Don’t Ignore Expense Ratio In Picking Fund

Investors who are thrilled about their returns in the last few years may well shrug off little things, like minor differences in mutualfund expense levels.

If you’re earning 20 or 30 percent a year, what’s a few basis points?

A basis point is just one-hundredth of a percentage point. If expenses are 1.5 percent instead of 1.2 percent - 30 basis points more - who cares?

Answer: You should.

All else being equal, investors are better off with low expense ratios, since expenses eat into fund returns.

To assess the value of low fees, Bloomberg Inc., the market-data and news provider, recently looked at fund-expense ratios in relation to fund performance, as reported by Morningstar Inc., the fund-tracking company.

The study identified funds with expense ratios above or below average for each of 11 categories. Then it compared the funds’ investment returns with the average return for each category over the last five years.

Result: In 10 of the 11 categories, low-cost funds were best at turning in above-average returns.

For example, among the 58 funds that invested in large-company growth stocks, only 26 percent of the high-cost funds beat the category’s five-year performance record, while 54 percent of the low-cost funds beat the average.

High-cost funds in this category had expense ratios of 1.18 percent or more of total fund assets; low-cost funds had expenses lower than that.

The best low-cost fund performance occurred in categories involving large-company stocks and bonds. So these types of funds seemed to get the most benefit from low expense ratios.

The one category to swim against the current was the small-company, growth-stock group, which had average expenses of 1.55 percent.

Of the 21 high-cost funds in this group, 62 percent beat the category’s five-year return, while 48 percent of the 40 low-cost funds beat the average.

One reason: Small-company stocks are especially hard to research, and sometimes hard to trade, so good fund management may mean more than low expenses.

The study underscores the value of keeping fund expenses low.

Over many years, saving a few basis points on expenses could give investors significantly higher profits.