How The Hidden Fees Of Mutual Funds Hurt Your Portfoliio

Oh man oh man, this is fantastic!

Listening to the Meb Faber Podcast while mowing my lawn this afternoon and he mentioned this website called FeeX.com.

FeeX is a site you can go and for FREE type in your fund holdings, even link your account if you’re so inclined. Their algorithm will then analyze your funds PLUS a list of comparable funds that are a whole lot cheaper. It’s crazy! And it’s awesome!

For instance, I typed in USMIX, which is USAA’s Extended Market Index. Out came a bunch of other funds, exactly like it, but cost significantly less.

Here is an Example

Then FeeX calculated what the other funds would save me over time in total fees. Folks, we are not talking about pennies here. We’re talking tens of thousands of dollars.

Fees matter, my friends. And if you own high fee funds you’ve got to understand the headwind you’re dealing with when it comes to performance. The more fees, the less your fund will be able to compete.  Just no other way around it.

Of course, this does not mean higher cost funds CAN’T outperform lower cost funds. It’s just going to be hard to do it.

Think about it like this.  Let’s say we each expect the market to return 10%.  My fund costs 2% your fund costs .50%.  Because my fund costs 4x your fund, I have to return 1.50% more than you, year after year, just to equal you.

How can I do that without taking on much more risk? I can’t.  So, the higher cost funds will underperform or take on more risk to outperform.  And just cause one takes on more risk doesn’t necessarily mean out performance either.

So, give FeeX a try here.

And, if you are interested in investment-related podcasts, you’ll have a tough time beating Meb Fabers podcast which can be found here.

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Mutual Funds: everyone owns them. And nowadays, it’s SO easy to analyze them. You can just go to a place like Yahoo Finance – Business Finance, Stock Market, Quotes, News or Morningstar | Independent Investment Research and get an unlimited amount of info, at your fingertips, for free!

The internet has been fantastic for the democratization of the investment world, bringing information to the masses, not unlike William Tyndale translating Bibles.

Mutual Fund Hidden Fees

However, there is one area of mutual funds that no matter the research you do, you will still be in the dark; the actual trading costs a mutual fund incurs.

Try going to the SEC website and look up trading costs for the fund of your choice. You’ll find nothing. Try going to Morningstar. Nope, not there either. Call the fund company maybe? Sorry. They don’t have that information.

Trading Costs Can DOUBLE Your Fees

So, you may be inclined to think that because the information can’t be found, it’s not that important. Well, you’d be wrong to make that assumption. In this video, and the accompanying article from my blog, https://joshscandlen.com/expensive-mu…, I use research a couple academics conducted that claim trading costs add another level of fees to investors equal to the actual expense ratio of a fund! Think about that. You have a 1% mutual fund expense ratio, but add in trading costs and your total expenses are 2%!

Now, that may not seem a big deal to you. But think about it like this. Let’s just say your fund returns 10% before fees. Well if fees are 2% total, to include trading, costs, your net return is 8%. This means you’ve lost 20% of your gross returns to fees! Don’t forget, fees don’t go away when the markets go down. So, if your fund grossed -10% return, well after fees your NET return would be -12%. Again, it cost you 20% more on the downside and 20% LESS on the up.

Comparing Fund Expenses

Yet, we have no way to measure what Fund A costs vs. Fund B. And that’s not good. So, in the video, I show you how to make an attempt to understand the total costs of your fund. It’s not scientific, but it’s the best we can do at this point. We start by examining “Turnover”.

Now, you may be think a high turnover equals high expense relative to a lower turnover fund. Unfortunately, that may not be the case. The professors examined a $500 million small-cap fund with 50% turnover vs. a $100 million large cap fund with 100% turnover. The small cap fund had more trading costs. However, turnover is a starting point in your analysis. It just isn’t as clear as we’d like it to be.

Vanguard S&P 500 (VFINX)

Looking at Vanguard’s SP 500 Index fund. It has a turnover of 3% and an expense ratio of .14%. It is a HUGE fund, $84 billion of assets. So, when it trades, it’s not cheap. BUT at least you know it doesn’t trade much and has low expenses to match. So, if you have a fund with a huge asset base, high expenses, and high turnover…. well that fund is probably going to cost you.


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