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Thursday, August 12, 2010
Expense ratio or Morningstar stars - which do you want to know when you consider buying a fund?
Russel Kinnel, Morningstar's director of mutual fund research, just completed a study and found the quintile of lowest expense funds beat the highest quintile every single time and lowest expense funds beat the star system more than half the time. The results show that the differences are significant.
Investors are getting the message. The Journal of Financial Planning, July 2010, reports that investors put $1.1 trillion in funds that had expense ratios at least 20% below average and pulled $86 billion from funds with expense ratios 20% above average over the 5 years ended December 2009.
The message that the single best predictor of performance is expenses and costs is slowly but surely crystallizing in the minds of investors.
Matt Hougan, IndexUniverse blogger, says Morningstar's stars are still widely used because "... they’re easy to understand and make for good advertising." In other words, it’s style over substance; and it has cost investors a lot of money over the years."