Expense ratios as predictors

Morningstar just came out with a nifty analysis of mutual funds: cheaper is better. We believe by proxy the same analysis & concepts extend to ETF's, although liquidity and transaction costs need to be considered.

"Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two quintiles, and you’ll be on the path to success." - How Expense Ratios and Star Ratings Predict Success, Russell Kinnel, Director of Fund Research & Editor, in Aug. 2010 Fund Investor

Update on Tuesday, September 14, 2010 at 12:18PM by hb

What are the odds of picking a winner? Over 15 years some 71% of mutual funds either underperformed or simply went away.

"of the 3,842 funds that were available on January 1, 1995, 1,646 (43%) underperformed the Dow Jones U.S. Total Stock Market Index through 2009, and another 1,071 (28%) were merged or liquidated along the way." source: Vanguard, Commentary, Aug 2010, fund data from Morningstar's 9 box system