Excessive Mutual Fund Expenses Also Mean Higher Risk and Worse Performance

Abstract

It is not enough to say that particular mutual funds have very excessive and most excessive expense ratios. In addition, these high cost funds are associated with negative portfolio characteristics that include more risky and less diversified portfolios, higher trading costs and lower earnings. Further, these high cost funds are associated with performance attributes that include lower risk/return performance based on three measures and lower total returns over two time periods.

The complete word, then, is that mutual funds with high expense ratios - whether two or three standard deviations above the mean of their Morningstar category are further associated with both negative portfolio characteristics and performance attributes.

Keywords: mutual funds, expense ratios, portfolio characteristics, trading costs, earnings, total returns, risk, risk/return performance, performance attributes

JEL Classification: G2, G23, G28