In eight out of nine investment styles, lower-expense mutual funds beat out more expensive brethren over one-, three-, five-, and 10-year periods, according to a new study from Standard & Poors. The only style category where most costly funds won out was mid-cap blend.
"Investors need to pay closer attention to expenses, especially in a market environment where returns are expected to be in the single digits. It is in this type of setting that expenses can take a larger proportion of a funds return," said Phil Edwards, managing director of funds research at S&P.
Because fund expenses are presented in percentage form, many investors become confused and dont really understand the meaning of the figures, he added.
S&P determined the expense ratios of funds in each of nine style categories, then calculated the average expenses. Each category was then divided into two groups, funds with expenses above the average and those with expenses below the average.
In the large-cap growth category, the average expense was 1.6%, but the average for funds below that was 1.10% while the average for funds above that was 2.24%. The funds with the higher expenses averaged a one-year return of negative16.70%. Those with lower expenses averaged negative 15.66%. The average difference in expenses was 1.14%, while the average difference in performance was 1.04%.