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 $3.3 billion fund is a master limited partnership, which means it invests in other energy (e.g. oil and gas) limited partnerships. They are often touted for their tax advantages, but their 5-year after-fees return is 3.01%.
|Mutual Fund||Assets ($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?