Analysis of the Fee Structure and Expense Ratios of U.S. Equity Mutual Funds
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Date
2018-05
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Publisher
The Ohio State University
Abstract
A plethora of research exists showing the relationship between a mutual fund's performance, in the form of its percentage return to investors, and a fund's expense ratio. Existing research, by Hooks (1996), Haslem, Baker, and Smith (2008), and Bello and Frank (2010), show across different samples and controls that funds with higher than average expenses under-perform compared to those with a lower ratio. With this being the case, how do mutual funds justify having a higher than average expense ratio and what are the actual factors of a fund that determine this ratio? This is a major gap in mutual fund research and although some findings do exist on the determinants of these expenses, this paper hopes to add to those findings through analysis of additional variables and controls. To do this, data was collected via the independent mutual fund database Morningstar. A screening was used to control the data set so that the results of this research would be most applicable to casual investors who are most susceptible to high expense ratios. From this screening both a year to date cross sectional set of data and a time series dataset of annual data from 2013 to 2017. A regression analysis was conducted on the cross-sectional data set and results show that both the year to date absolute return percentile and the rank percentile of the funds are both significant in determining the expense ratio. Four multiple-regression models adapted from previous research by Ferris and Chance (1987) were used to come up with results from the time-series data set. These models resulted in coefficients of determination between 50%-60%, with the size of the fund, additional load fees, and the use of a 12-b1 plan being the most significant variables.
Description
3rd place in the Business Solutions in the Global Economy category at the Denman Forum
Keywords
Mutual Funds, Expense Ratio, Economy, Investments