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Funds With Low Expense Ratios Outperform More Expe

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June 13, 2003 — A Standard & Poor’s study found that funds with lower expense ratios outperform more expensive funds in all but one domestic equity fund style category. The exception was mid-cap blend funds, where funds with higher expense ratios outperformed funds with lower expenses. These results covered the one-, three-, five-, and ten-year periods through April, on an annualized basis.

The study determined the average expense ratio for each of the nine domestic equity fund style categories. Funds in each style category were divided into two groups: those with expense ratios lower than their respective peer-group average, and those with expense ratios higher than their peer average. Average annualized returns for each of these two groups were compared over one-, three-, five-, and ten-year periods to determine if a fund’s returns justified its expense level over the long term. These comparisons found that funds with higher than average expense ratios did not show higher returns in eight of the nine style categories.

“Investors don’t always take expenses into account when selecting a mutual fund because they are typically stated in percentage returns — making it harder to translate in a meaningful way,” notes Phil Edwards, managing director of funds research at Standard & Poor’s. “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 fund’s return.”

The following table shows the average performance of funds with expense ratios above and below the average for their style category. Fund returns are through April 30, 2003.

Style CategoryOne-Year

Returns (%)Three-Year

Returns (%)Five-Year

Returns (%)Ten-Year

Returns (%)Average Expense Ratio (%)

Average Large-Cap

Growth Fund-16.12-19.78-4.34+7.271.60

Funds Above Average Expense Ratio-16.70-20.80-5.50+6.052.24

Funds Below Average Expense Ratio-15.66-19.03-3.71+7.591.10

Average Large-Cap

Blend Fund-14.65-13.20-3.55+8.111.26

Funds Above Average Expense Ratio-14.95-13.33-4.33+6.421.85

Funds Below Average Expense Ratio-14.39-13.11-2.99+8.590.75

Average Large-Cap

Value Fund-15.92-5.66-1.98+8.411.41

Funds Above Average Expense Ratio-16.46-6.23-2.61+7.241.94

Funds Below Average Expense Ratio-15.45-5.20-1.54+8.740.97

Average Mid-Cap

Growth Fund-19.09-18.83-2.52+7.011.69

Funds Above Average Expense Ratio-19.60-19.80-3.53+4.692.22

Funds Below Average Expense Ratio-18.60-17.94-1.80+7.691.19

Average Mid-Cap

Blend Fund-15.60-4.81+1.61+9.661.26

Funds Above Average Expense Ratio-15.44-4.94+2.38+10.371.78

Funds Below Average Expense Ratio-15.75-4.70+1.00+9.330.76

Average Mid-Cap

Value Fund-15.38+2.89+1.91+10.171.48

Funds Above Average Expense Ratio-15.85+1.12+0.27+8.741.98

Funds Below Average Expense Ratio-15.02+4.04+2.63+10.471.11

Average Small-Cap

Growth Fund-22.99-16.88-3.54+5.921.78

Funds Above Average Expense Ratio-23.54-19.07-5.32+2.442.55

Funds Below Average Expense Ratio-22.60-15.43-2.42+7.491.25

Average Small-Cap

Blend Fund-19.61-2.75+0.34+9.471.44

Funds Above Average Expense Ratio-20.37-3.96+0.44+6.192.06

Funds Below Average Expense Ratio-19.03-2.04+0.28+9.640.97

Average Small-Cap

Value Fund-18.23+5.28+1.21+10.031.60

Funds Above Average Expense Ratio-18.60+4.35+0.12+6.912.22

Funds Below Average Expense Ratio-17.99+5.87+1.86+10.671.16

Source: Standard & Poor’s.