Performance and Characteristics of Retail S&P 500 Index Mutual Funds

Abstract

We investigate the performance and attributes of 136 retail mutual funds tracking the S&P 500 Index across diverse expense ratio classes. Our performance measures are the Sharpe ratio, Jensen's alpha, and annualized total returns. Attributes analyzed for their relation to expense ratios include front-end loads, deferred charges, 12b-1 fees, fund size, fund age, cash holdings and turnover.

The evidence shows that S&P 500 Index funds with low expense ratios outperform those with high expense ratios. Expense ratios generally decrease as 12b-1 fees and deferred charges decrease and as fund size and age increase. Investors should not view S&P 500 Index funds as being homogeneous because significant differences exist in expenses and performance among the funds.

After controlling for attributes that influence fund expense ratios, we conclude that some index funds have expense ratios that are significantly higher than the norm. Despite the often-presumed commodity-like nature of index funds, S&P 500 Index funds are not all created equal. Our evidence shows that investors tend to follow a policy of choosing those funds with low expense ratios.

Keywords: mutual funds, retail index funds, performance, characteristics, expense ratio, 12b-1 fees, Sharpe index, Jensen alpha

JEL Classification: G2, G23, G28