Real Equity Mutual Fund Costs Zig Zag

February 2005
Journal of Financial Planning;Feb2005, Vol. 18 Issue 2, p19
Academic Journal
This article deals with the findings of a study commissioned by the Zero Alpha Group (ZAG), a nationwide network of eight independent advisory firms, regarding trading costs of equity mutual funds in the U.S. as of February 2005. Trading costs, on average, eat up an additional 44 percent above the average reported expense ratios, and shareholders don't even realize it. ZAG commissioned three professors to study over 5,000 equity mutual funds. While the trading-cost average for all the funds equaled 44 percent of the reported expense ratios, growth funds ran well above average, with small-cap-growth trading costs chewing up 123 percent above their expense ratios. Another stark difference was between actively managed funds and index funds. Annual trading costs for actively managed funds ran 48 percent of the expense ratio, while those for index funds averaged 6 percent. The ZAG study calculated the trading costs based on an explicit and implicit component. The explicit component was brokerage commissions paid for trades, and implicit trading costs included bid-ask spreads and market-impact costs that ZAG acknowledges are more difficult to quantify. The problem for shareholders in all this is that these transaction costs are all but impossible for the shareholder to find amid mutual fund documentation.


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