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Mutual Funds
Bargain-basement funds
November 23, 1999: 11:25 a.m. ET

Finally, some good news in fund costs for cheapskates and penny-pinchers
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - The mutual-fund business hasn't exactly been courting budget-conscious investors. In fact, fund companies have pretty much ignored the cheapskates and penny-pinchers of Wall Street.
     But some cracks have developed in attitudes about fund fees, and a few companies have tried to follow in the footsteps of cost-conscious fund giant Vanguard Group.
     "High expenses do add up over a period of 10, 15, or 20 years," said Dennis Foley, a vice president at Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF), which introduced five low-cost mutual funds in 1997.
    
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     Vanguard has championed low-cost investing for years under the direction of founder John Bogle, even as fees in the industry have climbed.
     While Vanguard's fees have dropped 54 percent to an average of 0.28 percent in the past 20 years, the industry average has soared 64 percent to an average of 0.97 percent, the fund group said.
     At TIAA-CREF, the company has waived part of the management fees for the funds until 2003, so the annual costs range from 0.29 percent on assets for its Bond Plus Fund to 0.49 percent for its International Equity Fund. There are no sales charges and no so-called 12b-1 fees (for marketing and advertising costs), Foley said.
     "We think returns are unpredictable, but you can keep expenses controlled," Foley said.
     Besides Vanguard and TIAA-CREF, Fidelity Investments and American Funds offer investors lower-cost options, said Russ Kinnel, an analyst at fund-tracker Morningstar. A stock fund shouldn't cost more than 1 percent, while a bond fund should average no more than 0.75 percent, he said.
     "In general, the fund industry can do better," Kinnel said.
    
Dot-com mutual funds?

     Meanwhile, two new Internet start-ups, StockJungle.com and X.com, are introducing mutual funds with a twist that offer lower expenses.
     StockJungle.com debuted a S&P 500 index fund last week with no expenses at all as part of its Naked Mutual Funds series. The company is covering costs of up to 0.50 percent of assets a year, which could reach as high as $5 million if the fund hits its cap of $1 billion, said Michael Witz, founder and chief executive.
     "There is no catch," Witz said. "I believe the fee structure in the mutual fund industry should be completely overhauled."
     The company hopes to use the free index fund to help draw assets to its other funds, which carry maximum annual fees of 1 percent.
     StockJungle.com introduced a Market Leaders Growth Fund, of stocks leading their sectors; as well as a pure-play Internet Fund. A fourth fund, called Community Intelligence Fund, is investing in stocks that are recommended by members of a virtual community at StockJungle.com.
     Witz doesn't seem concerned about making a profit, and said StockJungle.com will make money through advertising on its site and e-commerce partnerships. The company also is eliminating paper transactions so it will have lower per-account costs, he said.
     At X.com, the company will introduce low-cost mutual funds as part of its investing "supersite," said John Story, executive vice president. The exact fees haven't been set.
     First, the company will introduce with partner Barclays Global Advisor an S&P 500 index fund, a money market index fund, and a bond index fund, all with no redemption fees or administrative fees. Later, it plans a small cap fund and an international fund.
     "We want to offer building blocks for anyone's portfolio," Story said. "We don't want any barriers to entry."
     Like StockJungle.com, X.com believes it can make up the difference on fund fees because it is an Internet company without costly branch offices or paper transactions.
    
Still some doubters

     While the Internet is creating new investing opportunities, some mutual-fund pros still have their doubts.
     Kinnel, of Morningstar, said the free S&P 500 index fund sounds gimmicky and said investors would be better off in Vanguard's S&P 500 index fund. Vanguard has an established name and a low expense ratio of just 0.18 percent for the fund.
     "You're getting better service," Kinnel said.Back to top


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.