Which of the following is NOT typically a cost associated with actively managed funds?

• A. Management fees
• B. Transaction costs
• C. Lower expense ratios
• D. Fund operating costs

Answer: (C)

When evaluating actively managed funds, the costs you typically encounter come from the fund manager’s expertise and the trading activity needed to try to outperform a benchmark. That means management fees are a direct charge for the manager’s services, transaction costs arise from buying and selling securities within the fund, and fund operating costs cover administrative and other ongoing expenses. The expense ratio is the annual percentage of assets to cover all these costs. Actively managed funds usually carry higher expense ratios due to active research and frequent trading. So describing “lower expense ratios” as a cost is not typical for actively managed funds—that would signify cheaper costs, more characteristic of passively managed funds. In short, the other items reflect actual ongoing costs, while lower expense ratios are not a typical cost associated with active management.