Unbundling the Expense Ratio: Hidden Distribution Costs in European Mutual Fund Markets

Using data on more than 5,000 mutual funds domiciled in four European countries in 2006, we investigate whether distribution costs embedded into the expense ratio can be held responsible for the differences of expense ratios of mutual funds in different countries. We confirm the existence of relevant country effects in the pricing of mutual fund management services. Comparing load and no‐load funds and using survey data on fee retrocession to the distribution channel, we provide evidence that these effects are heavily influenced by the cost of the distribution embedded in the expense ratio.