By Jonathan Ping
A funny thing happened when Morningstar performed a study on whether expense ratios or Morningstar “star” ratings are better at predicting higher future mutual fund returns. Expense ratios won. Russel Kinnel, Morningstar’s director of mutual fund research and study author, wrote about the study results on Morningstar and these quotes sum it up:
If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. […] Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.
The study didn’t look very far back, but it probably couldn’t because Morningstar keeps trying to tweak its rating system into something that… um… works.