Chapter 3-Fund Expenses Flashcards
Total return figures shown in periodicals, annual reports, & used by fund advisory services usually do not factor in any up front commission, BUT
Do include all ongoing costs. Account maintenance fees count as 1-time fees NOT ongoing expenses.
Ongoing expenses for a mutual fund include…
- Management fee
- Administration fee (staff salaries, call centers, accounting compliance)
- Any 12b-1 fees
- Brokerage costs (whenever the fund buys or sells securities)
- Any interest expense (if fund borrows money to purchase shares)
The most common type of back end sales load is…
Contingent deferred sales load (CDSC or CDSL) where this fee remains highest if you sell in 1st year of owning fund but gradually reduces to 0 the longer you hold the fund.
Front-end sales loads …
Come out of the amount you send to purchase shares of a fund. It reduces what you can purchase funds with. So maybe $9500 of $10k goes towards buying fund shares.
Generally, look for domestic equity and fixed income funds with expense ratios…
Under 1.25%. Some even say under 1% for equity funds and under .75% for fixed income funds.
A drop from 1.5% fees to .5% fees can lead to $10k invested over 20 years with annual return of 10% growing to ..:
$60,858 instead of $49,725-that’s a 22.4% difference!
Expense ratios affect returns on ____ more than their ____
Bond funds; equity counterparts
Few investors show concern over a fund’s expense ratio …
Perhaps because the ratio isn’t on a shareholder’s statement
As of 2020, equity funds charged ___% expense ratios, hybrid funds charged __% expense ratios, & bond funds charged __%
.59, .70, .48
As of 2020, equity funds charged ___% expense ratios, hybrid funds charged __% expense ratios, & bond funds charged __%
.59, .70, .48
An expense ratio includes …
- Administrative costs
- Management fees-this is managing the portfolio to earn max profit; ranges from .1%_1%
- 12b-1 fees (marketing costs); ranges from .25%-1% max annually
The expense ratio does NOT include …
Brokerage commissions the fund incurs to buy & sell stocks or bonds.
Expense ratios on mutual funds range from __; stock index funds and bond index funds have __ ratios. Small sector-equity funds & small___ stock portfolios have the__ ratios.
<.1%-6.5%+(!!!); lowest; foreign; highest
Some examples of
Mutual funds with their average expense ratios.
Long-term gov bonds __
Short-term gov bonds ___
Med-term municipal bonds___
Bear market___
Emerging markets stock___
World stock___
Health care___
.9%
1%
1.1%
5.4%
2.5%
2.4%
2%
Small mutual funds tend to have ___ expense ratios than large funds because of ____.
Higher; economies of scale
When evaluating a fund’s expense ratios, compare a fund’s current ratio with ___ to spot a trend. Also, compare the expense ratio with ____ the same size.
Past ratios; expense ratios of other portfolios of
The top 10% paid of Chief investment officers ($1.2 million), head of equities (or bonds) $1.3 million, portfolio managers ($500k), securities analysts ($480k) get paid about …
3-5 times the average of their category.
Turnover ratio is calculated by taking the …
Lesser of purchases OR sales, and dividing that number by average monthly net assets.
The turnover rate for the average equity fund is ___. Low turnover rates are ___. High turnover rates are ___. High turnover rates often mean ____ expenses.
90-100%. 30% or less. 120%+. excessive trading
Some turnover rates include ___ for technology funds, ___ for world bond funds, ___ for medium term gov bond funds, and ___ for bear market funds.
124; 135; 410; 479
Annual turnover for equity funds was ___ 50 years ago compared to 90-100% today.
People purchasing mutual funds redeem their shares at an annual rate of ___ compared to about 5% in 1960.
15%; 25%
A mutual fund’s expense ratio does NOT include
- Trading costs
- Bid-ask spreads
Why an average Joe in theory could ostensibly just “pick stocks on their own”.
From 1970-2018, the Dow saw a cumulative return of ___.
Even during the 1970s, the Dow ___.
The return correlation between the Dow and S&P 500 since 1970 has been __.
The companies composing the S&P 500 are adjusted based on market cap every ___.
over 3,000%!!
increased by 9.5%.
95%
Quarter
A fund or share class with a deferred sales charge (load) typically also has
An annual 12b-1 fee
___% of 12b-1 mutual fund fees are used for advertising and promotion.
Only 2%
The maximum 12b-1 fee that a fund can charge per FINRA is __ for the most part.
1%
About ___ of mutual funds have a 12b-1 fee
60%
Practice question:
What fund document is described as “part narrative, part grocery list, and part accounting ledger?”
Shareholder report
Mutual fund boards of directors typically meet ____.
The median director salary for the largest fund families is ____.
4-5 times per year.
an average of $200K.
