Another Look at S&P 500 Retail Index Funds : Are S&P 500 Funds a Financial Commodity?

We analyze the expense ratio and attributes affecting the performance of 136 retail S&P 500 Index funds. These funds are among the simplest of financial vehicles. Nonetheless, the expense ratios and performance of these benchmark trackers differ significantly.Our univariate analysis shows that mutual fund performance, as measured by the median Sharpe ratios, Jensen's alphas and annualized total returns, increases as expense ratios decrease.In addition, a positive relation exists between expense ratios, deferred charges and 12b-1 fees. By contrast, fund size and age are negatively related to expense ratios. Thus, our analysis of mutual fund expenses suggests expense-conscious retail investors should look carefully at the deferred charges, 12b-1 fees, size and age of the S&P 500 Index fund before investing. Our multivariate model provides evidence that the expense ratios help to explain performance; that is, lower expense ratios are strongly related to higher returns.What are the implications of our findings? Investors often view index mutual funds as financial commodities because of the often-held assumption that funds tracking the same benchmark index should not differ in any meaningful way. Our evidence of large differences in expense ratios across retail S&P 500 Index funds casts serious doubt on this term as a descriptor of these funds. One explanation for the presence and enduring popularity of high-priced index funds is that some uninformed investors are paying high costs without receiving commensurate benefits. Another explanation is that such funds tend to require significantly lower minimum initial purchase amounts. The evidence suggests that despite less-than-perfect price competition among the whole of S&P 500 Index funds, the S&P 500 Index funds with the lowest expense ratios (Quartile 1) attract the majority of retail investors' funds