Could someone help explain these Mutual Fund expenses?

[dessert]

Here is copy straight from morningstar snapshot of a mutual fund.
Could someone explain the expense ratio as shown below?
Are 12b-1 fees normal or unusual?
What is considered a high 12b-1 fee? I have read where anything above .25 is considered a "load fund".
Why are there two different expense ratios shown and which one would be the one used to charge the fund?

Actual Fees %
12b-1 0.25
Management 0.78
Net Expense Ratio: Annual Report 1.27
Net Expense Ratio: Prospectus 1.35

 

[joesxm3]

12B-1 Fees financial definition of 12B-1 Fees. 12B-1 Fees finance term by the Free Online Dictionary.

 

[dessert]

Thanks joesxm.
That's where I read about the .25 value for 12b-1 fees.
It seems to me that 12b-1 fees are not the norm with Mutual Funds.
Would that be a correct assumption?
Why the two different expense ratios stated?

 

[joesxm3]

None of my funds have a 12b-1 fee. I think you are better without them.

Sometimes the funds voluntarily reduce the management fee for a time period for marketing purposes. I think that they may also calculate them exactly at the end of the year (i.e. annual report). It may be that the prospectus states the maximum or estimated fee, and the annual report shows the actual fee for the prior year.

 

[DblDoc]

That is an expensive fund. Compare Fidelity Spartan or Vanguard MF's for low cost MF's. If at all possible avoid anything with a load or 12b-1 fees.

DD

 

[Retire Soon]

The only thing that is missing is trading costs, which a mutual fund is not required to publish. Many times it's a good idea to find a fund with low turnover, because the costs to buy and sell holdings will be much lower. Better yet, why not consider index funds as they have close to no turnover and typically have expense ratios of around 0.20% ?

 

[FinanceDude]

Thanks joesxm.
That's where I read about the .25 value for 12b-1 fees.
It seems to me that 12b-1 fees are not the norm with Mutual Funds.
Would that be a correct assumption?
Why the two different expense ratios stated?

12b-1 fees of .25 are very common, most mutual fund families now limit them to that amount, meaning they were higher in the past.

If the prospectus says the higher number, it means that fund management has decided to reduce the expense due to a large inflow of cash or another reason.

Outside of direct companies like Vanguard, T Row Price, and others, 12b-1's are quite common.

FINRA and the SEC are looking at eliminating 12b-1's for all mutual funds, but don't hold your breath.

 

[Texas Proud]

12b-1 fees are (supposed to be) taking YOUR money to advertise the fund to attract other investors so the management fee can come down due to a larger sized fund....

OR.... just to make more money


Usually they go to the financial advisor that had you put your money in the fund.... a nice chuck of change if they get a lot of people..

 

[FinanceDude]

12b-1 fees are (supposed to be) taking YOUR money to advertise the fund to attract other investors so the management fee can come down due to a larger sized fund....

OR.... just to make more money


Usually they go to the financial advisor that had you put your money in the fund.... a nice chuck of change if they get a lot of people..

Well 12b-1 fees were SUPPOSED to either go down or be eliminated as the funds got bigger, but they haven't really.

On established funds today, it is a way to make money.

The advisor gets 25bp a year on the fund, or $2.50 on every $1000 you have invested in it, or $50 a year on a $20,000 account. You need a LOT of folks to make that number work..............

 

[dessert]

Thanks for the information guys and/or gals. I was looking around at different funds and found one with 12b-1 fees listed at .75% and ER at 1.50.
I'm used to looking at MF without 12b-1 fees so I was just trying to get a feel for why they were there. We learn a lot on this site.

 

[Texas Proud]

Thanks for the information guys and/or gals. I was looking around at different funds and found one with 12b-1 fees listed at .75% and ER at 1.50.
I'm used to looking at MF without 12b-1 fees so I was just trying to get a feel for why they were there. We learn a lot on this site.

Hopefully you are not invested in that one.... it is ripping off their investors big time!!!

 

[pedorrero]

Also per some authors, there is roughly an additional 50% (of the published expense ratio, so about another 0.75%) of hidden expenses that include things like the mutual fund's trading costs. If you like getting the dirt on the financial industry, try the latest Ric Edelman book ("Lies about Money") or Mike Edesses's "The Big Investment Lie" .


-- Pedorrero, who Extols Edesses to Excess

 

[WM]

Also per some authors, there is roughly an additional 50% (of the published expense ratio, so about another 0.75%) of hidden expenses that include things like the mutual fund's trading costs.

Someone else just mentioned this to me today - that aside from the expense ratio, there are other "hidden fees." What's the deal? Is there any way to know what you're really paying?

The guy I was talking to was trying to make the case that even though index funds appear cheaper, these "hidden fees" make them nearly comparable to (relatively cheap) managed funds.

 

[samclem]

The guy I was talking to was trying to make the case that even though index funds appear cheaper, these "hidden fees" make them nearly comparable to (relatively cheap) managed funds.

It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.

 

[WM]

It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.

The "hidden fees" are generated when they trade stuff, right? So a 500 index shouldn't have much of this at all? I saw a reference in another thread to this being more common in very narrowly focused index funds.

 

[samclem]

Hidden fees: There's no precise definition of what is included in this term. Obviously, it includes fees that are not disclosed in the fund prospectus. For example, the fees charged by some brokers to put a client into a fund is sometimes termed a "hidden fee" because it isn't in the fund prospectus. (sometimes called "alphabet fees" becasue the share types are often known as "A-shares", B-shares" etc, each type with a separate commission schedule). The costs you pay for turnover within the fund are of two major types: trading costs and taxes. The trading costs are what the fund management pays to the big brokerage houses to buy and sell the stocks within the fund) also come out of the fund, but aren't part of the stated expense ratio. Tax costs are incurred by the investor when a fund realizes capital gains as a result of selling stocks within the fund. These are not normally thought of as "hidden fees" (because they aren't charged by the fund company to investors) but they are surely a cost that investors should know and consider. Some funds (usually identified as "tax managed" funds) take special pains to reduce these tax costs.

Yes, narrowly-focussed index funds might be expected to have higher hidden fees and tax costs due to more frequent trading.

The take away: Buy index or low-cost managed funds directly from the mutual fund company and you'll significantly reduce the burden of these fees and costs. Costs matter a lot.

 

[chinaco]

The fees on mutual funds is very confusing.

I never look at anything but the total fee charged.

Mutual funds have a fee listed in the prospectus. But they can waive part of the fee from year to year. Some do that for various reasons.

I am not sure about the situation that you listed.

Fees... That is what I like about VG... the fee is typically low.

 

[Art G]

It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.

Sorry, but this theory just drives me out of my gourd! First off, an index fund is the only GUARANTEED to underperform its index.
Now, as to fees, you should compare not only 12b-1's, but also, management fees and most importantly total returns. There are fund families out there that trade heavily and therefore incur quite a few expenses, and some that trade very little. But most importantly should be results.
Would you rather pay 5% for a 20% return, or 2% for a 10% return? Personally, I look much more closely at 5, 10, and 20 year return averages, than I do the expense ratio. But then, I'm an investor, not an accountant.

 

[boutros]

My new favorite hidden "fee" is when mutual funds or ETFs lend securities to short sellers then keep the fee charged to the short seller instead of returning it to the shareholder. This is not part of the ER and I don't believe that the amount the manager earns doing this is a required disclosure.

 

[WM]

Hidden fees: There's no precise definition of what is included in this term. Obviously, it includes fees that are not disclosed in the fund prospectus. For example, the fees charged by some brokers to put a client into a fund is sometimes termed a "hidden fee" because it isn't in the fund prospectus. (sometimes called "alphabet fees" becasue the share types are often known as "A-shares", B-shares" etc, each type with a separate commission schedule). The costs you pay for turnover within the fund are of two major types: trading costs and taxes. The trading costs are what the fund management pays to the big brokerage houses to buy and sell the stocks within the fund) also come out of the fund, but aren't part of the stated expense ratio. Tax costs are incurred by the investor when a fund realizes capital gains as a result of selling stocks within the fund. These are not normally thought of as "hidden fees" (because they aren't charged by the fund company to investors) but they are surely a cost that investors should know and consider. Some funds (usually identified as "tax managed" funds) take special pains to reduce these tax costs.

THANK YOU, this is very clear and exactly the kind of explanation I was looking for. I love this board!

 

[cute fuzzy bunny]

Sorry, but this theory just drives me out of my gourd! First off, an index fund is the only GUARANTEED to underperform its index.
Now, as to fees, you should compare not only 12b-1's, but also, management fees and most importantly total returns. There are fund families out there that trade heavily and therefore incur quite a few expenses, and some that trade very little. But most importantly should be results.
Would you rather pay 5% for a 20% return, or 2% for a 10% return? Personally, I look much more closely at 5, 10, and 20 year return averages, than I do the expense ratio. But then, I'm an investor, not an accountant.

Actually by timing some of the index additions and removals, an adept index fund manager can squeak out gains over and above the index returns.

As for the rest, the data says that most funds with high ER's have lower returns than their comparable indexes, over 20 year periods. A high ER fund with high risk adjusted returns vs their index equivalents rarely happens. When it does, you had to be lucky enough to be in it, because there was usually no forewarning. If you jump into one thats had great "5, 10, 20 year numbers", chances are your next 5, 10 or 20 will be underperformance years.

 

[FinanceDude]

Actually by timing some of the index additions and removals, an adept index fund manager can squeak out gains over and above the index returns.

I thought they had to adjust to the index changes in a timely fashion, are you saying Vanguard and others are not acting as "true index funds".......

As for the rest, the data says that most funds with high ER's have lower returns than their comparable indexes, over 20 year periods. A high ER fund with high risk adjusted returns vs their index equivalents rarely happens. When it does, you had to be lucky enough to be in it, because there was usually no forewarning. If you jump into one thats had great "5, 10, 20 year numbers", chances are your next 5, 10 or 20 will be underperformance years.

I think the best part is "MOST", not "ALL". I own some funds myself that have trounced the indexes, but for a lot of folks, an index fund is fine..............

 

[cute fuzzy bunny]

They do have to adjust the index in a timely manner, but as I understand it Sauter and company have been both timing their entry/exits for new index additions/deletions, and also substituting futures when those become cheaper than the actual equities.

Doesnt squeak too much out, but if there were no minor shenanigans going on then all s&p 500 indexes would perform exactly the same for a given ER. Yet they dont.

As far as your funds, have they trounced the indexes for 20 years?

Did you know for sure when you bought them that they'd do their short term trouncing? Or was it luck of the draw? Did all the non-index funds you bought trounce their index equivalents, risk adjusted? Havent we already all had these conversations a few dozen times?

 

[Art G]

Can't the reverse then be true? ...Did you know before you bought your index fund that it wouldn't underperform other indices? Or that the S&P wouldn't underperform the market as a whole?
If I'm buying something, I'm buying with the belief I've given myself the best odds possible to make gains. If I were only after the very top gains, I'd be buying nothing but sector funds or specific country funds. However, my thinking is, I'd much rather put my money with proven managers than to put it in a place that merely buys an index. Are you also a fan of unmanned jets and computers running the world

 

[cute fuzzy bunny]

No, but I'm a fan of the reams and reams and reams of data that say that managed funds underperform index funds over longer periods of time. I'm planning on investing for longer periods of time.

But there are people who dont like the idea that a passive investment does better than an active one, or that monkeys throwing darts at the stock pages produce better results than active managers.

Unfortunately, disbelief usually fails to change the actual data.

But again, some folks just cant help themselves. They want to believe that a hand on the wheel improves the results. They want to believe that paying 1.5% to a fund manager can give them better results.

Even in the cases and time periods where active management produces market beating results, its all hindsight. And these "winners" vs losers, even after the survivors bias is thrown in, still are in numbers lower than random chance would produce.

I used to agree with you. Then I read a couple of books and reviewed all the information and found that my inherent opinion that active management just HAD to do some good had no factual basis whatsoever.

An opinion in opposition of the facts has a name...cant put my finger on it though...