The Use and Abuse of Mutual Fund Expenses

23 Pages Posted: 8 Feb 2006

See all articles by Todd Houge

Todd Houge

University of Iowa

Jay W. Wellman

Cornell University - School of Hotel Administration

Date Written: January 31, 2006

Abstract

Prior research shows that mutual fund investors are often aware of up-front charges like sales loads, but they are less mindful of annual operating expenses, even though both types of fees lower overall performance. This study documents the historical trend and recent abuse of annual mutual fund expenses. As the industry becomes more adept at segmenting customers by level of investment sophistication, we claim that load mutual fund companies take advantage of this ability and charge higher expenses to their target customer: the less-knowledgeable investor. No-load fund companies, who tend to attract the more sophisticated investor, offer lower expenses. For example, over 2000-2004 the average annual expense ratio of load equity funds was 50 basis points higher than no-load equity funds. We show evidence of this widening cost disparity since the early 1990s among new and existing equity, bond, and index funds. We also document a growing abuse of sales distribution or 12b-1 fees among funds that are closed to new investors, almost all of which are load funds. Thus, load fund investors are more susceptible to paying higher expenses and receiving lower returns over time.

Keywords: 12b-1 fees, asset management fees, expense ratios, mutual funds, sales loads

JEL Classification: G18, G23, G24

Suggested Citation

Houge, Todd and Wellman, Jay W., The Use and Abuse of Mutual Fund Expenses (January 31, 2006). Available at SSRN: https://ssrn.com/abstract=880463 or http://dx.doi.org/10.2139/ssrn.880463

Todd Houge (Contact Author)

University of Iowa ( email )

Henry B. Tippie College of Business
Department of Finance, S288 PBB
Iowa City, IA 52242-1994
United States
319-335-3754 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/thouge

Jay W. Wellman

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
543
Abstract Views
2,654
rank
49,178
PlumX Metrics