Tara Siegel Bernard reported that what the insiders have known for a long time -- mutual fund and other expenses really matter -- was put to the test by Morningstar.
It turned out that using expense ratios as a guide to choose the best mutual funds were more helpful than star ratings 58 percent of the time. (Morningstar identified the best funds using “success ratios,” which show what percentage of funds in a given group survived and outperformed their peers. Often times, studies don’t exclude funds that failed, which can distort results).“Investors should make expense ratios a primary test in fund selection,” Russel Kinnel, director of mutual fund research at Morningstar, said in an article about the study. “They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you’ll be on the path to success.”
The study looked all mutual funds, including funds where investments are actively-managed by a portfolio manager, as well as passively-managed funds that track an index. Index funds tend to beat actively-managed funds over time given their low costs. And while most index funds analyzed in the study were also the cheapest, they only represented a small number of the funds studied. For instance, index funds comprised 5.5 percent of the domestic stock funds analyzed, and they represented about 27 percent of the domestic stock funds in the cheapest quintile.
“In every single time period and data point tested, low-cost funds beat high-cost funds,” Mr. Kinnel said in the article. Stars guided investors to better results a still-pretty-helpful 84 percent of the time.
