Chapter 3-Fund Expenses

Question 1

Total return figures shown in periodicals, annual reports, & used by fund advisory services usually do not factor in any up front commission, BUT

Answer 1

Do include all ongoing costs. Account maintenance fees count as 1-time fees NOT ongoing expenses.

Question 2

Ongoing expenses for a mutual fund include…

Answer 2

1. Management fee
2. Administration fee (staff salaries, call centers, accounting compliance)
3. Any 12b-1 fees
4. Brokerage costs (whenever the fund buys or sells securities)
5. Any interest expense (if fund borrows money to purchase shares)

Question 3

The most common type of back end sales load is…

Answer 3

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.

Question 4

Front-end sales loads …

Answer 4

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.

Question 5

Generally, look for domestic equity and fixed income funds with expense ratios…

Answer 5

Under 1.25%. Some even say under 1% for equity funds and under .75% for fixed income funds.

Question 6

A drop from 1.5% fees to .5% fees can lead to $10k invested over 20 years with annual return of 10% growing to ..:

Answer 6

$60,858 instead of $49,725-that’s a 22.4% difference!

Question 7

Expense ratios affect returns on ____ more than their ____

Answer 7

Bond funds; equity counterparts

Question 8

Few investors show concern over a fund’s expense ratio …

Answer 8

Perhaps because the ratio isn’t on a shareholder’s statement

Question 9

As of 2020, equity funds charged ___% expense ratios, hybrid funds charged __% expense ratios, & bond funds charged __%

Answer 9

.59, .70, .48

Question 10

As of 2020, equity funds charged ___% expense ratios, hybrid funds charged __% expense ratios, & bond funds charged __%

Answer 10

.59, .70, .48

Question 11

An expense ratio includes …

Answer 11

1. Administrative costs
2. Management fees-this is managing the portfolio to earn max profit; ranges from .1%_1%
3. 12b-1 fees (marketing costs); ranges from .25%-1% max annually

Question 12

The expense ratio does NOT include …

Answer 12

Brokerage commissions the fund incurs to buy & sell stocks or bonds.

Question 13

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.

Answer 13

<.1%-6.5%+(!!!); lowest; foreign; highest

Question 14

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___

Answer 14

.9%
1%
1.1%

5.4%
2.5%
2.4%
2%

Question 15

Small mutual funds tend to have ___ expense ratios than large funds because of ____.

Answer 15

Higher; economies of scale

Question 16

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.

Answer 16

Past ratios; expense ratios of other portfolios of

Question 17

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 …

Answer 17

3-5 times the average of their category.

Question 18

Turnover ratio is calculated by taking the …

Answer 18

Lesser of purchases OR sales, and dividing that number by average monthly net assets.

Question 19

The turnover rate for the average equity fund is ___. Low turnover rates are ___. High turnover rates are ___. High turnover rates often mean ____ expenses.

Answer 19

90-100%. 30% or less. 120%+. excessive trading

Question 20

Some turnover rates include ___ for technology funds, ___ for world bond funds, ___ for medium term gov bond funds, and ___ for bear market funds.

Answer 20

124; 135; 410; 479

Question 21

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.

Answer 21

15%; 25%

Question 22

A mutual fund’s expense ratio does NOT include

Answer 22

1. Trading costs
2. Bid-ask spreads

Question 23

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 ___.

Answer 23

over 3,000%!!
increased by 9.5%.
95%
Quarter

Question 24

A fund or share class with a deferred sales charge (load) typically also has

Answer 24

An annual 12b-1 fee

Question 25

___% of 12b-1 mutual fund fees are used for advertising and promotion.

Answer 25

Only 2%

Question 26

The maximum 12b-1 fee that a fund can charge per FINRA is __ for the most part.

Answer 26

1%

Question 27

About ___ of mutual funds have a 12b-1 fee

Answer 27

60%

Question 28

Practice question:
What fund document is described as “part narrative, part grocery list, and part accounting ledger?”

Answer 28

Shareholder report

Question 29

Mutual fund boards of directors typically meet ____.
The median director salary for the largest fund families is ____.

Answer 29

4-5 times per year.
an average of $200K.