Why Mutual Fund Fees Are Misleading

According to a study released a few years ago by the Zero Alpha Group, almost half of the expenses of the top 30 domestic equity funds are omitted from their reported expense ratios.  The funds included in the study have about $750Billion of the approximately $7Trillion in mutual fund assets nationwide.

Edward O’Neil, assistant professor of finance at Wake Forest University, conducted the study.  He added the cost of trading incurred in portfolio turnover.  Transaction costs included brokerage expenses and implicit bid-ask spreads.  For some funds, the study found transaction costs exceed 400% of their expense ratios.

If you or your advisor relies on reported expense ratios as a key for selecting mutual funds for your investment portfolio, be careful.   These numbers alone can be misleading.

Do you know what your investments are really costing you?  Minimizing expenses now can make a big difference over time.


About the author

Lynn Garrison, PE, CFP®

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