Researchers: If index funds are a commodity, why are their fees so divergent?
Jul 2nd, 2008 | Filed under: Investment Management FeesLast week, we told you about a paper that suggested price competition in the mutual fund industry was somewhat less than robust. Rather than lopping all mutual funds into one pot and comparing their fees, the authors of that report examined the fees of individual funds relative to their Morningstar category average. While not as ideal as examining the active management delivered by each fund, this approach loosely categorizes funds by their level of active management (e.g. the small cap growth category has a higher level of active management than the large cap value category).
Although not directly examined by that particular paper, one category that makes no denials about its lack of active management is the S&P Index Mutual Fund category. These (almost) purely passive funds are the subject of another paper by the same authors available here.
In “Institutional S&P 500 Index Mutual Funds as Financial Commodities: Fact or Fiction?” John Haslem, Kent Baker and David Smith examine whether index funds are really are all the same and whether they are truly “commodities”.
They find a wide variation in the fees (and therefore the performance) of S&P index funds. This is counter-intuitive given their common Investment strategy, but even more counterintuitive when one considers that institutional investors should be less likely than retail investors to pay unwarranted fees.
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[...] “It turns out that the price of an index fund has a lot more to do with the economics of managing a fund, not the investment strategy itself. “ (All About Alpha) [...]
Did the authors control for the distribution channel of the funds? Funds are not competitive across channels, but within channels.
[...] It turns out that the price of an index fund has a lot more to do with the economics of managing a fund, not the investment strategy itself. (All About Alpha) [...]