Each year Lipper produces its "Quick Guide to Fund Expenses." The report consists of a single table displaying the asset-weighted average and average total expense ratios by load-type (front-end load/no-load, institutional, and back-end load/level-load), fund type (actively managed funds, index funds, exchange-traded funds, and funds of funds), and Lipper classifications/objectives.
The table is designed to do exactly as the name entails—the reader should be able to compare quickly expenses across these different fund types.
The 2012 Lipper Quick Guide to Fund Expenses (the Guide) contains expense ratios for open-end mutual funds with fiscal year-ends in 2011 and with at least six months of operating expense data. Lipper calculates expense ratios from the audited fiscal data disclosed in each fund's annual report, which is publicly available two months after the fiscal year-end for each fund.
From these calculated expense ratios, Lipper computes the average total expense ratio and the asset-weighted average total expense ratio. The average total expense ratio is the simple average for a set of funds. The asset-weighted average is computed by assigning an asset weight based on the average net assets of a fund. The expense ratio for each fund then is multiplied by this weight and summed to create the asset-weighted average for a set of funds.
There are two consistent expense themes across Lipper classifications/objectives and fund types. These themes exist not only in this year's guide but also in guides from previous years. And, they are expected to exist on into the future.
The first is that asset-weighted average total expense ratios tend to be lower than average total expense ratios. For example, institutional U.S. diversified equity funds have an average total expense ratio of 1.073%, compared to the lower asset-weighted average ratio of 0.765%. The difference most likely arises from economies of scale.
Typically, as a fund grows in size, greater operational efficiencies are realized. This means that funds with greater assets have lower total expense ratios. When an asset-weighted average is computed, funds with more assets are given a greater weight than funds with fewer assets, and this in turn causes the asset-weighted average to be lower than the average total expense ratio.
The second finding concerns load types. From the macro level view presented in the Guide, institutional funds tend to have lower total expense ratios as compared to front-end/no-load funds, while back-end/level-load funds typically have the highest average and asset-weighted average total expense ratios. For example, institutional domestic taxable fixed income funds have an average total expense ratio of 0.733%, compared to 0.861% for front-end load/no-load funds.
Back-end load/level-load domestic taxable fixed income funds' average total expense ratio is higher still at 1.1590%. The expense differences between funds of different load-types can be partly attributed to 12b-1 and non-12b-1 service fees incurred based on the method and type of distribution of the fund.
In addition, institutional funds may only be available to specific investors, and therefore incur fewer advertising costs than their retail counterparts incur.
Fund Types-Index Funds and Exchange-Traded Funds
The table below displays several interesting findings across fund types. As with the themes discussed earlier, these findings hold in previous versions of the guide, and they are expected to be reaffirmed in future versions of the guide.
Index funds and exchange-traded funds (ETFs) are less expensive than actively managed open-end funds.
For example, US diversified equity (USDE) ETFs and USDE institutional index funds have asset-weighted average total expense ratios of 0.330% and 0.182%, respectively, versus actively managed USDE institutional funds with expense ratios of 0.765%.
This difference is mostly due to structure. ETFs and index funds are designed to match an index; as such, their management costs are lower than actively managed open-end mutual funds.
Funds of Funds
So-called funds of funds have a different expense structure from non-funds of funds, which makes it difficult to compare the asset-weighted average and average total expense ratios for funds of funds and non-funds of funds. Fund of funds total expense ratios (displayed in the last lines of the table) contain expenses known as underlying fund expenses. Underlying fund expenses are incurred from a fund's investments in its underlying funds.
Comparing the total expense ratios for funds of funds and non-funds of funds entails comparing expenses containing different components. However, mixed-asset non-funds of funds do have similar average and asset-weighted average total expense ratios to lifestyle and lifecycle funds of funds. This is most likely because, despite the different expense components, they invest in a similar mix of equity and fixed income investments.
Actively Managed Funds
Average and asset-weighted average total expense ratios for actively managed funds vary by Lipper classification/objective.
Equity funds are divided into five groups: U.S. diversified equity, balanced/mixed equity, other domestic equity, sector equity, and all world equity. These groups are further split into smaller sub-groups. Across load-types, other domestic equity, sector equity, and all world equity groups have the highest average and asset-weighted average total expense ratios.
Within equity, the groupings are not consistently more expensive than one another are; however, equity funds are more expensive than fixed income funds. The asset-weighted average for front-end and no-load equity funds is 0.880%, while the asset-weighted average for front-end and no-load fixed income funds is 0.469%.
Fixed income funds are divided into three groups: taxable fixed income, money market, and municipal debt. Across all three load-types, money market funds have the lowest average and asset-weighted average total expense ratios, ranging from 0.176% to 0.273%. The taxable fixed income group has the highest average and asset-weighted average total expense ratios across the three groupings of funds.
Money market funds in the fixed income arena offer a unique case study when it comes to expenses. That is because there is not as much variation in total expenses between load-types or the expense ratio calculation methodologies. This is most likely because money market funds' total expense ratios are minimized as low as they can go, so that money market funds can maintain positive yields.
The 2012 Lipper Quick Guide to Fund Expenses shows that expense differences exist across Lipper classifications/objectives, load-types, and fund types. While the actual expense amounts for funds change from year-to-year, the general trends discussed here hold true for the past and are expected to hold true in the future.
Sasha Franger is a Fiduciary Research Analyst for Lipper.
In that capacity, she specializes in analysis of the expenses
and performance of mutual funds, writing papers
and conducting research on pertinent industry trends.