When it was launched in 1976>, the Vanguard 500 index fund (VFINX)
Regardless of which camp you re in, it's hard to argue with the Vanguard 500 fund's success. Since its inception, it has returned an average annual 9.8% while charging some of the lowest fees in the business. Indeed, depending on the share class, the annual expenses run as little at $9 a year for every $10,000 invested. The average actively managed equity fund can charge over 10 times that amount.
Even as the investing world gets sidetracked by "stress tests," dismal earnings and banking woes, it s still important to remember the most important element of fund-picking: low fees. There are plenty of things that impact fund performance: good (or bad) stock picking, a well-honed (or flawed) investing strategy and the larger economic picture. But fees also play a part -- and there is a powerful incentive to pay attention to them. Over the life of a retirement account, expenses can eat up tens of thousands of dollars.
This week, the SmartMoney.com fund screen looked for funds that had the lowest annual expense ratios in their respective Lipper classifications. That last detail is an important one. If we simply screened for the lowest annual expense ratios, regardless of classification, the table below would be filled with S&P 500 index funds. That's not our goal. Our method finds the cheapest small-cap fund, the cheapest health-care sector fund and the cheapest international offering. We also mixed in performance data. After all, what good are low fees if returns are poor? We ultimately found 22 funds.
Mutual fund fees and how they relate to performance has been widely studied in the academic world. Mark Carhart, a former professor at the University of Southern California, produced a definitive study in 1997. In "On Persistence in Mutual Fund Performance" he tried to nail down exactly what impacts fund performance year after year. One conclusion: "The investment costs of expense ratios, transaction costs and load fees all have a direct, negative impact on performance," he wrote.
Some investors -- especially those who believe in a manager's ability to beat the market -- will take issue with that as a blanket statement. If you were fortunate enough to invest in CGM Focus (CGMFX)
Investors can also be rewarded in another way for seeking out low-fee funds. If they're willing to move lump sums of money into certain offerings, fund companies will give them a discount. Vanguard offers its Admiral share class to investors with over $100,000 in a fund or to those with $50,000 and 10 years worth of ownership. The share class slashes fees on some funds by anywhere from 18% to 50%. Fidelity's Advantage share class also kicks in with a $100,000 investment.
Of course, in addition to low fees, we want to see a good performance. We offer up our finalists with one caveat: Ailing banks, poor earnings, government programs, falling house prices -- the list of things that can impact stocks is long and varied and won't dissipate any time soon. "Who knows how this stuff will play out," says David Hefty, co-founder of Cornerstone Wealth Management in Auburn, Ind. So while we think the funds below are worthy of consideration, investors of all stripes should prepare for tough times ahead.
The Criteria: The equity funds on our list have annual expense ratios that are in the lowest 5% of their respective Lipper fund classifications. They are open to new money and don't charge a sales load. We waived our usual $5,000 minimum investment criteria since some fund companies offer discounts on larger positions. The funds had three- and five-year performance track records that put them in the top 20% of their peer groups. Finally, we did not consider target date, asset allocation or balanced offerings of funds of funds since they get their own screens at other times during the year.
|* Sister share class offers cheaper expense ratio |
** Instutional share class requires a $50,000 minimum investment
*** Admiral share class
|BUFSX||Buffalo Small Cap||1256||13.5||-6.64||1.86||1.00|
|SPFIX||California Investment Trust S&P 500||54||1.46||-9.88||-1.84||0.36|
|GSFTX||Columbia Dividend Income||777||-2.81||-5.59||2.00||0.80|
|FSAGX||Fidelity Select Gold||2247||6.84||0.82||18.95||0.85|
|FSMEX||Fidelity Select Medical Equip. & Systems||1029||5.26||-0.26||2.81||0.88|
|FSCSX||Fidelity Select Software & Computer Services||538||11.68||-2.73||1.59||0.86|
|FWRLX||Fidelity Select Wireless||237||35.66||-4.89||6.77||0.91|
|FSMKX||Fidelity Spartan S&P 500 *||4829||1.47||-9.97||-1.84||0.10|
|HAINX||Harbor International **||12577||2.69||-8.23||6.67||0.79|
|LEXCX||ING Corporate Leaders||313||-4.67||-6.27||3.31||0.51|
|SWPPX||Schwab S&P 500||2055||1.36||-9.84||-1.77||0.09|
|PRHSX||T. Rowe Price Health Sciences||1659||1.21||-2.44||2.46||0.86|
|RPMGX||T. Rowe Price Mid Cap Growth||9284||13.8||-7.21||2.93||0.82|
|PRMTX||T Rowe Price Media & Telecommunications||870||20.0||-4.28||7.47||0.90|
|VFINX||Vanguard 500 *||34504||1.43||-9.99||-1.88||0.16|
|VDIGX||Vanguard Dividend Growth||1745||0.18||-3.96||2.05||0.36|
|VWILX||Vanguard International Growth ***||2672||6.93||-10.14||3.34||0.28|
|VWENX||Vanguard Wellington ***||13846||1.84||-2.38||3.46||0.18|
- Fund Classification = *
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 20
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 20
- Expense Ratio <= bottom 15% of classification
- Load Fund (type) = No Load
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
- Year-to-Date return = Display Only
* Screen does not include fixed income, fund of funds, target date or balanced offerings.