The president of Morningstar's
Equity and Mutual Fund Research, Don Phillips
, set out to destroy an urban myth about mutual funds' hidden fees. Though investors may have heard that mutual funds have hidden fees of 140 to 200 bps, large cap funds' fees of that type are less than 7 bps on average with small cap funds having higher brokerage costs.
The cost of trading friction is important to note, but is nowhere near 140 to 200 basis points. If a mutual fund des a terrible job at trading, Phillips said it is possible to to come near costs of 140 bps. Phillips dispels the notion of high fees by pointing out that the average index fund would trail its index by its expense ratio plus 140 bps. Over the trailing past five year years the average large-cap equity fund trails the market index by only 25 bps. Putting it in more colorful terms:
"Put another way, the thing lurking in the shadows of your mutual fund is a squirrel, not a werewolf."
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