Eye On the Market: Pass the Ketchup?
By David O. England
CARTERVILLE, IL - Eye on the Market with David O. England - Pass the Ketchup?

In May, I identified the top US equity mutual funds (A Shares) by size in terms of net assets, dividend yield, expense ratios, and 12b-1 fees and sales load-commissions and compared their returns vs. SPY, a very popular Exchange Traded Fund that tracks the S&P 500- what we refer to as “the market”.

I made the comment “High commission/high fee mutual funds are excellent investment vehicles, especially for the salesman selling them”. When I made the statement it did not conform to the theme from Dale Carnegie on how to “Win Friends and Influence People”, especially with my associates who are brokers.

So today, we will audit the one year returns of these funds to see if my original thesis/statement from May holds true or see if it is time to “eat my words”, so to speak.

To avoid potential bias from my broker friends, I selected the top five Equity Mutual Funds alphabetically. Per the front end sales load, the top five (A Shares) have a very hefty commission $575 per $10,000. In addition they all have 12B-1 fees that are separate from the sales load commissions. Keep in mind that commissions are not illegal-it is your decision if you want to pay them. Many brokers can sell Institutional shares and bypass the commissions. These figures are from Yahoo Finance and are for educational purposes only.

The total expenses can vary. The trade commission to purchase SPY could vary per the online brokers from zero to $9 per transaction. Yes, compare a $9 commission for SPY vs. $575 per $10,000 purchased for Type A shares and you can see why brokers may get upset when their clients learn how things work. In fairness, I also included the dividend yield, which for some funds are impressive but are still less than their sales load.

Since all five (A Share) equity mutual funds have a high front end commission, I want to see if and by how much they outperformed the market. I would hope with the high expenses/fees they would at least outperform the market (S&P 500 ETF) by that amount to justify their extra expense.

For the total return price comparison let’s go back to March of 2009, when what I call “The New Paradigm of Investing” began and run to the present. As you can see zero/none/nada of these high commission, type A mutual funds symbol outperformed the market ETF SPY. Also, the zero load-low $9 flat fee commission, low expense ratio (.09%) ETF grossly outperformed the equity mutual funds 129% to their best price return of 104% to 75%. Keep in mind past performance does not indicate future returns. Also, SPY still outperformed these mutual funds going back one year. It will be interesting to see the price performance results at the end of the year.


What can we learn from this? In no way does this mean that equity mutual funds always underperform the market. I am sure there are some out of the thousands that outperform. Some of my favorites are a select group of the (no load) Vanguard-Index Mutual Funds. Also, bigger is not always better and just because a fund charges a commission (load fund) there is no guarantee it will have higher returns than zero commissions (no load) mutual funds and vice-versa.

Full Disclosure-I do not own any shares of SPY and will never own any Mutual Funds mentioned in this column.

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(Disclaimer) The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short or hold any stock or investment product is a direct result of your own decision, free will and research.

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Published 07:00 AM, Saturday Oct. 06, 2012
Updated 12:26 PM, Thursday Oct. 11, 2012

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