Evaluating Fees in Mutual Funds and ETFs

There are two major fee categories (in addition to any advisory fees from your financial advisor) that you should be aware of. Here they are:

1. Expense Ratios: Are a combination of the following fee components. Expense ratios for AVERAGE Mutual Funds are around 1 to 1.5%. ETF Index funds can be as low as 0.09%.

• Management Fees: The fees to pay for the person(s) who are making the trading decisions. These people are called the PRINCIPLES of the fund (like your grade school principle)
• 12b-1 Fees: The fees for distribution the fund (advertising, printing, paying commissions to salespersons)
• Transactions Fees: The fees of actually trading the individual stocks

2. Sales Loads: These fees are to pay for the sales people selling these products. They also pay for the marketing materials.

• Front Load (Class A Shares): You buy a $10 stock for $10.50. So you pay more for the shares than they are worth in order to pay for the sales.
• Back Load (Class B Shares): You buy $10 worth stock for your $10, but when you sell your stock (say for $15), the fund pays you ~$14.50 and keeps the $0.50 to pay for sales. Sometimes, this fee is waived if you keep your shares for x years, and then those shares are converted to Class A shares (without paying the sales fee). That is a good thing.
• No Load (Class C Shares): You don’t pay for sales directly, but the fund’s expense ratio is typically much higher to account for not charging you directly. They will typically put this in the 12b-1 component of the expense ratio.
• Level-Load (also classified as Class C Shares): These funds will charge you a % every year to pay for the sales fee.

So what do I look for in a Mutual Fund or ETF? I look for low expense ratios and no sales charges. The amounts I look for are less than 0.5% in total. These are normally only going to be found in index funds as index funds are not typically actively managed (so you don’t have to pay for a professional money manager who on average doesn’t beat the market).

Some great places to check what your fees are:

1. Bloomberg- Search your symbol + Bloomberg in Google
2. FINRA — http://apps.finra.org/fundanalyzer/1/fa.aspx