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Mutual Fund Expenses Do Matter

By JLP | February 14, 2007

(Especially when it comes to index funds)

A reader left a comment on my previous post, Not All S&P 500 Index Mutual Funds Are Created Equal!, asking me if I could post the annual returns by class or fee range. It sounded like a good idea to me. Here’s what I found out:

I took the funds listed in my research and ranked them according to their 5-year annualized return. I then created the following chart with the funds’ returns along with their management fees. I also added trendlines to make it easier to see the pattern.

S&P 500 Index Mutual Fund Returns vs. Expenses

IMPORTANT NOTE: Included in my research are front-load funds. However, the loads are NOT included in the returns, which effectively overstates their performance. In other words, the performance of the front-load mutual funds looks better than it really is.

Fees matter! Although it’s not necessarily true with all mutual funds, it is definitely true with index funds.

For you Excel junkies out there, you can download the spreadsheet I created to do my analysis.

Topics: Index Funds, Investing | 2 Comments »


2 Responses to “Mutual Fund Expenses Do Matter”

  1. Independent George Says:
    February 15th, 2007 at 12:37 pm

    What I wonder about is why anybody ever buys into loaded funds to begin with? It’s all the more puzzling when you consider that these are all supposedly index funds.

    I can understand why someone might be willing to pay extra for an actively managed fund (I generally disagree, but can understand the reasoning). What is the point of those high-cost/low yield index funds? How do the fund managers explain those costs – and why do people buy them anyway?

  2. tolak Says:
    February 22nd, 2007 at 12:18 am

    No-fee advisors buy load funds for their clients. The load then pays the advisor a commission.

    The slicker advisors talk their clients into B share funds, or back-end-load. They make it appear as if while the client stays in the fund, the load is decreasing annually. But while they’re waiting, other non-load-related fees are accumulating and make up for the decrease and still pay the advisor. At the end of the load magical “decrease” period, the client keeps paying other fees indefinitely.

    Such is the price for being ignorant about finances.

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