As most regular readers know, I am a huge advocate of low-cost index funds. The best portfolio for most investors is a three-fund portfolio.
But I wanted to look at the other end of the cost spectrum and see some of the highest-cost mutual funds offered by Wall Street. The Vanguard Total Stock Market index fund (VTSAX), the backbone of a three-fund portfolio, has an expense ratio of 0.04%. As we’ll see, there are some investors who are paying more than 100 times that in costs.
How I Made This List
I started my search for the most expensive mutual funds by going to Fidelity’s Mutual Fund Screener. Of course, in order to find the worst of the worst, I unchecked the “no transaction fee funds only” button, and the number of mutual funds increased from about 3,600 to over 11,000. It’s kind of sad how many mutual funds have transaction fees. You should never, ever pay a transaction fee to buy a mutual fund, but over two-thirds of mutual funds have these fees.
While there are some expensive funds that are tiny (less than $5 million in assets), I only wanted to pick large mutual funds. These funds, in spite of their high expense ratios, have attracted hundreds of millions of dollars in assets. Many investors (perhaps even some of my readers) are invested in these funds.
I filtered for mutual funds with at least $300 million in assets. I then sorted the funds by net expense ratio to make my list of the most expensive mutual funds.
The fees on the mutual funds on this list are nauseating. I chose five mutual funds to highlight the absurdity of some of these mutual funds that have hundreds of millions of dollars in assets.
5. Blackrock Global Long/Short Equity Fund Investor C Shares (BDMCX) — 2.89% Exp. Ratio
BlackRock is a giant in the mutual fund industry, with $5.4 trillion of assets under management. They are even big players in the index ETF business, having bought the index ETF giant iShares from Barclays in 2009. However, this fund is not their brightest moment. As a Long/Short equity fund, this $596 million fund aims to generate absolute returns that are not correlated with the stock market. The fund has earned annual returns of 2.70% since inception in 2012. Their expense ratio is higher than their actual return to investors!
4. Catalyst Hedged Futures Strategy Fund Class C (HFXCX) — 3.01% Exp. Ratio
This fund is one of several funds in the list that are listed in the Option Writing class of mutual funds. According to their prospectus, the fund aims to “achieve its investment objective by buying and selling options and option spreads on stock index futures.” I’m very skeptical of whether money can be made with options, but what is indisputable is that it is very expensive to run an option portfolio. The bid-ask spreads on option contracts are much higher than that of regular stocks. Because of this, the 3.01% expense ratio of HFXCX makes sense. They currently manage $476 million, earning a 5-year after-expenses return of -1.45%.
3. Goldman Sachs Multi-Manager Alternatives Fund Class C Shares (GMCMX) — 3.13% Exp. Ratio
Goldman Sachs needs no introduction as the world’s premier investment bank. They are able to hire the best of the best for their investment banking, sales & trading, and investment management operations. Not surprisingly, this fund has been able to attract over $1.2 billion in assets. Hiring the best of the best is not cheap, and GMCMX charges a 3.13% expense ratio to manage this fund. GMCMX is a fund-of-funds, which means they allocate investors’ money to several fund managers with different investment strategies. Essentially, this is like enlisting an expert to hire the best fund managers. Unfortunately, it has done very poorly since its inception in 2013, earning a 1.08% annual return.
2. Sierra Core Retirement Fund Class C (SIRCX) — 3.18% Exp. Ratio
SIRCX is another fund-of-funds, focusing on bonds. This $476 million fund has a 3.18% expense ratio. Unfortunately, with a 5-year return of 1.52%, investors in this mutual fund pay twice as much in fees as they receive in investment returns.
1. Oppenheimer SteelPath MLP Select 40 Fund Class C (MLPEX) – 5.66% Exp. Ratio
This is the big winner (loser?) in my mutual fund search. Of the over 11,000 funds in Fidelity’s mutual fund universe, MLPEX has the highest expense ratio at 5.66%. This $3.3 billion fund is a master limited partnership, which means it invests in other energy (e.g. oil and gas) limited partnerships. They are often touted for their tax advantages, but their 5-year after-fees return is 3.01%.
Summary
| Mutual Fund | Assets ($mill) | Exp. Ratio | 5-yr Return* |
| Oppenheimer SteelPath MLP Select 40 Fund Class C | $3,362 | 5.66% | 3.01% |
| Sierra Core Retirement Fund Class C | $476 | 3.18% | 1.52% |
| Goldman Sachs Multi-Manager Alternatives Fund Class C Shares | $1,229 | 3.13% | 1.08% |
| Catalyst Hedged Futures Strategy Fund Class C | $476 | 3.01% | -1.45% |
| Blackrock Global Long/Short Equity Fund Investor C Shares | $596 | 2.89% | 2.70% |
*Lifetime returns are used when the fund is less than 5 years old. Data as of 4/30/2017. Source: Fidelity
All five of the funds on my list have expense ratios greater than their historical returns. It’s incredible that these are real funds that invest serious money. These five funds manage a combined $6 billion dollars. Potentially tens of thousands of investors are invested in these expensive, under-performing funds.
What do you think? Do you know any other funds that should be added to this list? Do you or anyone you know invest in any of these funds?
Good eye openers. No I am not in any of these funds but I an evaluating your 3 fund approach. The other I get (60yrs young) I want simplicity in all part of my life. I must do this also in my 401k choices to see if I have some bad apples there.
Enjoy every issue.
Thanks Joyce. Send me an e-mail (or reply to the comment) with your 401(k) fund options and I’d love to see how you can simplify your portfolio.
-WSP
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$6 billion- it is quite incredible. Some of it is likely the phenomenon where people spend a lot on their fund manager thinking, I am hiring the best. The rest is probably just ignorance.
I think many people may be put into these funds by their financial “advisors”.
I’m sure I was probably investing in similar funds within my 401k’s prior to learning what the heck I was doing. Thankfully I know better now. Unfortunately, there are still so many people that don’t. Keep spreading the good word WSP.
Given that 2/3 of funds have transaction fees, a lot of money is still being made at the expense of ordinary investors.
It’s still amazing to me that these funds exist. I guess it’s true that there is a new sucker born every minute.
If anyone has these in their 401K at work it seems like an ERISA lawsuit would be justifiable.
It just goes to show that we need to continue spreading the financial information of low-cost funds making the best returns for investors over time.
My guess is that in many cases, a financial advisor put their client’s money into these funds, in the hope that they could produce market-beating returns.
Those yachts are expensive. You don’t want your financial advisor to be stuck with the little 50 footer do you?
I just recently wrote about my experience with a couple different financial advisors.
http://www.lifeprepcouple.com/financial-advisors-hate-coffee-and-talking-about-fees/
I like what you did there with the reference to Where Are The Customer’s Yachts?
Whaaaat in the world….
You know my sister in law told us that their advisor (not sure which or who) for the past 2 years have in fact lost money which I didn’t believe at first because…um is this not a bull market? She told us they would have been better off stuffing the money under their pillow case since it didn’t even pace with inflation.
I held my tongue because we’re much younger than they are and in no position for investing advice. Now I’m thinking I should have asked more questions…
It’s possible to lose money in a rising market…just predict a decline and short the stock market.
Truly insane. And it’s even crazier when you consider, many of the investments in these funds are initiated by Financial Advisors, who are charging their customers a flat 1-2% fee on top of the outrageous expense ratios!
I agree. It’s pure madness.
This is a great example of “You get what you pay for”
Oh sorry, I thought this was opposite day.
Many billions of dollars have gone from investors to fund managers on the basis of this belief.
Just to clarify, advisors that are using these C-share type funds are probably not charging a fee on top. C-shares have a 1% 12b-1 fee that is part of the overall fund expense- the fund company pays this amount to the advisor. It’s roughly the equivalent of an advisor charging a 1% fee on cheaper institutional class shares, but not very transparent to the client.
Thank you for the clarification, Randall.
Wow. I thought the 1.5% expense ratios in my wife’s American funds 401k were absurd. I guess it can always be worse.
The only thing crazier about how much they charge is the fact that they manage hundreds of millions of dollars with that expense ratio.
I actually do have some expensive alternative funds. They have equity like expected returns (after expense ratios) but should have no correlation to stock market. Funds with no net equity exposure can be excellent diversifier. In my case, I took from the bond side of my portfolio to generate these positions. These asset classes are very tax inefficient, but the after tax return is still greater than bonds.
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