Are mutual fund performance numbers reported net of fees (operating expenses and 12b-1)?
The answer depends on how you define "operating expenses."
Let's look at a cinematic metaphor to clear up this apparent ambiguity. A mutual fund's cost is similar to the cost of going to your local movie theater. Let's assume that the price of a movie ticket is $8. Snacks like popcorn, soft drinks and candy can easily add another $4 to the total cost of this entertainment, which means that it really costs you $12 to go to the movies.
A similar situation applies when it comes to the total costs for a mutual fund investor. There are four components to a fund's cost structure, two of which are deducted from a mutual fund's performance, which gives us its total return. Operating expenses (investment management, record keeping, custodial services, taxes, legal, accounting and auditing), expressed as the expense ratio, and a marketing/distribution fee (referred to as a 12b-1 fee, if there is one) is charged against the fund, which means that its total return is a net figure.
In addition, a fund incurs transactional costs – brokerage fees for buying and selling portfolio securities and spread differences between the bid and ask prices – which are not included in the expense ratio but certainly seem to qualify as operational expenses. These can be a significant expense item for a fund with a high portfolio turnover. Lastly, if your fund has a sales charge (load), that fee is also not included in its expense ratio.
In view of the above, a mutual fund's expense ratio is much like the price of a movie ticket in our example, while the transactional costs and sales charges are the equivalent to what a moviegoer spends at the refreshment counter. Obviously, neither the movie ticket price nor the expense ratio captures the respective total cost of a trip to the movies or a mutual fund investment.
When considering costs and expenses, a mutual fund's investment quality increases with the absence of sales charges and 12b-1 fees and the presence of low expense and portfolio turnover ratios. It is a matter of record that low-cost funds outperform high-cost funds.
The reader should note that because redemption fees for early withdrawals from a fund are controlled by the investor, not the fund company, they do not figure into this discussion.
To learn more, see Picking The Right Mutual Fund.
Yes. And that's the great thing about performance numbers on mutual funds, index funds, and ETFs. They are all reported net of all fees. The only time you have to be concerned about additional fees is if you also have a financial advisor. Their fees are on TOP of fund/ETF fees and you would only see your performance net of ALL fees (including the advisor fees) on your advisor's statements (in most cases).
Investopedia gave you a really great explanation to your question, so I'll simply add the following; what you should primarily look for is total return to review historical performance. If you rely on charts to help you evaluate mutual fund performance, it should be recognized that any kind of distribution (dividends, capital gains, etc.) is usually going to be reflected in the performance by way of a drop in the NAV of the fund.
I'm pretty careful to not give advice without knowing full information about an investor, but I can always sign off on this, by no means should you consider a fund with front or back-end sales loads. In this day and age, I am amazed that investors are still considering these products (or are being recommended them by commission-based advisors).
Adam Harding, CFP