The Wall Street Journal had a great article detailing how expensive it truly is to own a mutual fund. The average investor knows that when investing in a mutual fund, they will need to pay an expense ratio to compensate the portfolio manager and cover operating expenses. Currently, the average annual expense ratio of a U.S. stock fund is 1.31%.
However, that's not the true bottom line. There are front-load costs not reflected in the annual expense ratio and those expenses can make a fund two or three times as costly as advertised. Unfortunately, the average investor has no idea what these additional costs amount to due to a lack of information. Some of these costs are hard to find, being buried in a thick prospectus. I did my own study of two popular mutual fund companies and ran charts to see how they correlate to the overall market, the S&P 500. In other words, what makes these funds so special that they need to charge up to 6.48% and 6.80% respectively during the first year of ownership. The popular American Funds - Growth Fund of America sports a 5.75% front load fee on top of other miscellaneous expenses bringing the first year expense to 6.48%. Below, let's see how the performance stacks up against the S&P 500 low cost index fund (SPY) which costs just .15% to own.
However, that's not the true bottom line. There are front-load costs not reflected in the annual expense ratio and those expenses can make a fund two or three times as costly as advertised. Unfortunately, the average investor has no idea what these additional costs amount to due to a lack of information. Some of these costs are hard to find, being buried in a thick prospectus. I did my own study of two popular mutual fund companies and ran charts to see how they correlate to the overall market, the S&P 500. In other words, what makes these funds so special that they need to charge up to 6.48% and 6.80% respectively during the first year of ownership. The popular American Funds - Growth Fund of America sports a 5.75% front load fee on top of other miscellaneous expenses bringing the first year expense to 6.48%. Below, let's see how the performance stacks up against the S&P 500 low cost index fund (SPY) which costs just .15% to own.
As expected this fund shows a high correlation and just tracks the low cost S&P 500 (SPY) fund that charges just $150.00 on every $100,000 invested, as opposed to an approximate $5,230 first year cost for the American Fund (AGTHX), which includes volume breakpoints. Where's the value.
At Shaw Investments, we do not use high cost mutual funds that give kick backs from the mutual fund company to the advisor selling the fund. We have a fiduciary duty first and foremost to our clients, and receive no commissions, kickbacks or referral fees and will always consider the costs associated. Thank you for reading.
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