|
INVISIBLE COSTS Trading costs are subtracted from the fund's assets, but aren't reflected in the expense ratio. Both types of costs ultimately affect the investment return. But the trading costs aren't disclosed or easily calculated. The brokerage component of a fund's trading costs is typically detailed in a disclosure known as a "statement of additional information." But few investors read them, and there's no information on costs from bid-ask spreads or price impacts. ANOTHER VIEW John Rekenthaler, vice president of research with Morningstar, says his company's studies also have found that trading costs can significantly reduce a fund's returns. Although he didn't make any specific criticisms of the methods used by Edelen and his co-authors, Rekenthaler said the estimate of a 1.44 percent average annual impact for a typical stock fund sounds high. The figure probably overestimates the trading impact because funds on average don't underperform market benchmarks as much as that number would suggest, he says. WHAT INVESTORS CAN DO Expenses from trading vary widely among funds, and there's no standard way to calculate the costs. So most investors are stuck with considering a fund's turnover ratio as a relative gauge to indicate the potential expenses the fund may incur. The turnover ratio shows the percentage of the stocks in the fund that have been traded within the past 12 months. Fifty percent means half of the stocks have changed hands in a year. Edelen and his colleagues have devised an alternative that they believe better reflects a fund's trading costs, called "position-adjusted turnover," which takes into an account the relative weightings of the stocks within the fund. For now, it's best to check the traditional turnover ratio, which is widely available on fund research websites. There's no rule about what constitutes high turnover. But generally, a ratio of 100 percent is considered a high water-mark, or 50 percent if you're especially concerned about limiting trading costs. If a fund's turnover exceeds those levels, you may want to steer clear, unless the fund's investing style justifies frequent trading. ___ Questions? Email investorinsight@ap.org
[Associated
Press;
Copyright 2013 The Associated
Press. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
News | Sports | Business | Rural Review | Teaching & Learning | Home and Family | Tourism | Obituaries
Community |
Perspectives
|
Law & Courts |
Leisure Time
|
Spiritual Life |
Health & Fitness |
Teen Scene
Calendar
|
Letters to the Editor