New Findings on Fund Fees

In yet another chapter in the ongoing debate over fund fees, a new study plays down their importance. FundX Investment Group—the folks behind the newsletter NoLoad FundX—studied 306 diversified stock funds, both U.S. and foreign, over 21.75 years (that’s how many funds survived the entire period). From the cheapest to the costliest funds, there was an even mix of winners and losers. In other words, fees had no correlation with how well—or how poorly—a fund fared.

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But the point of the study was not to prove that fees don’t matter. In fact, says FundX’s Sean McKeon, “Fees do matter—a lot.” It’s just that other factors count, too. The study’s initial purpose was to test a proprietary investing strategy that FundX calls “upgrading.” (The approach favors the best-performing funds over various short-term periods, with no attention paid to fees.) But, McKeon says, it seemed a good time to examine how well other fund measures, such as expense ratios, predict results.

FundX found that no single data point by itself carries much weight. “There are so many moving parts,” says McKeon. “If only fees mattered, then Vanguard funds would always be at the top of the rankings.”

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But studies by fund researcher Morningstar say otherwise. Over various time periods—annually from 2005 through March 2010 and then in three-year and five-year periods through March 2010—“low-cost funds beat high-cost funds,” Morningstar’s Russel Kinnel wrote in a 2010 report.

McKeon argues that Kinnel’s study focused not on individual funds, but on groups of funds, organized by quintiles from lowest to highest costs. “In aggregate, low fees seem to matter,” says McKeon, “but people aren’t buying all funds.”

Kinnel’s response? Expenses aren’t the only thing, he says, “but they are the most tested and most dependable” factor. He says the FundX study was skewed against lower-fee funds because it was limited to those funds that survived 21.75 years. “High-cost funds have a dramatically lower survival rate,” he says. “If you instead started with all funds that existed 20 years ago and then calculated a return or success rate for the ensuing time that they did exist, you’d find that high-cost funds did much worse.” And so the debate continues.

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Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.