The comparison everyone makes wrong
Two funds. One charges 0.22%, the other 2.55%. The second is more expensive — obviously. But how much more expensive, in terms you'd actually feel?
The usual answer is "about 2.3 percentage points a year," which is true and almost useless. Percentage points of what? Of your capital, technically. But if you bought an income fund, you didn't buy it for the capital appreciation. You bought it for the cheque. So the question that matters isn't what the fee costs against your balance — it's what the fee costs against the income the fee is supposed to be producing.
That calculation is one division:
MER ÷ yield = the share of your income that goes to the manager.
Run it on those two funds. The cheap one, at 0.22% on a 4.5% distribution: 0.22 ÷ 4.5 ≈ 4.9%. Roughly a nickel of every income dollar goes to the fund company. The expensive one, at 2.55% on a 9.3% distribution: 2.55 ÷ 9.3 ≈ 27.4%. More than a quarter of every income dollar, gone before it reaches you.
Same two funds. Same two fees. But "0.22% versus 2.55%" and "5% of your income versus 27% of your income" land very differently — and the second one is the honest version, because it's denominated in the thing you actually came for.
Why the raw MER hides the problem
The reason the standard comparison misleads is that a fee is charged on assets while the benefit is delivered as income, and those two numbers can be wildly out of proportion.
Think about what a 2.5% MER means on a growth fund returning 8% a year: meaningful, roughly a third of your return, and something to think hard about. Now think about the same 2.5% on an income product where the distribution is the entire point. Every dollar of fee comes out of the same pool the distribution is paid from. The manager is first in line, every year, regardless of what the fund earns. Your distribution is what's left over.
There's an asymmetry buried in that arrangement worth stating plainly. The fee is guaranteed. The income isn't. The MER gets deducted whether the fund had a great year collecting option premium or a terrible one, whether the underlying companies raised their dividends or cut them. If distributions fall, the fee doesn't fall proportionally — so the share of your income going to the manager quietly increases exactly when the fund is performing worst. The ratio is at its ugliest precisely when you can least afford it.
Running the number yourself
Both inputs are published and easy to find. The MER is on every fund's fact sheet and profile page — use the MER rather than the management fee, since the MER includes operating costs and taxes and is the number that actually gets deducted. The distribution yield is on the same page.
A few worked examples, using round illustrative numbers to make the pattern visible:
- 0.20% MER, 4% yield → 5% of your income to fees
- 0.70% MER, 5% yield → 14%
- 1.00% MER, 6% yield → 17%
- 2.00% MER, 8% yield → 25%
- 2.50% MER, 7% yield → 36%
Notice the last two. The 2.50% fund charges more and yields less than the 2.00% fund, and the gap between them in raw-MER terms looks like half a percentage point — trivial. In income terms it's the difference between the manager keeping a quarter of your cheque and keeping over a third. That's the compression the raw number hides: at high fee levels, small MER differences produce large swings in what reaches you.
There's a second, more useful pattern here too. A high MER can be defensible if it's genuinely buying a higher distribution — that's the case every expensive income fund implicitly makes. This ratio is how you test the claim rather than take it. A fund charging four times as much should be delivering substantially more income per fee dollar, not less. Quite often it isn't.
What the ratio doesn't tell you
This is one number, and one number never settles anything. Three limits worth holding onto.
It says nothing about whether the distribution is real. A fund can post a spectacular fee-efficiency ratio purely by having an enormous yield — and an enormous yield is often a symptom rather than an achievement. If the payout is partly funded by handing your own capital back, the ratio flatters a fund that's quietly liquidating itself. Cheap access to a distribution that's eroding your principal isn't a bargain. Read this number alongside the return of capital question, never instead of it.
It says nothing about total return. Fee efficiency measures the toll on your income, not what happened to your capital while you collected it. A fund can score beautifully on cost per income dollar while its unit price bleeds — one of the warning signs we've written about elsewhere.
It doesn't distinguish what you're paying for. A plain index fund and a leveraged covered-call fund are doing genuinely different amounts of work, and some of that work has real costs — the option-writing machinery we broke down here isn't free to run. The ratio tells you what you're paying. Whether that work is worth paying for is a separate judgment.
So it's a screen, not a verdict. Its value is that it's fast, it uses two published numbers, and it reframes the fee question in the only unit that matters for an income investor.
Why almost nobody publishes this
Partly because it isn't a standard industry metric — there's no regulatory requirement to disclose it and no fund company has an incentive to volunteer it. Partly because it's inconvenient. A fact sheet that said "27% of your distribution goes to management" would sell fewer units than one that says "MER: 2.55%," and both statements are equally true.
But mostly, I think, because the fee conversation in Canada has been stuck on comparing MERs to MERs for so long that the denominator question never comes up. Everyone knows fees matter. Far fewer people have converted that knowledge into "what fraction of my monthly cheque am I handing over," which is the version that actually changes behaviour.
It's a two-second calculation on numbers you already have. Run it on everything you own that pays you. Some of the results will be unremarkable. A few will be genuinely surprising, and those are the ones worth a second look — starting with whatever you own that has the highest yield, because that's where the fee is doing the most work to stay invisible.
We compute this ratio on every fund we track, which is why you'll see it on our research pages and in how our scoring works. But you don't need us for it. You need a fact sheet and a calculator.