An Analysis of the Expense Ratio Pricing of SMB, HML and UMD Exposure in U.S. Equity Mutual Funds

Grover, S. and Kizer, J. "An Analysis of the Expense Ratio Pricing of SMB, HML and UMD Exposure in U.S. Equity Mutual Funds." The Journal of Portfolio Management, Fall 2016, Vol. 43, No. 1, pp. 138-143

Posted: 2 Jul 2015 Last revised: 7 Jul 2017

See all articles by Jared Kizer

Jared Kizer

Buckingham Strategic Wealth

Sean Grover

Georgetown University McDonough School of Business

Date Written: September 31, 2016

Abstract

The expense ratio price of U.S. equity market exposure is close to zero with funds such as the Vanguard Total Stock Market Index (ticker: VTSAX), which charges an expense ratio of just 5 bps. An interesting, and more difficult, question to answer is, How much are mutual fund companies charging investors to gain exposure to small-capitalization, value, and positive momentum stocks? The authors answer this question using monthly returns data for low-cost mutual funds and ETFs in tandem with Fama-French three- and Carhart four-factor equity pricing models and current fund expense ratio levels. They indeed find strong evidence that fund companies charge for exposure to individual factor premiums. Additionally, they find significant variation in how aggressively factor exposure is priced, both across fund companies and across portfolios offering identical levels of factor premium exposure.

Keywords: factor models, asset pricing, expense ratio

JEL Classification: G11, G12

Suggested Citation

Kizer, Jared and Grover, Sean, An Analysis of the Expense Ratio Pricing of SMB, HML and UMD Exposure in U.S. Equity Mutual Funds (September 31, 2016). Grover, S. and Kizer, J. "An Analysis of the Expense Ratio Pricing of SMB, HML and UMD Exposure in U.S. Equity Mutual Funds." The Journal of Portfolio Management, Fall 2016, Vol. 43, No. 1, pp. 138-143. Available at SSRN: https://ssrn.com/abstract=2625247 or http://dx.doi.org/10.2139/ssrn.2625247

Jared Kizer

Buckingham Strategic Wealth ( email )

8182 Maryland Avenue Suite 500
St. Louis, MO
United States

Sean Grover (Contact Author)

Georgetown University McDonough School of Business ( email )

37th and O Streets NW
Washington, DC 20057
United States

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