Monday, February 27, 2012

Mutual Fund Expense Analyzer: A Tool for Calculating Mutual Fund Fees and Expenses

By Geng Deng, PhD, FRM, Tim Husson, PhD and Olivia Wang, PhD

Every mutual fund investor should know how important fees and expenses are in determining the net return of his investment. Compared with other factors affecting a mutual fund’s or an Exchange Traded Fund (ETF)’s return, such as market returns, fees and expenses are more stable over time and it is therefore easier to predict their effect on a fund’s future performance. However, comparing fees and expenses across funds can be tedious and confusing, as different funds can use different fee structures.

Luckily, FINRA provides a free online tool which allows investors to compare the fees and expenses charged by over 18,000 mutual funds, ETFs and Exchange Traded Notes (ETNs). For example, we could choose three of the largest mutual funds, PIMCO Total Return Fund Institutional Class with ticker PTTRX, Fidelity Cash Reserves Fund with ticker FDRXX, and SPDR S&P 500 ETF with ticker SPY to compare their cost structures. The output is shown in Table 1:

Table 1


PIMCO Total Return Fund Institutional Class
Fidelity Cash Reserves Fund
SPDR S&P 500 ETF

Data as of
Data as of
Data as of
2/14/2012
2/22/2012
n/a
Ticker Symbol
PTTRX
FDRXX
SPY
Investment Amount
$10,000.00
$10,000.00
$10,000.00
Estimated Return You Selected
3.00%
3.00%
3.00%
Holding Period
10
10
10
Fund Value After 10 Year(s)
$12,834.99
$12,951.02
$13,318.76
Profit/Loss
$2,834.99
$2,951.02
$3,318.76
Total Fees & Sales Charges
$522.50
$422.25
$104.22
Total Fees
$522.50
$422.25
$104.22
Total Sales Charges
$0.00
$0.00
$0.00


Several inputs are required when generating this table. Here, we assume the initial investment amount is $10,000 and the investment horizon is ten years for all three funds. Also, we assume the annual return is 3% for all three funds. This assumption of uniform returns across the funds is not realistic, but it serves the purpose of making the cost structure more transparent.

This table makes clear the advantage of ETFs in terms of fees and expenses over conventional mutual funds: the total fees and sales changes for PIMCO total return fund is about five time of that of the SPDR S&P 500 ETF. Indeed, another piece of information provided by this tool (not shown in the table) is the annual operating expenses for each fund: while the expense is 0.09% for SPDR S&P 500 ETF, it is 0.46% for PIMCO Total Return Fund Institutional Class. This tool also outputs a wide variety of other data, including Morningstar ratings, investment objectives, and average annual returns.

We are glad that FINRA is making an effort to help investors make well-informed decisions. Although fee structures are not the only factor an investor should consider when choosing a mutual fund or ETF, this tool at least provides an objective comparison of known costs.

3 comments:

  1. Is there a positive correlation between fees and gross returns? In other words, are investors who pay higher fees compensated by higher returns?

    ReplyDelete
    Replies
    1. Good question. There certainly exists mutual funds or ETFs that charge relatively high fees and also provide higher returns. However, this is not to say that investors will always be properly compensated on the fees they pay by higher returns.

      Olivia W.

      Delete
  2. How to select a Mutual Fund? and Pls give some information on mutual fund, which mutual fund is good to invest?

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