Abstract
This article examines municipal bond fund returns from 1991 through 2000. Four predictions of the efficient markets hypothesis are supported. First, among similar-style funds, there is a consistent negative relationship between expense ratios and net returns. Second, on average, a 1% higher expense ratio reduces returns by about 1%. Third, load funds do not provide higher net returns than no-load funds. Fourth, expense ratios consistently predict relative fund returns for one-year through five-year investment horizons. In addition, the authors present multiple regressions for a large sample of funds across fixed-income styles. While the influences of duration, average credit quality, and tax status are time dependent, a lower expense ratio produces a persistent advantage year after year after year.
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