How much weight do you give to expense ratios

[Koolau]

But, a low cost index fund will always be a high cost index fund...

I think I lost you on that. Please explain.

 

[Texas Proud]

Well.... it should say BEAT.... do not know what happened to the AT....

OHHHH, I can edit... fixed it...

 

[motley]

That helps But still not following. A fund's expense ratio isn't inherently an indicator of its performance.

 

[Midpack]

That helps But still not following. A fund's expense ratio isn't inherently an indicator of its performance.

He said index fund, big difference. For equivalent index funds, expense ratio is likely the difference in performance.

 

[pjigar]

"Index funds make me more money than most managed funds..."

Yes, that is the trick--finding the minority of managed funds that beat the index. They are out there and they are not hard to find. Almost all comparison charting tools has the benchmarks available as a comparison. It's fairly easy to pick a fund and then click on chart, then compare, then click on S&P index fund, then 3 year, then 5 year, then 10 year timeframes.

And that's the rub. What you can find is what was return in "past" 3,5,10 years. No-one can assure you that same performance will continue in "future" 3,5,10 years.

Food for thought: Mutual Funds That Consistently Beat the Market? Not One of 2,132. (Published 2022)

 

[MichaelB]

That helps But still not following. A fund's expense ratio isn't inherently an indicator of its performance.

Just the contrary, Morningstar found that expense levels were the best predictor of future performance, Here’s an updated version of their study (here)

The expense ratio is the most proven predictor of future fund returns – and our data agrees. That’s also what academics, fund companies, and, of course, Jack Bogle, find when they run the data.
./.
We’ve done this over many years and many fund types, and expense ratios consistently show predictive power. Using expense ratios to choose funds helped in every asset class and in every quintile from 2010 to 2015.

 

[Koolau]

Just the contrary, Morningstar found that expense levels were the best predictor of future performance, Here’s an updated version of their study (here)

That's a truly amazing result! Thanks for sharing. Kinda puts the subject into perspective.

 

[motley]

Interesting. So in general the bigger the expense ratio, the worse it does?

 

[Qs Laptop]

And that's the rub. What you can find is what was return in "past" 3,5,10 years. No-one can assure you that same performance will continue in "future" 3,5,10 years.

Food for thought: Mutual Funds That Consistently Beat the Market? Not One of 2,132. (Published 2022)

Article says that not one managed fund stayed in the top quartile of performance for every consecutive year in the past 5 year (article was written in Dec. 2022.) This is the persistence factor that OldShooter mentioned.

So what? My point is that there are funds that can beat the index over 3, 5, 10 year intervals. Furthermore, if the managed fund has one down year in that 3, 5, 10 year interval the gains made by the managed fund in the other years more than exceeds the index for the entire interval. Ergo, they beat the index for the time interval but not necessarily every year in a row.

It's like saying, "Wow, FBGRX beat the index for 4 out of the last 5 years. I'm up 18% more overall than if I was invested in the index. But, darn, in year 3 of that run it had a down year, therefore I'm selling."

And aren't we investing for the long term? Who among us invests for one year? And if you do, which year do you pick?

 

[Qs Laptop]

Just the contrary, Morningstar found that expense levels were the best predictor of future performance, Here’s an updated version of their study (here)

A great example of a correlation not causation.

 

[OldShooter]

A great example of a correlation not causation.

Oh, I don't think so. Low costs imply very little trading and trading is expensive. It's not just the direct cost of trading that's the issue. The issue is market impact when the fund goes to market to buy or sell, the price inevitably moves away from them and that is a cost for the fund owners. Definitely a cause of lower performance.

 

[target2019]

Interesting. So in general the bigger the expense ratio, the worse it does?

Your question, answered yes, is inherent to passive investors' models.

,05 expense ratio over time beasts .50. To supportthis it helps to look at actual performance numbers. I suggested that earlier. It's possible that an active fund outperforms a passive one for a few years (Growth beats Value, for example), but can the fund managers consistently beat the passive approach?

In my mind it's not an all-or-nothing belief. It takes long periods to recognize the proof with a backtest. So, try different investments and keep an eye out for losing funds.

 

[MichaelB]

A great example of a correlation not causation.

From the linked paper

We’ve done this over many years and many fund types, and expense ratios consistently show predictive power

If it has predictive power it’s more than a simple correlation.

My portfolio investments are a mix of low cost index ETFs and higher cost actively managed funds, so I’m not vested in active vs passive. Nonetheless, the simple math here is compelling and makes sense. Taking less expense from total return allows the net return to be higher.

 

[OldShooter]

Interesting. So in general the bigger the expense ratio, the worse it does?

That's a truly amazing result! Thanks for sharing. Kinda puts the subject into perspective.

WADR this is very old news. Morningstar has been updating this study and reporting the results for years. The reason you may not have heard about it is that the fund industry would love to suppress it. You will not see it featured in fund advertisements of course, but also any web sites or publications that sell advertising to funds are going to ignore the result completely or, best case, report it in a cursory fashion.

Actually, I look at this and at the near-guaranteed success of broad index funds as two sides of the same coin. Start with index funds, turn the coin over and find low cost. Start with low cost and turn the coin over and you find the winning index funds.

Several have pointed out that higher cost actively managed funds can and have beat their benchmarks from time to time. That's certainly true and to be expected in a random market environment. It's like flipping "heads" close to ten times in a row. It happens. The SPIVA reports IIRC usually identify 5% +/- of active funds as beating over a ten year period. But no one, not even Fama and French, have figured out how to identify these winners at the beginning of the investment period. Identifying them at the end is trivially easy and completely worthless unless you are determined to ignore the multiple study results showing that performance, statistically, does not persist.

 

[imbatman]

I have seen that report many times, it has some good data and indicators. If you want to set it and forget it and aren't playing short-term trends or sector abnormalities, the greatest chance of success is the cheapest index.

 

[jazz4cash]

If only I had known 10 yrs ago that FBRGX would beat FXIAX. I do have both but I discarded some others along the way that couldn’t keep up.

 

[Qs Laptop]

I don't know why these discussions always seem to devolve into index funds vs. managed funds. And given the rules of the forum I don't know how.

From the Forum Description:
Discussions about market timing, individual stocks, commodities, precious metals and all other alternative asset classes. How to select and evaluate a financial advisor. This is NOT the forum to debate passive vs active or if the use of advisors is appropriate.

 

[OldShooter]

Yeah. I dunno. I have gotten dinged by the mods a couple of time because of this question. Note that mutual funds are not included in the "legal" forum topics either.

So I wonder where mutual funds and active/passive are appropriate subjects.

And, in defense of this particular thread, I don't know how you talk about fund expense ratios while not including passive funds. It would be like trying to talk abut low calorie meals without talking about salads.

 

[Sunset]

StockCharts uses total return. The tool is fee based but the performance chart is free to all. StockCharts.com | Advanced Financial Charts & Technical Analysis Tools

Thanks for that, as I look at charts but don't really know if they include the divs as part of the overall value increase/performance.

For example, I charted the FBGRX folks are talking about to BRK-B and SPY comparatively and FBGRX scored the lowest ? , with BRK-B the highest.

But then using your link it shows a different result. The range is different but over the last 20 years it shows BRK.B and FBGRX pretty close with variations

 

[ERD50]

I don't know why these discussions always seem to devolve into index funds vs. managed funds. And given the rules of the forum I don't know how. ...

I try to take note of which sub-forum I'm in, because of this rule. And I generally just stay out of this one because of it, because I honestly don't see how you can discuss an active investment w/o comparing it to other options, and the common and relevant comparison in many cases is a passive fund/ETF.

It's like asking if you would save money by buying a hybrid vehicle, but you aren't allowed to discuss the MPG of the non-hybrid for comparison.

 

[MichaelB]

I don't know why these discussions always seem to devolve into index funds vs. managed funds. And given the rules of the forum I don't know how.

From the Forum Description:
Discussions about market timing, individual stocks, commodities, precious metals and all other alternative asset classes. How to select and evaluate a financial advisor. This is NOT the forum to debate passive vs active or if the use of advisors is appropriate.

This is a discussion of expense rates, not passive vs active, but there is considerable overlap between the two, and it’s not really possible to have a robust discussion of one without the other.

 

[Midpack]

Thanks for that, as I look at charts but don't really know if they include the divs as part of the overall value increase/performance.

For example, I charted the FBGRX folks are talking about to BRK-B and SPY comparatively and FBGRX scored the lowest ? , with BRK-B the highest.View attachment 52451

But then using your link it shows a different result. The range is different but over the last 20 years it shows BRK.B and FBGRX pretty close with variations

View attachment 52452

Hindsight is a wonderful thing…

 

[motley]

Your question, answered yes, is inherent to passive investors' models.

,05 expense ratio over time beasts .50.

...all other things being equal; of course. But as always, the devil's in the details...

 

[OldShooter]

Your question, answered yes, is inherent to passive investors' models.

I don't think looking at expense ratios is in any way inherent to passive investing. All funds have expenses. I am on the investment committee for a nonprofit and I routinely calculate a dollar-weighted overall expense ratio for a portfolio that includes both passive and active funds. The Morningstar study results AFIK don't ever differentiate between investing styles either.

 

[target2019]

...all other things being equal; of course. But as always, the devil's in the details...

Exactly. And without knowing the specific fund details, the lower expense fund wins the total performance challenge over longer periods.