A higher expense ratio could force some funds out of certain brokerages and advisor platforms. Additionally, retail investors who view two funds with similar strategies but different expense ratios may just pick the less expensive one without understanding the actual strategy of the funds. Still, the benefits of this revision may reduce the drag on a fund’s performance.
Clearly, there’s more pressure for full disclosure and more pressure to keep expense ratios in mutual funds fair and transparent. The average mutual fund expense ratio is around 1.5%; if they were to become even more expensive as a result of these rules proposals, it would have the net effect of sending even more investors into the waiting arms of ETFs. [The Fight Against 12(b)-1 Fees in ETFs Hits a Snag.]
For more information on exchange traded funds, visit our ETF 101 category.
Max Chen contributed to this article.