Morningstar: Low Mutual Fund Fees Trump Our Star Ratings

Last Updated Aug 9, 2010 11:34 AM EDT

Low mutual fund fees are better than star ratings at predicting winning funds, according to a report released this morning by Morningstar, the creator of those star ratings. Did you catch that? Even the company that makes its living selling mutual fund research and ratings admits they're not as good a guideline as a fund's expense ratio (the annual cost of owning the fund, expressed as a percentage figure.)

"If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds," writes Russel Kinnel, the study's author.

So, take his advice. If you're still not paying attention to how much your funds cost, you're not just leaving money on the table, you're probably holding loser funds. (For a good explanation of how commissions might feed into the costs of the funds you're holding, watch this tutorial from MoneyWatch's Jill Schlesinger's).


Morningstar's ratings don't do so badly as a second tier criteria. The firm awards stars for fund performance and the best performing funds across many categories tended to be those that had both low fees and lots of stars.

So, review your portfolio. You can check the costs of the funds you own at the mutual fund cost calculator on the site of The Financial Industry Regulatory Authority (FINRA), the brokerage industry's self-regulating arm. And learn more about fund fees on the Securities and Exchange Commission (SEC) web site.

Consider keeping the bulk of your investments in low cost index funds or inexpensive exchange-traded funds, and don't forget that not all exchange-traded funds are inexpensive.

And the next time you're mutual fund shopping? Pay at least as much attention to the bottom line price as you would if you were buying a new TV or car. Over time, you'll pay way more for your fund.

Photo by R-Z on Flickr.
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