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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 likeor 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, and the accompanying article from my blog, , 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.