Data and Research May 5, 2016
Low-Cost Funds May be Outperformers
They are more likely to survive, which means they have outperformed their peers.
Reported by Lee Barney
Mornginstar took a look at the survival rates of funds at various fee levels and found that the lower-cost funds had a higher rate of surviving—another indication that these funds outperformed their peers.
“While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success,” says Russel Kinnel, chair of Morningstar’s North America ratings committee. “We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.”
Between 2010 and 2015, the cheapest quintile of U.S. equity funds had a success rate of 62%, compared to 48% for the second-cheapest quintile, 39% for the middle quintile, 30% for the second-priciest quintile and 20% for the priciest quintile.
For the cheapest quintile of international equity funds, 51% had a success rate compared with 21% for the priciest. Balanced funds had a 54% success rate for the cheapest quintile compared with 24% for the priciest. Taxable bond funds had a 59% success rate for the cheapest quintile compared to 17% for the priciest, and muni bonds had a 56% success rate for the cheapest quintile compared to 16% for the priciest.
Morningstar’s full report, “Predictive Power of Fees,” can be downloaded here.
“While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success,” says Russel Kinnel, chair of Morningstar’s North America ratings committee. “We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.”
Between 2010 and 2015, the cheapest quintile of U.S. equity funds had a success rate of 62%, compared to 48% for the second-cheapest quintile, 39% for the middle quintile, 30% for the second-priciest quintile and 20% for the priciest quintile.
For the cheapest quintile of international equity funds, 51% had a success rate compared with 21% for the priciest. Balanced funds had a 54% success rate for the cheapest quintile compared with 24% for the priciest. Taxable bond funds had a 59% success rate for the cheapest quintile compared to 17% for the priciest, and muni bonds had a 56% success rate for the cheapest quintile compared to 16% for the priciest.
Morningstar’s full report, “Predictive Power of Fees,” can be downloaded here.