Last year’s rollout of new online tools and data allowed us to further evolve our annual mutual fund guide. This year’s guide features a revised format. We’ve also increased the number of funds presented in the print version. More information, including expanded data on more than 24,500 mutual funds can be found on AAII.com.

The revised format you see in the print and PDF version of this guide shows key mutual fund data on a single page. Doing so allowed us to increase the number of funds covered. Nearly 400 mutual funds from a wide range of asset classes, fund groups and categories are covered. The single-page layout also makes it easier for those of you who prefer to print out copies.

To help you put the funds into perspective, we’re again including our category averages and mutual fund grades. The category averages provide a peer-based benchmark to compare a given fund against. They allow you to quickly see if a fund is more attractive or less attractive than all other funds in a particular category.

The grades range from A to F. The scale works just like it did when you were in school, A’s are good, while F’s are bad. Each of these grades is tied to a percentile rank based on how a specific fund compares to its category peers. A fund’s average annual return for a given period that ranks in the top quintile (best 20%) relative to that of its category peers will receive a grade of A. Lower grades are assigned for lower quintile rankings. So, a grade of C means that the fund’s average annual return for a certain period was about average relative to that of its category peers (the 41st to 60th percentile).

In the print version of this guide, grades are provided for three-, five- and 10-year annualized returns. In the online version of this guide, grades are provided for additional periods as well as for category risk and expense ratio (for these two figures, the lower the rank, the higher the grade).

There is also far more detailed information provided about each fund in the online version of this guide. At www.aaii.com/funds/mutualfundguide, you will find useful information about the composition of a fund’s portfolio, beta for equity funds, interest rate sensitivity (how sensitive a fund’s returns are to changes in interest rates) for bond funds, manager tenure, R-squared (a measure of whether an “active” manager is truly active) and minimum initial purchase amounts. This data is updated monthly and can be downloaded to spreadsheets: Click on the “Excel” button located on the right-hand side.

In this issue, we’ve also included our Guide to ETFs (exchange-traded funds). To accommodate it, we moved some commentary and features previously included in the mutual fund guide to a separate article in this issue. This includes information about how to use the guide and return data for the major indexes. 

Trends in Mutual Funds

The ongoing trend of individual investors pulling money out of equity-focused mutual funds continued last year. Data from the Investment Company Institute (ICI) on long-term flows clearly shows this trend. Flows are dollars invested in (inflows) and dollars withdrawn (outflows).

Domestic large-cap, mid-cap and multi-cap equity funds incurred long-term outflows during every month between January and November of 2020. Individual investors withdrew dollars from domestic small-cap funds, on a net basis, during every month but April. (December 2020 data had yet to be released by the ICI at the time of publication.)

It wasn’t much better on a global or foreign basis. Net outflows were realized by total world and developed market funds during every month between March and November. Emerging markets fared slightly better, with net inflows occurring in January, February and November. Outflows occurred during the other eight months.

In total, long-term outflows from equity mutual funds totaled more than $568 billion last year.

Some of the money went to bond mutual funds. Estimated inflows into bond funds were just shy of $183 billion. Inflows were mostly positive for the majority of taxable categories as well as municipal bonds during all months except for March and April.

Taxable bond funds—particularly investment-grade funds—were the big beneficiaries. Investment-grade bond funds realized almost $152 billion worth of inflows between January and November 2020.

Even with these trends, both equity and bond funds saw their total assets grow last year. Equity funds ended 2020 with $12.2 trillion in assets. Domestic equity funds had $9.2 trillion in assets as of the end of November, an increase of 10.8% from the prior year. Bond funds had $5.1 trillion in assets at the end of November, reflecting a 10.1% increase.

The size of a fund’s assets is determined by both the net amount of flows as well as its returns over a given period. The record high returns for stocks, as well as lower yields for bonds, helped to boost the size of mutual funds’ assets.

Vanguard’s Dominance Continues

The performance of the top 50 most widely held no-load mutual funds (highest total assets) is shown in Table 1. This is a table we’ve published in the AAII Journal for more than a decade now.

We went back and looked at the same table we published in the 2010 mutual guide—the first to be included in the AAII Journal—to provide a long-term comparison about how much industry leadership has changed.

At year-end 2009, 15 of the 50 most widely held funds were Vanguard funds. In the latest update to the table, Vanguard funds comprise 33 of the 50 shown.

The largest fund, Vanguard Total Stock Market Index Admiral (VTSAX), had $1.05 trillion in assets under management as of December 2020. This compares to $58 billion of assets at the end of 2009 for the Investor class shares of the same fund, also at the top of the list. (Vanguard’s Admiral and Investor class shares invest in the same funds; minimum purchase and fees are the only difference. For many Vanguard mutual funds, only Admiral class shares are now widely offered.)

Also notable is the ranking of Fidelity Contrafund (FCNTX). Though this large-cap fund ranked a close second in terms of total assets ($57 billion) at the end of 2009, its total current assets of $136 billion are only high enough to put the fund in ninth place in our rankings.

In total, only eight mutual fund families are represented on the current 50 most widely held funds table. They are Dodge & Cox, DoubleLine, Fidelity, Harbor Capital, Metropolitan West, Strategic Advisers, T. Rowe Price and Vanguard.

The Impact of Discount Broker Changes on Mutual Fund Trades

Most discount brokers stopped charging commissions on stocks and exchange-traded funds (ETFs) during the fourth quarter of 2019 and in January of 2020. This change in commission structure has yet to extend to mutual funds. Purchases and sales of mutual funds that are not included on brokers’ no-transaction-fee lists continue to cost between $20 and $50 per transaction.

Fortunately, individual investors have options. The major discount brokers offer between 3,000 and 4,400 mutual funds on a no-transaction-fee basis as shown in our discount brokerage guide (which appeared in the January 2021 AAII Journal). Mutual funds can also be bought and sold directly from their sponsors. The latter will require opening an account directly with the fund family or its brokerage arm, if one is offered. (Fidelity, Schwab and Vanguard all offer their respective funds through their brokerage units.)

Charles Schwab completed its acquisition of TD Ameritrade this past October. Both firms currently offer more than 4,000 mutual funds available to their clients on a no-transaction-fee basis. It’s currently unclear whether the current merging of operations will result in certain funds losing their no-transaction-fee status. Clients of either firm who are concerned may be able to check the no-transaction listing of the other firm.

Morgan Stanley completed its merger with E-Trade in October 2020 as well. Morgan Stanley intends to make more of its offerings available to E-Trade clients going forward. It is unclear what, if any, impact this will have on the 4,400 no-transaction-fee mutual funds offered by E-Trade.

Fidelity began offering fractional share purchases of stocks and ETFs last year. Some app-based brokers do as well. Previously, fractional shares of mutual funds could be purchased but not ETFs. We have yet to see any evidence suggesting this shift has altered demand for mutual funds.

Which Mutual Funds Were Included?

The mutual funds that appear in this guide were selected from the universe of open-end funds tracked through Nasdaq. The following are the various screens we used for the final selection of which funds to include in the print and the PDF versions of this guide.

Categories

The starting point for determining which categories to include were the fund groups matching our Asset Allocation Models. The stock and bond mutual funds comprising these groups are also the most frequently found in individual investors’ portfolios. We then expanded the list of fund categories to cover those of interest to a large number of investors or that were commonly found in workplace retirement plans. This latter group includes sector funds, high-yield bond funds, allocation funds and target-date funds.

Historical Record

Only those mutual funds with three full years of data are included in Table 4. This requirement ensures that there is a performance record of significant length and all performance measures can be calculated. This requirement was loosened for the listings of the best- and worst-performing funds (Tables 2 and 3) to provide a more direct comparison with our Quarterly Mutual Fund Update, which will be included in the May, August and November issues of the AAII Journal.

Size

Funds must appear in the Nasdaq mutual fund listings. Funds were generally required to have at least $1 billion in assets. These size requirements were loosened from a year ago to include more funds. A smaller size requirement was used for the top- and bottom-performing fund listing (Tables 2 and 3) to match the criteria used in our Quarterly Mutual Fund Update.

Loads

Only no-load mutual funds are included. Funds charging a load were excluded because of the large number of no-load funds available to individual investors and the drag on returns a front-end or back-end fee can have. Share classes more likely to have to 12b-1 fees were also excluded.

Expenses

Funds with significantly higher expense ratios than the average for their category are generally excluded.

Performance

For the most part, funds that significantly underperformed compared to the average performance of funds in their category are not included. Exceptions were made for funds of significant size.

Interest and Availability

Only those funds that are of general interest to mutual fund investors and available for investment by individual investors directly from the fund, without restrictions, are included in the print version of this guide. If a fund family offers multiple no-load classes of its funds, the investor or retail class is presented.

Go to Expanded Guide for Information on More Funds

Performance figures for mutual funds that do not appear in the print version of this guide can be accessed at www.aaii.com/guides/mfguide, where data on more than 24,500 funds can be found. These include funds sold exclusively through advisers and those designated with special share classes, such as retirement.

Additional analysis can be conducted with our Compare Funds tool, found at the Investing Ideas page. You can use it to compare and contrast return, risk and turnover information for two or more funds. You can also track the funds you own or are most interested in with My Portfolio. ▪

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