What Are Load-Waived Funds?
Load-waived funds are a share class of a mutual fund that waives load fees typically charged to its investors (such as front-end loads). Owning shares in a load-waived fund is a benefit to investors because it allows them to retain all of their investment's return instead of losing a portion of it to fees. In most cases, mutual fund companies will limit the number of load-waived funds and make them available only to certain investors.
- Load-waived funds are mutual funds that would normally charge certain fees, as do loaded funds, but instead don't require investors to pay those expenses.
- Fees normally charged on these kinds of funds include front-end loads, meaning a fee at the time the fund is purchased, and back-end loads, charged when a back-loaded fund is sold.
- Load-waived funds typically waive the fees due to some sort of qualifying circumstances, such as being offered through a 401(k) that would otherwise not include loaded funds.
- Load-waived funds are distinct from no-load funds, which do not charge any fees at all; load-waived funds will still charge an annual marketing and distribution fee, called a 12b-1. No-loads have lower expense ratios, as well.
- Investors who choose either load-waived funds or no-load funds benefit by keeping a greater portion of their returns.
Understanding Load-Waived Funds
The purchase of load-waived funds is sometimes restricted to those participating in defined contribution retirement plans and also for investors who invest a substantial amount in the mutual fund company's funds (such as institutional investors).
These special mutual fund shares commonly have an "LW" at the end of the fund's name and ticker to differentiate them.
The letter at the end of the fund name describes the load type: share Class A funds are front-loaded, Class B funds are back-loaded, and LW funds are load-waived funds.
Load-Waived Funds vs. No-Load Funds
No-load funds and load-waived funds do not charge a mutual fund load. However, there is a difference between the two.
A true no-load fund does not charge any load, and it does not have any fees, such as 12b-1 fees. Load-waived funds are mutual fund share class alternatives to loaded funds, such as A share class funds. As the name suggests, the mutual fund load is waived (not charged). Typically these funds are offered in 401(k) plans.
However, no-load funds generally have lower average expense ratios than load-waived funds. Lower expenses often translate into higher returns to the investor, especially over the long term. The load-waived fund is a fund offered by an adviser or broker who might remove (waive) the load but keep other fees, such as the 12b-1 fee.
Index Fund Fees and Loads
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds adhere to specific rules or standards (e.g., efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.
Investing in an index fund is a form of passive investing. The primary advantage of such a strategy is the lower management expense ratio on an index fund. Since expense ratios are directly reflected in the performance of the funds, actively managed funds and their higher expense ratios are automatically at a disadvantage to index funds. As a result, many actively managed funds struggle to keep up with their benchmarks.