Last year was a good year to be allocated to domestic equity mutual funds. U.S. equity funds, as a group, delivered a 22.3% return to shareholders. Sector equity funds did even better, with a 23.9% gain.

Such good returns would seem to be a magnet for new dollars. They weren’t. Domestic equity funds incurred $352 billion of net cash outflows between January 2021 and November 2021 according to data from the Investment Company Institute (ICI). Bond funds, conversely, saw net inflows of nearly $397 billion.

Taxable bond funds saw the bulk of the inflows. These funds returned a scant 0.5% last year. They are much less volatile, however. The taxable bond fund group has a total risk index of 0.40. The U.S. equity group has a total risk index of 1.39. The risk index compares the volatility of a fund’s monthly returns for the last three years to the volatility of returns for all funds. Lower numbers signal less volatility and higher numbers signal more volatility. Higher returns and a pattern of long-term outperformance can compensate investors for buying funds with higher risk index scores.

It isn’t just risk that impacts the returns investors realize. Two other factors also play a role: the tax-cost ratio and the expense ratio.

Last year was a painful one taxwise for many mutual fund shareholders. The CapGainsValet website counted 632 mutual funds that issued capital gains distributions in excess of 10% of their net asset value (NAV) last year. Not only was this more funds than 2019 and 2020 combined, it also was the largest number of such funds to issue capital gains distributions since at least 2014.

Capital gains distributions are taxable to investors holding such funds in taxable accounts. Taxes are due on these distributions even if you choose to automatically reinvest the proceeds and/or your fund declined in value.

The tax-cost ratio is one of the key data points included in our guide. It reflects how much an investor in the highest tax bracket saw their returns reduced by taxes. The more tax-averse you are, the more important the tax-cost ratio is.

Expense ratios have been described as a hidden tax on mutual fund shareholders. Investors don’t see deductions made from their fund holdings, but the fees do reduce the returns they realize. The fees can be particularly high for actively managed funds.

We ran the numbers on no-load large-cap equity funds. The median expense ratio for actively managed funds was 0.89%. This equates to an annual charge of $8.90 for every $1,000 invested. Because we used the median to run the calculation, approximately half of the large-cap equity funds charged more than that.

The median expense ratio for no-load large-cap index equity funds was significantly smaller at 0.25%. This equates to a fee of just $2.50 for every $1,000 invested.

The higher the expense ratio, the greater the return a mutual fund manager must realize just to break even with a lower-cost index fund. This is frequently not happening. The median passive large-cap fund returned 27.0% last year. The median actively managed large-cap fund returned 25.0%.

Gains for the Majority of Fund Categories

Overall, more than 90 mutual fund categories delivered positive returns last year. In comparison, only 24 categories declined in value during 2021.

Energy, real estate, energy master limited partnership and financial were the best-performing fund categories. They gained 42.8%, 40.0%, 38.0% and 32.0% respectively for the year. Small, mid-cap and large value also did very well.

The best-performing mutual fund, as shown in Table 1, was Bridgeway Small-Cap Value (BRSVX). This small-cap value fund holds 176 stocks and has an expense ratio of 0.92%. Its total risk index of 1.84 suggests a high level of volatility. Nonetheless, it has outperformed most of its peers over the past three-, five- and 10-year periods.

It wasn’t a good year for emerging markets funds, however. Latin America Stock and China Region were among the worst-performing categories, falling by 13.4% and 11.2% respectively last year. Despite China’s strong economic growth, funds specifically targeting it have not outperformed. During the past 10 years, the China Region category has an annualized return of 9.1%. Large-blend U.S. mutual funds have delivered a 15.0% return over the same period.

Fidelity Latin America (FLATX) was among the worst-performing funds (Table 2). It lost 15.6% last year. It has a 58% allocation to Brazil and a 25% allocation to Mexico. Such high-country concentrations are not unusual among emerging markets funds. Fidelity Latin America is an example of why you should not choose funds based on their families alone. The fund has three-year and five-year return grades of C and a 10-year return grade of F, though its expense ratio of 1.06% is below most of its peers.

Still, there are diversification benefits to allocating to international stocks as they don’t always move in unison with U.S. stocks.

More Vanguard in the Most Widely Held Funds

In each year’s mutual fund guide, we include a table highlighting the 50 most widely held funds. These are funds most likely to be individual investors’ portfolios and thereby of most interest.

Over time, we’ve seen Vanguard’s presence on the list increase. This year’s list of the most widely held funds (Table 3) includes 36 Vanguard mutual funds—an increase of two funds from last year. In a distant second place are Fidelity and T. Rowe Price with four funds each. Dodge & Cox (three), DoubleLine (one), Metropolitan West (one) and Strategic Advisers (one) round out the list.

Funds appearing on this table have no loads. Leveraged or inverse funds are excluded. Institutional funds are also excluded as are special share classes (e.g., adviser, retirement, etc.). Only Vanguard admiral share classes are shown for funds with both admiral and investor class shares available to individual investors.

Funds meeting these criteria are then sorted by total assets, largest to smallest.

The largest fund remains the Vanguard Total Stock Market Index Admiral (VTSAX). Its assets increased 27.7% from last year to $1.34 billion. This amount is larger than the combined total assets under management (AUM) of the second- and third-largest funds—Vanguard 500 Index Admiral (VFIAX) and Vanguard Total International Stock Index Admiral (VTIAX). It’s little wonder that The Wall Street Journal described Vanguard Total Stock Market as “the mutual fund that ate Wall Street.”

This Year’s Guide

This year’s mutual fund guide continues to make use of the data and tools available to members on AAII.com. They include our mutual fund grades and category averages.

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).

Members using the online version of this guide have access to data on more than 24,000 mutual funds on our website. This large universe includes the no-load funds widely available to most individual investors as well as institutional and special share class funds. The latter may only be available through workplace retirement plans [e.g., 401(k) plans] and/or through brokers and financial advisers. Go to www.aaii.com/guides/mfguide to access the online version of the guide.

Our mutual fund data is updated monthly. Spreadsheets can be downloaded by clicking on the “Excel” button located on the right-hand side of the online mutual fund guide.

AAII members reading either the print or PDF version of this guide will see key mutual fund data presented on a single page. Nearly 370 mutual funds from a wide range of asset classes, fund groups and categories are covered in the print and PDF versions. (The number of no-load mutual funds meeting our criteria decreased this year from last year. Just under 400 funds appeared in the print and PDF version of the 2021 guide.) The single-page layout makes it easier for those of you who prefer to print out copies.

All AAII members have the ability to track the mutual funds they own in our My Portfolio tool on AAII.com. Clicking on a fund’s name or ticker (or typing either into the search box located at the top of most pages on our website) will call up our mutual fund evaluator. This page provides valuable information and data about the fund you are most interested in. It’s a very helpful tool for conducting mutual fund research.

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 1 and 2) to provide a more direct comparison with our quarterly funds updates, 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 listings (Tables 1 and 2) to match the criteria used in our quarterly funds updates.

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 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/PDF 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 AAII.com 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 24,000 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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