Trading costs on mutual funds outweigh commission fees for investors, experts say

Concerns arise when managers make trades because of hefty cash flows

May 29, 2009 @ 2:14 pm

By Lisa Shidler

With many managers failing to generate strong returns, trading costs are harder for investors to stomach.

Often-ignored trading costs for mutual funds add an average of 1.64%, making positive returns even more difficult to achieve, said Arijit Dutta, associate director of fund analysis at Morningstar Inc. in Chicago.

He and Roger Edelen, assistant professor at the University of California, Davis Graduate School of Management, spoke today at Morningstar’s annual investment conference in Chicago.

Typically, investors and advisers worry about commission costs associated with a mutual fund, but trading is much costlier, Mr. Edelen said.

Concerns arise when managers make trades because of hefty cash flows, not because they want to add value to the fund, he said.

“Some funds have a high hurdle to overcome because of the costs,” Mr. Edelen said. “This doesn’t mean that active management is dead; it just means that they have a [high] hurdle to overcome."

Mr. Edelen said commission costs pale in comparison with the costs that are added by trading, particularly when fund managers buy stocks because they have an added supply of cash.

He said trading costs add up because managers start to buy a stock one day and continue to buy that same stock for several days.

By the time they’ve finished purchasing the stock, they have driven up the price of the stock, and it is much more expensive than it was when they first bought it, Mr. Edelen said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Ed Slott: Tax strategies to help clients take advantage of market declines

When the markets decline or are volatile, it is an opportunity to put a few retirement savings strategies to work, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

On Social Security, financial advisers tell clients to not count on much

Beyond debating its solvency, advisers embrace the reality of a broken system.

More advisers disapprove of Trump job performance at six-month mark

More than half of respondents to InvestmentNews poll say their confidence has dropped since start of term. Supporters give him partial credit for market uptick.

Fidelity taps Goldman Sachs to expand lending services through RIAs

Streamlined non-purpose loans use investment portfolios as collateral.

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Vanguard winning at bond inflows, too

But iShares is strong competition.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print