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FINALLY, INVESTORS FLOCK TO LOW-COST FUNDS

Mutual fund investors are turning into tightwads - and they'll be richer for it.

When you buy a fund, you can't be sure you will garner good performance. But if you favor low-cost funds, you will at least keep more of whatever you make.

After much hectoring, this key investment truth finally seems to be sinking in.

-Among recent fund buyers, 74 percent say they considered fees and expenses before investing, according to a 2006 survey conducted for the Investment Company Institute, the Washington trade group. Indeed, costs were the factor cited most often, even edging out fund performance, which was mentioned by 69 percent.

-Total annual stock-fund costs, including fund-sales commissions, or "loads," plunged to 1.07 percent of assets in 2006 from 2.32 percent in 1980, says the Investment Company Institute. Meanwhile, total annual bond fund costs dropped to 0.83 percent from 2.05 percent. The ICI's figures are asset-weighted, which means popular funds have the biggest impact on these numbers.

What's driving the decline in costs? Much of the credit goes to fund buyers, including ordinary investors, 401(k) plans and financial advisers. "The bulk of the flows go into lower-cost funds," says the ICI's chief economist, Brian Reid. "Investors are more sensitive to fees."

-The growing focus on costs is forcing funds to hold down expenses. At least 48 percent of stock funds and 55 percent of taxable bond funds are - for now - waiving part of their fund expenses, calculates investment researcher Morningstar Inc.

-Maybe the clearest sign of investors' penny-pinching is the explosive growth in exchange-traded index funds, which trade like stocks and are renowned for their low expenses. As of May 31, ETFs boasted $486-billion in assets, up from $151-billion at the end of 2003, according to the ICI.

"The one area where you see outright price competition is index funds," including ETFs and regular index mutual funds, says Russel Kinnel, Morningstar's director of fund research. For instance, he notes Fidelity Investments has capped expenses on its core stock-index funds at 0.1 percent, rather than risk losing assets to lower-cost competitors.

There is, however, still plenty of room for improvement, by fund companies and fund investors.

Consider mutual funds' stock trading, which isn't included in standard expense ratios. Turnover ran 65 percent in 2006, implying an average holding period of 18 months, vs. 30 percent in 1976, which suggests a three-year holding period. These figures, calculated by Vanguard Group's Bogle Financial Markets Research Center, exclude index funds.

Owning a fund with 65 percent turnover is like paying roughly an extra 0.6 percentage points in annual expenses, estimates John Bogle, president of the Bogle Center. Today's frenetic buying and selling is ridiculous, he scoffs. "These managers are just trading with one another."

Mutual-fund investors are turning into tightwads - and they'll be richer for it.

When you buy a fund, you can't be sure you will garner good performance. But if you favor low-cost funds, you will at least keep more of whatever you make.

After much hectoring, this key investment truth finally seems to be sinking in.

-Among recent fund buyers, 74 percent say they considered fees and expenses before investing, according to a 2006 survey conducted for the Investment Company Institute, the Washington trade group. Indeed, costs were the factor cited most often, even edging out fund performance, which was mentioned by 69 percent.

-Total annual stock-fund costs, including fund-sales commissions, or "loads," plunged to 1.07 percent of assets in 2006 from 2.32 percent in 1980, says the Investment Company Institute. Meanwhile, total annual bond-fund costs dropped to 0.83 percent from 2.05 percent. The ICI's figures are asset-weighted, which means popular funds have the biggest impact on these numbers.

What's driving the decline in costs? Much of the credit goes to fund buyers, including ordinary investors, 401(k) plans and financial advisers. "The bulk of the flows go into lower-cost funds," says the ICI's chief economist, Brian Reid. "Investors are more sensitive to fees."

-The growing focus on costs is forcing funds to hold down expenses. At least 48 percent of stock funds and 55 percent of taxable-bond funds are - for now - waiving part of their fund expenses, calculates investment researcher Morningstar Inc.

-Maybe the clearest sign of investors' penny-pinching is the explosive growth in exchange-traded index funds, which trade like stocks and are renowned for their low expenses. As of May 31, ETFs boasted $486-billion in assets, up from $151-billion at the end of 2003, according to the ICI.

"The one area where you see outright price competition is index funds," including ETFs and regular index mutual funds, says Russel Kinnel, Morningstar's director of fund research. For instance, he notes Fidelity Investments has capped expenses on its core stock-index funds at 0.1 percent, rather than risk losing assets to lower-cost competitors.

There is, however, still plenty of room for improvement, by fund companies and fund investors.

Consider mutual funds' stock trading, which isn't included in standard expense ratios. Turnover ran 65 percent in 2006, implying an average holding period of 18 months, vs. 30 percent in 1976, which suggests a three-year holding period. These figures, calculated by Vanguard Group's Bogle Financial Markets Research Center, exclude index funds.

Owning a fund with 65 percent turnover is like paying roughly an extra 0.6 percentage point in annual expenses, estimates John Bogle, president of the Bogle Center. Today's frenetic buying and selling is ridiculous, he scoffs. "These managers are just trading with one another."

FAST FACTS

Costs count

Mutual fund investors are finally zeroing in on costs:

- Over the past decade, 90 percent of new stock-fund money has been invested in funds with below-average expenses.

- 74 percent of recent fund buyers considered fees and expenses, while 69 percent looked at performance, 61 percent at risk and 25 percent at the manager.

Source: Investment Company Institute

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