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Jack Bogle on All-In Fund Investments

Assembling the pieces.

John Rekenthaler, 12/26/2013

A Nickel Here, a Dime There
Jack Bogle has a forthcoming article [no link, as it has not yet been published] for Financial Analysts Journal that looks broadly at mutual fund costs, as opposed to merely the official expense ratio. The paper is the best treatment yet of the subject.

The key table comes at the end of the paper.

For the first time, the six elements of mutual fund costs appear in a single table. They are sorted into two bins: costs that are inextricably attached to a fund, so that they cannot be avoided by any shareholder; and costs that vary by investor. The distinction is important. Investor costs should not be ignored, but they are different than fund costs and should be treated as such.


The three fund costs:

Expense Ratio
Bogle cites an average of 1.12%, taken from the category of large-blend U.S. stock funds. He uses that category, as opposed to all funds, because his reference point for a (nearly) costless investment is Vanguard Total Stock Market Index VITSX. Fair enough. His decision to equal-weight expenses is similarly sound. For measuring the typical fund, rather than aggregate investor experience (a subtle but important distinction), equal-weighting is the way to go.

Nevertheless, aggregate investor experience is also worth examining. That story is somewhat happier. As investors favor lower-cost funds, the asset-weighted average expense ratio for actively managed stock funds of all flavors (not just large-blend U.S. funds) is about 90 basis points (that is, 0.90%). Actively managed balanced and bond funds are at 80 and 65 basis points, respectively.

Transaction Costs
Transaction costs are a wild card. Tangible brokerage costs can readily be measured, as they are provided in a fund's Statement of Additional Information, but they are a secondary matter. The bigger issues are the cost of paying the bid-ask spread and the possibility that the fund pushes the security's price because of its transaction. Neither item can be found on a fund's financial statements. (The second of the two is largely a mystery to the fund itself.)

is vice president of research for Morningstar.

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