an online profile, find the link to download a fund’s regulatory documents and look for the most recent management report of fund performance.

ETF issuers are required to show recent and past MERs and TERs in their management reports. The ideal ETF is one with a low fee that has been getting lower over time.

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