Mutual Fund Fees Matter More Than You Think
I
Daniel T. Newquist, CFP®,
AIF® is a Principal Wealth
Advisor with RNP Advisory
Services, Inc., in Morgan Hill
with over 19 years experi-
ence advising clients on their
personal wealth, retirement
planning, insurance, and
business planning needs.
Investment advisory services
offered through RNP Advisory
Services, Inc. – a registered
investment advisor. Securities
offered through Securities
America, Inc., member
FINRA/SIPC. RNP Advisory
Services and Securities
America are separate entities.
The Investment Fiduciary
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Website: RNPadvisory.com
Phonel: 408-779-0699.
between mutual funds, it doesn’t tell us much
about how a fund will do in the future.
Researchers at The Vanguard Group
conducted their own analysis of how expenses
relate to performance by comparing the least
expensive mutual funds to the most expensive
mutual funds over a ten-year period.
The results, in the table below, show a
noticeable gap between the two groups over
the ten-year time period they evaluated. In
every case, the group of lower-cost funds out-
performed the higher-cost funds.
Why Fees Matter
Mutual fund fees carry such weight in the
investment selection process because they are
always there. Whether a mutual fund goes up
or down, or outperforms its benchmark or not,
mutual fund fees are always present.
Obviously, there are exceptions to the rule,
and buying the lowest-cost mutual fund does
not make future success a guarantee. But fees
should be considered when comparing funds
of a similar asset class to each other. Fees are
something that should be looked at carefully
when choosing investments and evaluating the
mutual funds and exchange traded funds used
in your accounts.
Lower costs can support higher returns
Average annual returns over the ten years through 2012
By Daniel T. Newquist,
CFP®, AIF®
f you had to pick one factor that would
determine the future success of your
mutual fund versus its peers, what
would it be? Maybe manager tenure, the
reputation of the mutual fund company,
the fund’s Morningstar rating or the fund’s
three-year performance track record (or
maybe a longer period) come to mind. Those
would all be good factors to review, but they
don’t necessarily stack the odds of future
performance in your favor.
It turns out that the amount you pay a
mutual fund matters more than the factors
listed above. Many researchers have explored
the impact fees have on investments. In one
study, Morningstar, Inc., tested its famous star
rating system against mutual fund fees.
In their star rating system, they assign the
best-performing funds five stars and the worst
one star. They wanted to see if an investment
in five-star funds would help you outperform
low-cost mutual funds. In a couple of cases
the star system won, but in the majority of
cases, the expense ratios strategy did a better
job of predicting which mutual funds would
do better than average in the future.
While the star system is a great way to
simplify the historical comparison process
Median fund in lowest-cost quartile
Median fund in highest-cost quartile
Source: The Vanguard Group, Inc. Past performance is not indicative of future results. All mutual funds in each Morningstar category were ranked by their expense ratios as of December 31, 2012.
They were then divided into four equal groups, from the lowest-cost to the highest-cost funds. The chart shows the ten-year annualized returns for the median funds in the lowest-cost and highest-cost
quartiles. Returns are net of expenses, excluding loads and taxes. Both actively managed and indexed funds are included, as are all share classes with at least ten years of returns.
GILROY • MORGAN HILL • SAN MARTIN
MARCH/APRIL 2017
gmhtoday.com
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