Due in large part to the competitive threat from index funds and exchange-traded funds (ETFs), fees across the fund universe, including actively managed mutual funds, are declining.
“Our study of U.S. open-end mutual funds and exchange-traded funds found the asset-weighted average expense ratio across funds was 0.52% in 2017, from 0.56% in 2016, reflecting an 8% decline,” according to Morningstar data.
Still, mutual funds have their work cut out for themselves when it comes to competing with ETFs on fees. At the end of 2017, the asset-weighted average expense ratio on mutual funds dropped to 0.72% from 0.75% compared to a drop to 0.30% from 0.31% for passive funds, according to Morningstar.
One way of looking at that scenario is there is plenty of room for the universe of low-cost mutual funds to grow as more funds trim expenses. Data confirm investors are drawn to funds, including low-cost mutual funds, that dwell in the bottom quintiles of their respective peer groups when it comes to fees.
For fee-conscious investors, here are some of the best low-cost mutual funds to consider right now.
Low-Cost Mutual Funds: Primecap Odyssey Growth (POGRX)
Expense Ratio: 0.67% annually, or $67 per $10,000 invested
With an annual expense ratio of 0.67%, there is room for Primecap Odyssey Growth (MUTF:POGRX) to become more of a low-cost mutual fund, but that fee is below average for active funds. Plus, the Primecap Odyssey Growth is a no load, which adds to its cost effectiveness.
The fund’s management team “seeks to identify stocks that have above average growth aspects or attributes that may contribute to accelerated earnings growth in the foreseeable future,” according to the issuer.
Active management, including among low-cost mutual funds, has been heavily criticized in recent years. However, the POGRX management team is more than earning its keep. A $10,000 investment in the fund when it debuted in November 2004 would have been worth nearly $47,000 at the end of the first quarter, while the same investment in the S&P 500 over the same period turned into just under $31,000.
Low-Cost Mutual Funds: Dodge & Cox Stock (DODGX)
Expense Ratio: 0.52%
Dodge & Cox Stock (MUTF:DODGX) certainly qualifies as a low-cost mutual fund with an annual fee that is well below average among open-ended mutual funds. DODGX carries a minimum investment of $2,500, but that figure drops to $1,000 if investors purchase this low-cost mutual fund in an individual retirement account (IRA).
DODGX is a value fund where the management team “focuses on the underlying financial condition and prospects of individual companies, including future earnings, cash flow, and dividends,” according to the issuer.
Investors that like low-cost mutual funds with long-running track records will like DODGX because this fund debuted in 1965. The lineup is concentrated with just 64 holdings as of the end of the first quarter. Nearly 60% of DODGX’s weight is allocated to the financial services and healthcare sectors, representing significant overweights to those sectors relative to the S&P 500.
Low-Cost Mutual Funds: T. Rowe Price Dividend Growth (PRDGX)Expense Ratio: 0.64%
The T. Rowe Price Dividend Growth (MUTF:PRDGX) fund is an example of an income-generating, low-cost mutual fund. In the eyes of Morningstar, this is a four-star fund with a below average fee level, though PRDGX requires a minimum investment of $2,500.
Importantly, PRGDX has an enviable track record. It has outperformed the S&P 500 and its Lipper average over the past three, five and 10 years and since its inception. A turnover rate of 4.7% helps minimize costs for investors and this low-cost mutual fund is a little less volatile than the S&P 500.
Low-Cost Mutual Funds: Schwab International Core Equity Fund (SICNX)Expense Ratio: 0.86%
With an annual fee of 0.86%, the Schwab International Core Equity Fund (MUTF:SICNX) fund does not scream “low-cost mutual fund,” but among actively managed international equity funds, this fee is reasonable. Plus, it is arguably warranted as SICNX has easily outperformed the MSCI EAFE Index over the trailing 10-year period.
That out-performance is noteworthy at a time when many frugal investors are flocking to low-cost international index funds and ETFs that track indexes similar to the MSCI EAFE benchmark. The top 10 countries in SICNX account for 87.57% of the fund’s geographic exposure, according to Schwab data.
Japan and the U.K. combine for about 42% of SICNX’s geographic exposure, while Germany at almost 11% is the only market with a double-digit allocation in this low-cost mutual fund. SICNX currently has 185 holdings ranging from mega- to small-caps, but about two-thirds of the roster are large- and mega-caps.
Low-Cost Mutual Funds: Fidelity International Index Fund – Investor Class (FSIIX)Expense Ratio: 0.16%
The Fidelity International Index Fund – Investor Class (MUTF:FSIIX) ranks as a low-cost mutual fund in part because it is a passively managed index fund. It is also an example of declining fund fees because just over a year ago, its annual fee was 0.20%. Today, it is 0.16%. There is a minimum investment of $2,500, but portfolio turnover is low at just 2%.
Actually, expenses on FSIIX are lower than on the largest ETF tracking the MSCI EAFE Index, a relevant comparison because this Fidelity product tracks that benchmark as well.
This low-cost mutual fund is an idea for cost-conscious investors that want to add international diversity to their portfolios without a significant uptick in risk. Additionally, many of the major geographic components in the MSCI EAFE Index remain attractively valued when measured against U.S. equities.
Low-Cost Mutual Funds: Payden Corporate Bond Fund (PYACX)
Expense Ratio: 0.65%
Low-cost mutual funds can and do include fixed income funds. The Payden Corporate Bond Fund (MUTF:PYACX) is reasonably priced for an active fund in the corporate debt space, an area where active management can serve investors well. PYACX has a $5,000 minimum investment, but figure declines to $2,000 for investors wishing to add the fund to their IRAs.
Proving PYACX is a low-cost mutual fund in the corporate bond space is the fact that the average fee on funds in this arena tracked by Morningstar is 0.87%. PYACX attempts to beat the widely followed Bloomberg Barclays US Corporate Investment Grade Index.
The fund’s managers aim “to purchase investment-grade corporate bonds of companies that have leading market positions, strong cash flow generation, stable management teams and predictable earnings,” according to the issuer.
This low-cost mutual fund has a duration of 6.6 years and a 30-day SEC yield of 3.90%. Seventy-eight percent of its holdings are rated A or BBB.
Low-Cost Mutual Funds: Thrivent Limited Maturity Bond Fund (THLIX)Expense Ratio: 0.42%
The Thrivent Limited Maturity Bond Fund (MUTF:THLIX) is a low-cost mutual fund to consider when interest rates are rising, as is the case today.
“This fund invests primarily in investment-grade corporate bonds, government bonds, asset-backed securities, mortgage-backed securities and collateralized debt obligations. The Fund may also invest a portion of assets in leveraged loans and foreign securities,” according to Thrivent.
THLIX has 500 holdings with an average duration of 1.6 years. The bulk of the fund’s lineup is allocated to short-term, investment-grade corporate debt, mortgage-backed securities (MBS) and U.S. Treasuries.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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