The Effect of Loads and Expenses on Open-End Mutual Fund Returns

We examine 1012 mutual funds to investigate the relationship between the fund's sales load, annual expense, and return. We find that low-expense funds significantly outperform high and very- high expense funds. Furthermore, we find that for funds with similar expenses, the load funds to not produce returns sufficient to offset the load versus no-load funds. However, when broken down by expense level, we find that load funds (even high-load funds) with low expenses do sufficiently outperform high-expense, no-load funds. We attribute this to that finding that high expense funds are characterized by higher turnover than low-expense funds. Given fund managers inability to select "above average" stocks, this leads to higher expenses but not higher returns, and thus lower net-of-expense returns.