Expense Ratios

Mutual funds and brokers are always preaching not to buy any fund with a high expense ratio. That is the annual costs of the fund to pay for trading of stocks within their portfolio, salaries, rent, telephone, analysts, etc. Most of them tell you not to buy one that exceeds 1.5%. There is also another expense added by some mutual funds called a 12b1 (usually from ¼% to 1%) that is supposed to be used for promotional purposes only. These numbers may appear small, but they are being applied to multi-millions, sometimes billions of dollars.

The 12b1 is for advertising of the fund to bring in more investors. The more customers, the more money in the fund, spreads expenses over a greater amount of money and should reduce the expense ratio.

We have seen allegations recently that many funds are putting the 12b1 in the pockets of the fund managers and even as the fund gets larger and larger the expense fees have not been reduced.

I won't be discussing here the loads (commissions) charged as I see no reason to buy any fund that charges commissions; there are thousands of no-load (no commission) funds that outperform the load funds.

For example, here are 2 funds. The first is Pioneer Fund which incidentally has a commission charge of 5.75% with a price per share increase of 22% in 2003 and an expense ratio of 1.11%. Another fund Yacktman Focus Fund with no commission charge and a return of 27% with an expense ratio of 1.25%. Five percent better return is a huge difference. Which one would you buy?

The Merrill Lynch Global Technology Fund with a back end load of 4% and an expense ratio of 2.78% yielded 52% so far this year. Another no-load fund, Profunds BioTechnlogy, with an expense ration of 2.92% and has made 56% YTD. Another no-brainer as to which one you wished you had bought earlier this year. Just a couple of more: Enterprise Growth Fund with a commission of 4.75%, an expense of 1.73% and a return of 20% YTD and Rydex Energy Fund a no load with expenses of 1.39% and a return of 23% YTD.

Even if you leave out the commission charges you will easily find funds that have returns in excess of those with lower expense ratios. Don't be fooled by Wall Street nonsense of anything but net total return on your money. Period. If you take into account the additional commissions that many funds and brokerage companies charge you will quickly see you have been hoodwinked all these years.

The above examples are not extreme as I don't think expense ratios should mean anything to influence your purchase. Don't let any broker or financial planner sell you anything other than the best return for your money.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005