Lower Expense Ratios Research Articles

Smart Beta 2.0: A Disruptive Innovation

There is a new battlefront in the money management business. New smart beta ETFs are entering the market to compete against actively managed mutual funds. These funds will be formidable competition, offering the possibility of superior performance -- traditionally the province only of actively managed funds -- lower expense ratios and other advantages. As with every disruptive innovation we have studied, we predict investors will be the ultimate winners. Download our new white paper to learn: Why index-based investing is a new form of active management; How to use active share to evaluate funds; How our smart beta indexes historically outperform actively managed mutual funds; Why ETFs can offer superior tax efficiency over mutual funds; How to substitute mutual funds with smart beta ETFs and how it can improve after-fee performance.

Too Big to Tax? Vanguard and the Armms Length Standard

Vanguard is the world’s largest complex of mutual funds, with over $3 trillion in assets under management, including $215 billion added in 2014. Vanguard’s main attraction to investors is its low costs. Profs. Freeman and Brown (2000) report that the advisory fees charged by the Vanguard Group “tend to present lower expense ratios than the rest of the mutual fund industry” because “Vanguard funds are run on the same basis as most companies in the economy: boards are unswervingly devoted to making as much money as possible…for shareholders [of the funds]. Stated differently, Vanguard funds are uncontaminated by the conflict of interest that affects most of the rest of the fund industry.” Michael Rawson, a Morningstar analyst, told the Financial Times in May 2015 that “[i]t is phenomenal that a single company could represent almost 20 percent of the US mutual fund industry. But they have done it through offering products that are consistently lower cost than other funds”. The main reason for Vanguard’s lower fees than, for example, the fees charged by Fidelity (its closest rival) is that Vanguard has a unique structure, approved by the SEC in 1975: The investment manager (Vanguard Group Inc., or VGI) is owned by the Vanguard domestic mutual funds (the Funds) in proportion to Net Asset Value. This structure, Profs. Freeman and Brown argue, means that there is no conflict of interest between VGI and the Funds, while every other mutual fund complex has the advisor charging too much because it puts the interest of shareholders of the advisor ahead of investors that are shareholders of the funds.Coates and Hubbard (2007) have argued that this situation should result in investors moving from other funds to Vanguard, and the recent phenomenal growth of Vanguard suggests that they were right. But there is a problem: As David Danon, a former Vanguard in-house tax lawyer, has argued in a lawsuit filed in 2013, the Vanguard structure directly contravenes the arm’s length standard of Treags. Reg. 1.482-1(b)(1) because VGI provides services to the Funds “at cost”, i.e., without charging an arm’s length profit. VGI is a C corporation and the Funds are Regulated Investment Companies (RICs) not taxable at the corporate level, so this situation results in avoidance of billions of corporate taxes. The IRS has not taken action on Danon’s whistleblower complaint, nor has the NY Attorney General intervened in his qui tam lawsuit against Vanguard. Given the millions of Americans that have invested in Vanguard funds and the billions in tax at stake (which would presumably be borne by the investors in the Funds if Vanguard raises its fees to include the tax), this case raises the question: Is Vanguard too big to tax?This article will argue (a) that the Vanguard “at cost” pricing is unsustainable under the arm’s length standard, and that the IRS will win in court if it challenges Vanguard’s transfer pricing; (b) that the Vanguard case illustrates some of the problems with the arm’s length standard and would have been avoided had unitary taxation principles been applied to Vanguard and its Funds.

Mutual Fund Heterogeneity and Fee Dispersion

The purpose of this study is to discuss research that identifies heterogeneous mutual fund and investor attributes and relations that explain dispersion in fund fees. One might think there is a short list of attributes and relations, such as high versus low expense ratios, that tells the full story of fund fee dispersion, but the story is much more extensive and nuanced. The research topics discussed are not inclusive of heterogeneous fund and investor attributes and relations that generate dispersions in fund fees, but they do provide depth within particular research domains.Select findings for discussions of factors influencing dispersion of mutual fund fees include:(1) Fund competition and agency conflicts are important determinants of fund pricing; (2) Fee dispersion primarily arises from heterogeneity of products, clienteles, and production functions; (3) Negative relations between fees and performance is due to strategic fee-setting and investor sensitivity to performance; (4) Investor perceptions of fund markets are key to fund fee-setting mechanisms; (5) Funds segment investors by level of investment sophistication and sell high-cost funds to less-knowledgeable investors; and (6) Fees are lower with small boards, boards with relatively more independent directors, and boards where a higher proportion of directors sit on boards of other sponsor funds.

ETF Expense Ratios: Are All Costs Borne by the Investor? An Empirical Analysis Using the Open-End Mutual Fund Model

On average, ETFs have lower annual expense ratios than open-end mutual funds due to a few functional differences. Both have fixed and variable costs which are incorporated in the expense ratio, and the assumption is that all costs are borne by the investor. We apply previous models for open-end funds to ETFs and find mixed results. Like open-end funds, larger and older ETFs tend to have lower expense ratios. Unlike open-end funds, ETFs that participate in no-transaction fee programs do not have higher expense ratios. Our results suggest that, among ETFs, all costs may not be borne by the investor.

An Intertemporal Study of ETF Liquidityand Underlying Factor Transition, 2009–2014

This article seeks to determine the migration of exchange-traded fund (ETF) liquidity and its factor constituents in the U.S. market over time, with the ultimate goal of making the ETF market more efficient and transparent. Using a set of factors commonly thought to impact liquidity, the authors develop a four-factor liquidity scoring algorithm (A-C liquidity score), extending the 2009 study by Agrrawal and Clark. The most liquid ETFs typically have lower bid–ask spreads, higher market capitalizations, lower expense ratios, and higher average trading volumes. The transition of ETF liquidity over the 2009–2014 period indicates that there is liquidity persistence and factor strengthening across all variables. Bid–ask spreads and expense ratios have compressed, which is a good trend for investors. Asset size and trading volume have gone up, which can be indicative of greater market participation and possibly high-frequency trading in the ETF environment. From 2009 to 2014, the ETF asset class has witnessed a phenomenal 34.9% annual growth rate, compared with a 19.8% growth rate in the Russell 3000 (the aggregate market capitalization for the ETF dataset increased from $438 billion in 2009 to $2,112 billion in 2014). The ETF ecosystem seems to be thriving as the new asset class of choice among both institutional and informed retail investors. However, there are two findings of concern. First, the overall beta of the ETFs in the study seems to have transitioned over time and moved up more than 9%. This may be due to increased cross-asset correlations, sector intertwining, global market cointegration, overlapping core constituents in ETFs, or simply a systematic upward drift in overall market risk premium; this limits portfolio diversification benefits. Second, over the five-year period, 25.7% of ETFs in the initial 622 ETF dataset (2009) were liquidated. This is an additional risk that investors and regulators have to keep in mind when evaluating ETFs. The cost of poor liquidity, overlooked by some retail investors, is often in the form of shallow market depth, high expense ratios, and a range of trade execution difficulties, besides potentially high tracking errors with the associated benchmark index. In conclusion, although ETF liquidity has grown significantly over time for most assets, there is some natural pruning, with pockets of concern. Overall, ETFs have rapidly become a viable and efficient instrument in the asset management landscape. <b>TOPICS:</b>Exchange-traded funds and applications, factor-based models, portfolio construction

Differential Impacts on Mutual Fund Fees

The purpose of this study is to discuss research that identifies heterogeneous mutual fund and investor attributes and relations that explain dispersion in fund fees. One might think there is a short list of attributes and relations, such as high versus low expense ratios, that tells the full story of fund fee dispersion, but the story is much more extensive and nuanced. The research topics discussed are not inclusive of heterogeneous fund and investor attributes and relations that generate dispersions in fund fees, but they do provide depth within particular research domains.Select findings for discussions of factors influencing dispersion of mutual fund fees include: (1) Fund competition and agency conflicts importantly determine fund pricing; (2) Fee dispersion primarily arises from heterogeneity of products, clienteles, and production functions; (3) Negative relations between fees and performance is due to fund strategic fee-setting and investor sensitivity to performance; (4) Investor perceptions of fund markets are key to fund fee-setting mechanisms; (5) Funds segment investors by level of investment sophistication and sell high cost funds to less-knowledgeable investors; and (6) Fees are lower with small sized boards, boards with relatively more independent directors, and relatively more directors sitting on large proportions of other sponsor funds.

The Strategic Setting Of Real Estate Mutual Fund Expense Ratios

Real estate mutual fund expense ratios are analyzed using panel data comprising 1,130 observations. The results show that expense ratio is inversely related to share class assets, fund family size, and fund age. Conversely, the expense ratio is positively related to larger funds and fund families with superior performance. This result is interesting because individual fund classes with favorable performance are associated with lower expense ratios. The results are robust to common estimation methodologies.

Mutual Funds’ Performance, Expense Ratios, and Inflows: Evidence and Implications for Policy

Previous research connects mutual fund fees and inflows and also suggests that better-performing funds attract higher inflows. In this article, the author further analyzes the relationship between funds’ performance, the expenses they charge, and the inflow they attract. The analysis results suggest that funds that perform similarly and charge similar expenses attract higher inflows if they reduce their expense ratios. In addition, funds that charge low expense ratios attract similar or higher inflows compared with better-performing funds that charge higher expenses. Moreover, funds that reduce their expense ratio relative to their preceding year’s expense ratio attract higher inflows than better-performing funds that reduce their expense ratio by a lower magnitude. The author finds that this investment strategy in past best-performing funds achieves positive risk-adjusted excess returns.

S&P 500 Index Mutual Funds: Diverse Expenses and Performance Characteristics

For investor and institutional class index mutual funds that track the S&P 500 Index, there are just 25 funds with statistically low expense ratios (management fee findings are found above). However, there are only five index funds - all investor class - with statistically very high and extremely high expense ratios. Thus, these results contain both bad and good news for investors. Unfortunately, the complete story of high expense ratios for S&P 500Index funds finds more bad news. The Sharpe ratio, Jensen’s alpha, annualized total return, Morningstar Star ratings, and average net assets are all statistically, negatively correlated with index funds with statistically high expense ratios. Further, portfolio turnover and 12b-1 fees are statistically, positively correlated with index funds with statistically high expense ratios.

Bank ETF's: A Return-Risk Perspective

Exchange Traded Fund (ETF) remains the hottest area of the investment world. An ETF is a security that tracks an index and represents a basket of stocks similar to an index fund, but trades like a stock on an exchange. The ETFs, like index funds, typically reflect the performance of the benchmark index. Hence, looking at the performance of benchmark indices of India, retail investor can also expect similar kind of returns from the ETFs, instead of struggling to select the best out of hundreds of available funds. Besides this, ETFs also have advantages like lower expense ratio and distribution costs over index funds. The present study is an attempt to evaluate the risk return perspective of entire bank ETFs available in India. The study examines the portfolio characteristics of bank ETFs, compares the performance of the bank ETFs with the industry average and its benchmark i.e. CNX PSU Bank Index. It further examines its risk-return with the help of mean, standard deviation, beta, R-squared statistics, Sharpe and Treynor ratio. It has been observed that the entire selected bank ETFs are cost effective and moderately aggressive in nature. The performance of the Bank BeES is notable on the basis of its risk-return perspective.

Mutual Funds: An Influential Review of Studies in Performance, Persistence, Investment Styles, Managerial Skills, Fund Characteristics and Behavioral Patterns

This study seeks to review the most recent studies in the field of mutual funds (2005-2009). Virtually all articles reviewed by this paper belong to top journals and top institutions. Moreover, this study also attempts to evaluate some other articles published prior to 2005 and defined as legendary (i.e. Fama and French, 1993). As the mutual fund industry has developed rapidly over the past 20 years, there has concomitantly evolved a rich plausible academic literature consisting of numerous topics. One of the most frequently addressed topics in the current literature is that of mutual fund performance. While earlier studies lay emphasis on the straightforward performance measures and benchmarking, this focus on performance dimension seems to have changed from performance-based studies to style-based studies which also present information regarding persistence in fund performance, fund characteristics, behavioural patterns, stock-picking and timing abilities of managers. Following this shift of emphasis, the methods applied and the data employed by other papers have changed too. This study therefore aims to build on the current literature by assessing all these relevant studies. It further complements the literature by evaluating studies in terms of five distinct dimensions, namely “Questions Addressed by Author(s), Method(s) Adopted, Data Employed, Key Findings, and Contribution to the extant literature and Critique”. Consequently, this study satisfies the need to synthesize the key contributions that have recently been made on the history of mutual funds by other papers. Having investigated the recently evolving body of the literature on the respective topics, the common findings are as follows; a) small-cap funds generally outperform large-cap funds and large-cap funds possess more style consistency than do the mid/small-cap funds. Growth funds play a dominant role in the late 1990s, whereas value funds are very common before and after this period. b) There are no clear persistent patterns found and even if there are, it is generally due to luck rather than skill. c) Actively managed funds generally underperform passive strategies and there is very little evidence of fund managers with timing/picking abilities. d) Low expense ratios are related to superior performance and fund flows are found to be positively related to advertising and distribution fees. Female managers participate in excessive trading and are more risk-averse compared to their male counterparts.

What Factors Work in Selecting Funds? Evidence from the European Offshore Market

â While published literature has largely concentrated on the performance persistence phenomenon, research is sparse in regards to the determinants of investment performance. â In this paper, Standard & Poor’s makes a strong effort to establish robust results by comparing the performance of different fund portfolios formed based upon qualitative and quantitative fund factors, and providing an economically meaningful measure of the magnitude of the relation between performance and attributes. â On the qualitative factors side, for developed equities and bonds funds, larger funds tend to outperform smaller funds as economies of scale dominates market liquidity. Funds with lower expense ratios tend to provide better risk-adjusted performance compared to their higher expense counterparts. â On the quantitative factors side, Jensen alpha and information ratio tend to do the best job in predicting future fund performance. â Superior performance is a short-lived phenomenon that is observable only when funds are selected and sampled frequently. Therefore, fund selection framework should focus more on finding an appropriate mix of factors that successfully predict fund outperformance over shorter time periods, rather than focus on finding fund managers that consistently outperform over longer time periods.

A cross-sectional analysis of Malaysian unit trust fund expense ratios

This study examines the determinants of fund expense ratio in a cross-sectional sample of Malaysian unit trust funds. Since fund performance is a key decisive factor for many investors in selecting mutual funds, and given that fund expenses are an important determinant of fund returns, the information on what factors affect fund expense ratio is becoming more relevant than ever for investors when selecting a fund. The results show that larger funds have lower expense ratios than smaller funds, suggesting the presence of economies of scale. There is also evidence of economies of scope in that funds that belong to a large fund family are found to have low expense ratios. The findings further indicate that funds with high returns volatility are associated with low expense ratios and that high portfolio turnover leads to high expense ratio. There is no evidence that fund objective and fund age are related to fund expense ratio.

Are Retail S&amp;P 500 Index Funds a Financial Commodity? Insights for Investors

Conventional wisdom suggests that index funds are commodity-like in nature. If this presumption is accurate, price competition should be more evident with index funds than with actively managed funds. Thus, expenses should not vary widely among index funds using the same benchmark. In this paper, we investigate whether retail S&P 500 Index funds are a financial commodity. Specifically, we test whether expenses matter more for retail S&P 500 Index funds than for actively managed funds. Our analysis of 106 retail S&P 500 Index funds shows a wide disparity in (net) expense ratios. In addition, we find large performance differences among funds within diverse (net) expense ratio classes. Based on this evidence, we conclude that retail S&P 500 Index funds with low (net) expense ratios, on average, outperform those with high (net) expense ratios. Specifically, our univariate analysis shows that Sharpe ratios and Jensen alphas tend to increase as (net) expense ratios decline across standard deviation classes. Thus, lower (net) expense ratios result in improved risk-adjusted returns. Retail S&P 500 Index funds with low (net) expense ratios also tend to have higher annualized returns compared with those with (net) expense ratios that are high. Thus, lower costs mean larger returns. Our multivariate model provides evidence on characteristics that investors can use to explain performance. In this OLS model, we pool the funds and use dummies and interactions for testing the relative significance of variables across retail S&P 500 Index funds and actively managed large-cap blend funds used as a control group. We find evidence that (net) expense ratio class helps to explain performance. In addition, fund size is a distinguishing variable for performance. Cash holdings and portfolio turnover generally have a positive relation with performance but loads, especially deferred loads, and 12b-1 fees typically have the opposite relation. In addition, our results show that expenses do not matter more for retail S&P 500 Index funds than for actively managed funds. What are the implications of our findings? Mutual fund investors are likely to view index funds as financial commodities because of the common belief that such funds do not differ in any significant way, especially when tracking the same benchmark index. Evidence of large differences in (net) expense ratios across index funds casts serious doubt on using commodity as a descriptor. Further, this finding becomes more serious because price competition should be even more competitive among index funds, especially in the pricing of (net) expense ratios. Apparently, it does not. This implies that some uninformed investors are paying high costs without receiving commensurate benefits. This study provides an important lesson for mutual fund investors who are interested in retail S&P 500 Index funds. Namely, (net) expense ratios have a direct negative impact on performance. Low cost does not characterize all retail S&P 500 Index funds. Some funds charge fees and incur expenses that are too diverse along the range of outcomes to be consistent with commodities. Thus, when comparing mutual funds, investors should generally seek to minimize expenses because additional fees provide no apparent economic benefit.

Performance and Characteristics of Retail S&amp;P 500 Index Mutual Funds

We investigate the performance and attributes of 136 retail mutual funds tracking the S&P 500 Index across diverse expense ratio classes. Our performance measures are the Sharpe ratio, Jensen's alpha, and annualized total returns. Attributes analyzed for their relation to expense ratios include front-end loads, deferred charges, 12b-1 fees, fund size, fund age, cash holdings and turnover. The evidence shows that S&P 500 Index funds with low expense ratios outperform those with high expense ratios. Expense ratios generally decrease as 12b-1 fees and deferred charges decrease and as fund size and age increase. Investors should not view S&P 500 Index funds as being homogeneous because significant differences exist in expenses and performance among the funds. After controlling for attributes that influence fund expense ratios, we conclude that some index funds have expense ratios that are significantly higher than the norm. Despite the often-presumed commodity-like nature of index funds, S&P 500 Index funds are not all created equal. Our evidence shows that investors tend to follow a policy of choosing those funds with low expense ratios.

Exchange-Traded Fund: Nature, Developments, and Implications

1. The AMEX provides market liquidity and continuous trading at or near current market prices for index shares. Continuous trading provides more flexibility in rebalancing portfolios. Prices are determined by supply and demand. Index shares may be traded in small lots and the trading strategies available to common stock are also available for index shares. 2. Most index shares transactions are executed on the AMEX, especially less than block size trades. Bid-ask spreads are not unreasonable, and brokerage commissions and fees can be reduced by online and/or discount brokers. But, index share trading costs favor buy-and-hold strategies. 3. Large investors may also directly purchase and redeem index shares packaged as minimum block-size creation/redemption units. Creation/redemption units are purchased/redeemed in exchange for stock portfolios that match specific benchmark indexes. But, there are purchase and redemption fees. 4. Investor exchanges of redemption units for in-kind baskets of stock are tax-free exchanges. ETFs do not sell stocks with potential capital gains to meet redemptions and there are no performance drags from holdings of cash assets. Investors may also unbundle portfolio shares received and sell them for any tax losses.5. AMEX trading and tax-free direct exchanges with continuous portfolio transparency facilitate arbitrage that maintains index share prices at or very near NAVs of underlying portfolios. Arbitrageurs buy index shares selling at discount to NAVs on the AMEX, directly exchange redemption units for underlying stock portfolios, and sell unbundled stocks on the AMEX for more than paid for index share redemption units. 6. ETFs are very tax efficient due to direct tax-free exchanges, portfolio transparency, index portfolios, and control over specific composition of underlying stock portfolios. Index portfolios are not actively managed, which minimizes turnover and realized capital gains. Shares of stock with largest unrealized capital gains are exchanged for redemption units to minimize realized capital gains. Shares with smallest unrealized capital gains are sold to meet changes in composition of benchmark indexes and to minimize realized capital gains. 7. Domestic ETFs are inherently less costly to manage than traditional domestic mutual funds. They have lower expense ratios than actively managed domestic mutual funds and also most index funds with the same benchmark indexes.8. ETFs and mutual funds provide instant diversification with broadly based portfolios or homemade portfolios with allocations of narrowly focused ETFs, such as foreign/domestic, specific country, investment style and/or industry sectors.9. ETFs provide access to benchmark indexes and global sectors not (yet) available from mutual funds. 10. Investors may practice cash management by temporarily sweeping cash inflows into index shares. ETFs Disadvantages1. Index share trading costs are higher than pure no-load mutual funds with zero shareholder transaction costs. This difference is increased by market timing and dollar cost averaging strategies that trade frequently, even given online and/or discount brokerage commissions and small bid-ask spreads. 2. Investor purchase and redemption of creation and redemption units are subject to fees, which are higher than for pure no-load mutual funds.3. ETF brokers generally provide less in the way of diversity and quality of shareholder services than mutual funds. 4. ETF index shares risk selling at discounts (also premiums) to NAVs of underlying stock portfolios, but arbitrage normally keeps them small. But, index shares can trade at significant discounts/premiums for extended periods, especially in small, less liquid international markets. HOLDRs have proven to have large discounts to NAV. 5. No sponsor of both EFTs and index mutual funds has yet matched the annual returns of the Vanguard 500 Index Fund. 6. ETFs often have large tracking errors in matching the performance of international small market benchmark indexes. These indexes do not provide required portfolio diversification and markets have low liquidity and high trading costs. Tracking error derives from use of statistical methods to approximate benchmark performance. These ETFs also have higher expense ratios and higher portfolio turnover and trading costs than comparable mutual funds. 7. Performance and liquidity of ETF shares have yet to be severely tested in major market declines. 8. The settlement period for index share trades is three days, but it is overnight for mutual fund redemptions.

Performance and Characteristics of Actively Managed Retail Equity Mutual Funds with Diverse Expense Ratios

We investigate the relation between the performance and characteristics of 1,779 domestic, actively managed retail equity mutual funds with diverse expense ratios. We show that using expense ratio standard deviation classes is an effective method for characterizing fund expenses for investors. Using various performance measures including Russell-index-adjusted returns, the results indicate that superior performance, on average, occurs among large funds with low expense ratios, low trading activity, and no or low front-end loads. Performance is invariant with respect to whether funds have 12b-1 fees.

Performance and Characteristics of Actively Managed Institutional Equity Mutual Funds

In this study, we provide extensive evidence on the performance characteristics of 1,118 U.S. domestic, actively managed institutional equity mutual funds. We measure performance using such measures as three-year Sharpe ratios, Jensen's alphas, and Miller's active alphas as well as annualized Russell Index-adjusted returns over multiple periods (1, 3, 5, 10, 15 years). We relate performance to fund attributes including expense ratio class, net assets, 12b-1 fees dummy, turnover ratio, beta, cash, and dividend yield.We analyze the disparity of expense ratios of actively managed institutional equity mutual funds and find that expense ratios differ widely among Morningstar categories. Consistent with previous studies involving actively managed retail equity mutual funds, we find strong evidence that the average actively managed institutional equity mutual fund cannot beat a representative benchmark after expenses.We also examine fund characteristics partitioned by expense ratio class and conduct univariate tests. We obtain mixed results concerning whether funds with low expense ratios outperform those with higher expense ratios. Our findings are sensitive to the performance measure and time period used. Compared with mutual funds in high and very high expense ratio classes, our results show that funds in low or very low expense ratio classes have significantly lower deferred loads, 12b-1 fees, management fees, and portfolio turnover. In addition, lower expense ratio funds are larger and have managers with a longer tenure. This evidence suggests that expense-conscious institutional investors should look carefully at these characteristics before investing.Our study provides new evidence that supports links between their performance of actively managed institutional equity mutual funds and fund attributes. Based on our multiple-regression regression, we find a consistently negative sign in the relation between expense ratio class and performance but statistical significance only for Miller's active alpha performance measure. There is strong support suggesting that larger institutional equity funds tend to outperform smaller institutional equity funds, which may reflect greater monitoring. This finding implies that institutional investors should focus on larger mutual funds as a means of enhancing their portfolio returns. We show that the effect of an institutional equity fund's holding cash on its performance is consistently positive and significant in six of the seven regressions. Our evidence shows statistically significant but mixed results for turnover, beta, and dividend yield. In addition, our results indicate no significant relation between performance and the existence of 12b-1 fees.Finally, we compare our results with the extant mutual fund literature in order to link any potential difference in findings to the characteristics of institutional funds. Our analysis reveals that expenses have a weaker relation with fund performance for institutional funds than retail funds because institutional funds, on average, have substantially lower expenses. However, fund asset size appears to be a more important indicator of fund performance for institutional funds than for retail funds. Finally, for both institutional funds and retail funds, a positive relation exists between a higher percentage of cash held and better fund performance. These findings warrant further investigation.

Does Index Investing Work Well in Sector Funds?

This abstract was created post-production by the JFI Editorial Board. The debate on the merits of active and index investing is relatively new for sector investing, unlike the old debate for broad-based size (large-, mid-, or small-cap) or style (value, growth or blend) segments of the market. The new debate for sector investing assumes importance in light of increasing interest in sector investing and a growing number of active and passive investment options. This paper contributes to the debate by examining characteristics, risk and performance measures of all available vehicles for index investing in U.S. sector funds. The authors of this study find sector index funds and sector ETFs have lower expense ratios and lower turnover rates than the average of actively-managed sector mutual funds in their respective category. Pure sector investing is for the active investor and is not a buy-and-hold technique. Unlike their counterparts for broad-based size or style segments of the market, sector index funds have at best performed only as well as the average of actively-managed sector mutual funds with lower risk and comparable return and risk-adjusted return.

Characteristics and Performance of U.S. Bond Funds in Index Investing

This abstract was created post-production by the JFI Editorial Board. A well-diversified portfolio should contain bonds. This study has identified all bond index funds and ETFs currently available as avenues to diversify portfolios. The authors of this study find the "almost" index funds identified by Ferri (2002) tum out to be gems: they have low expense ratios and the lowest turnover, while exhibiting mostly the lowest risk and highest riskadjusted returns. Pure index funds, with low expense ratios and turnover, have performed well in the past ten years based on Morningstar's ratings, but below average in the past three years. Enhanced index funds have the highest expense ratios, extremely high turnover, average or high risk and always the lowest risk-adjusted returns. As newcomers, bond ETFs have the lowest expense ratios and comparable returns, but they underperformed "almost" and pure index funds in the areas of turnover, risks and risk-adjusted returns.