August 18, 2009 at 1:00 pm by Tom Lydon
After taking a beating in the markets in the last year, mutual funds have their hands out for more fees. At a time when exchange traded funds (ETFs) are gaining popularity, it’s an interesting move.
The market plunged 40% last year, socking mutual fund investors right in the gut. Now here comes the kicker: over the last year, fees at equity mutual funds have risen about 5% on average, according to Morningstar. So what gives?
It seems counter-intuitive that a fund company would hike up their fees despite major losses and lowered portfolio values. The reason is that mutual funds actually make their money by charging fees on assets under management. When the market tanked, assets fell, causing margins to follow suit, explain Dan Burrows and Aleksandra Todorova for SmartMoney.
When equity markets declined 40% to 50% domestically and even greater overseas, income to funds representing these asset classes were cut in half. That led to a decline in fees.
Some funds that reduced management fees when markets and fund asset levels were high have been forced to now increase fees to cover underlying expenses. If there is any winner in this, it could be the ETF providers.
Expect ETFs to continue to get more attention as investors feel increasingly comfortable moving back into the market. In most cases their underlying expenses are a fraction of the 1.57% average mutual fund fee. Additionally, most actively managed mutual funds have underperformed their designated benchmarks over time.
For more stories about mutual funds, visit our mutual fund category.
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