Kathleen Owens
Kathleen Owens, Aurora Financial Planning Investment Management
Mutual funds and exchange traded funds (ETFs) are like a basket of investments. You combine your money with other investors to “mutually” buy stocks, bonds, and other investments. Professional money managers decide the strategy and manage the fund. There is a mutual fund or ETF for just about any investment strategy.
How to identify a mutual fund is by its ticker. All mutual funds end with the letter X. One of the oldest mutual funds is Putnam Investors Fund and the ticker is PINVX.
What are the costs? The cost is called the expense ratio. This is the percentage that will be deducted annually from your investment in the fund. One reason mutual funds usually cost more than ETFs is because most mutual funds are actively managed, whereas most ETFs are passively managed. The bulk of ETFs track an index, such as the S&P 500. However, actively managed ETFs are now trending.
ETFs have an expense ratio, but don’t have share classes.
Also, within the expense ratio is the 12b-1 fee. Part of this fee is to incentivize the stockbroker to sell the mutual fund, but not intended to pay for advice. Under the Investment Adviser Act of 1940, any advice a broker provides to earn the 12b-1 fee must be “solely incidental” to what is primarily the sale of a product.
Below is an example of a mutual fund’s costs depending on which share class you buy. The investment is $10,000, for the time period indicated, and you redeem all of your shares at the end of each period. Assumes a 5% return each year and the operating expenses are the same. Based on these assumptions your costs would be:
MDILX Share Class Cost
“A” Shares, +5.25% sales charge (load)
1 Year: $613
3 Years: $843
5 Years: $1,090
10 Years: $1,799
“C” Shares
1 Year: $269
3 Years: $559
5 Years: $975
10 Years: $1,948
“I” Institutional Shares
1 Year: $67
3 Years: $237
5 Years: $421
10 Years: $955
“R” Retirement Shares
1 Year: $118
3 Years: $428
5 Years: $760
10 Years: $1,700
Costs can vary widely depending if you purchase through an investment adviser or a broker-financial advisor. If you purchase through certain brokers, you may be charged a transaction fee, a commission plus management fee. Always get costs in writing before you proceed with any investment purchase.
The good news is the cost to own mutual funds and ETFs have dropped, due to investor awareness of costs and industry competition. Now the average expense ratio for mutual funds and ETFs is 0.37%.
Kathleen Owens, is a Fiduciary, Fee-Only Registered Investment Adviser Representative and Certified Financial Planner candidate with Aurora Financial Planning & Investment Management LLC. She can be contacted at 858-205-7651 or [email protected].