Mutual funds can still say they've got a lot more in combined
assets under management than the roughly $1.2 trillion ETFs and
ETNs hold, but as the rivalry between mutual funds and
exchange-traded products intensifies, more attention than ever is
being paid to one of the primary causes of the tussle: Costs.
In a note published today
says mutual fund investors are paid 0.75% in expenses last year
compared with 0.77% in 2010." The figures include all open-end
funds except funds of funds where the layering of fees can make
for messy comparisons, according to Morningstar.
The lower fees represent progress to be sure, but at an
average expense ratio of 0.75%, that still means investors lose
$75 per year invested in mutual funds.
Again, progress is progress and no one should complain about
seeing their fees lowered, but when the average goes to 0.75%
from 0.77%, it's hardly cause for excitement. According to
Morningstar data, the average expense ratio for an international
equity mutual fund is 0.93%. Sorry, but that's insulting,
especially when an investor can own the Vanguard MSCI Emerging
Markets ETF (NYSE:
) and the iShares MSCI Brazil Index Fund (NYSE:
) for a COMBINDED 0.79%, 0.2% for VWO and 0.59% for EWZ. That's
just one example of an ETF pair that's cheaper than the average
mutual fund in a particular category.
Morningstar also highlights dramatic fee reductions for a
couple of mutual funds including the Wasatch Ultra Growth Fund,
which appears to be a
mid-cap or small-cap growth fund
. The fund "had one of the biggest fee drops as expenses fell to
1.68% in 2010 and 1.42% in 2011 from 1.75% in 2009," Morningstar
Please sense the sarcasm: Wow. The The iShares Russell Midcap
Growth Index Fund (NYSE:
) charges just 0.25% while the iShares Morningstar Mid Growth
Index Fund (NYSE:
) has an expense ratio of just 0.3%. The Vanguard Mid-Cap Growth
) charges a scant 0.12%.
Then there is the little matter of something called returns.
You know, the reason investors put money into the financial
markets in the first place. Well actively managed mutual funds
are duds when it comes to returns
. Morningstar said earlier this year, just 17% of large-cap
mutual funds beat the S&P 500 last year. Remember, you can
own the SPDR S&P 500 for less than 0.1% in fees.
Not to beat up on the Wasatch Ultra Growth Fund, but over the
past five years and 10 years, the fund seriously lags the
performance of the
Russell 2000 Index
. Investors can capture exposure to that index with the iShares
Russell 2000 Index Fund (NYSE:
), which charges just 0.26%.
In other words, IWM is nearly 120 basis points cheaper than
the aforementioned mutual fund, but at no time over the past
year, year-to-date and in the past month has the mutual fund
outperformed IWM by that margin.
The debate doesn't revolve around just one fund from Wasatch.
Just look at the the top-performing emerging market ETFs
over the past five years as illustrated by
. That group has an average expense ratio of 1.54%. For that
privilege, an investor might also be subject to redemption fees,
not being able to see a fund's holdings updated daily as is the
case with most ETFs and, of course, the potential for
disappointing performance exists.
Morningstar says "costs have come down because of
appreciation, inflows, and a shift to lower-cost funds." Let's
just come right and say what's really going on: Mutual fund
companies are asleep at the wheel, arguably they have been, if
they think investors will continue to pay even 0.75% for active
management that generates slack results. Assets have to come from
somewhere and since ETF assets under management show an upward
trajectory, it's reasonable to say plenty of new ETF inflows are
new mutual fund outflows.
Please feel to contact me for a cordial debate on this subject
or just to ask questions. Follow me on Twitter: @ETFProfesor1
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