Sunday, October 18, 2009

Bond Mutual Fund Fees

A recent Wall Street Journal article by Jason Zweig discussed the annual costs of owning a taxable bond fund. He referenced Morningstar research which showed that the average taxable bond fund charged over 1% in annual fees with some bond funds charging as high as 2.98%. His recommendation? Look to a bond index fund rather than an actively managed bond mutual fund. The example Zweig gave was the Vanguard Total Bond Market Index Fund which charges only 22 basis points, or 0.22 of 1%....about 1/5 what the other funds charge on average. Another example of an inexpensive fund group would be Dimensional, which charges approximately half of what Vanguard charges. (Blue Haven Capital uses both Vanguard and Dimensional products for its client portfolios).

A third choice is for the investor to use a money manager to build his or her own bond portfolio using individual bonds. The trick here is to make sure that the money manager really knows bonds. Most retail stock brokers are not familiar with bonds and will often purchase bonds at very uncompetitive prices. By finding a money manager that really knows bonds, the investor can capture the low cost structure that Dimensional and Vanguard offer, but also end up owning a highly customized bond portfolio which provides exactly the income stream the investor needs. (Blue Haven Capital also builds portfolios using individual bonds).

It pays to shop around when looking for fixed income products. ETFs, funds, and individual bond portfolios all make sense, but not at the prices that Morningstar found.

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