Point 4: Fees and Expenses of the Fund
The fund is offered on a pure no-load basis (that is, the fund has no 12b-1 fees or charges to buy or sell shares).
The fund's operating expenses are deducted from its total assets before daily share prices and income distributions are calculated. The fund's expense ratio for the most recent fiscal year was 0.79% of assets.
| Annual Fund Operating Expenses | |||||||
|---|---|---|---|---|---|---|---|
| Investment Advisory Fees | 0.58% | ||||||
| Distribution Costs | none | ||||||
| Other Expenses | 0.21% | ||||||
| Total Operating Expenses | 0.79% | ||||||
The following example illustrates the expenses that you would incur on a $10,000 investment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period:
| 1 Year | 3 Years | 5 Years | 10 Years |
|---|---|---|---|
| $81 | $252 | $439 | $978 |
Note that this example does not represent past or future expenses or performance. Actual expenses may be higher or lower than those shown.
What to Look for: Expenses count. Every dollar spent in expenses by a fund is a dollar less of return for the investors. All funds have expenses and different types of funds tend to have different average expense ratios—expenses stated as a percentage of fund value on an annual basis.
The expense ratio includes the investment advisory fee, fund administrative expenses, and a distribution fee, referred to as the 12b-1 charge, an annual load that cannot exceed 1.00%. The expense ratio does not include front-end sales loads, back-end sales loads, redemption fees, or account transaction charges.
When you are judging expense ratios, keep in mind that very high expense ratios relative to similar funds are difficult for portfolio managers to overcome, so an examination of category averages is useful (see table below).
| Fund Category | Average Expense Ratio (%) | ||||||
|---|---|---|---|---|---|---|---|
| Domestic Stock Funds | 1.2 | ||||||
| International Stock Funds | 1.2 | ||||||
| Domestic Bond Funds | 0.6 | ||||||
| International Bond Funds | 1.1 | ||||||
| Index Funds | 0.8 |
Expense ratios that are significantly higher than these averages—for instance, 1.5% for a domestic stock fund—are cause for concern, particularly for lower-return funds such as bond funds.
The table will also note any loads or fees that are charged to buy or sell fund shares, reinvest dividends, or exchange into other funds in the family. Remember, loads reduce returns dollar-for-dollar and do nothing to improve fund performance.
The second half of the fees and expense table is the cost in dollars of a $10,000 initial fund investment, assuming a return of 5% annually with all distributions reinvested. Since this table is in dollars and not percentages, it is fairly useless unless you are willing to multiply these dollar expenses by the number of $10,000 investment units you have in the fund. Even then, it is more difficult to judge expenses in dollars than in terms of percentages.
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