A recent article in the Wall Street Journal by Jonathan Clements highlighted the advantages of low-cost bond funds.
Jonathan correctly points out that low-cost bond funds consistently outperform their high-cost cousins. This is not because low-cost bond funds are run by superior investment managers. It’s simply a result of the funds’ low expenses.
As an example, take Vanguard GNMA with an expense ratio of .20% and Franklin US Government Securities with an expense ratio of .72%. Both funds focus exclusively on GNMA securities. The difference in their expense ratios is .52%.
According to Morningstar, for the period ending 11/30/2005, the difference in their 3, 5, and 10 year returns was .51%, .55%, and .48% respectively. It’s no coincidence that the difference in returns almost exactly matches the difference in expenses. High-cost bond funds mute the power of compound interest and herd you into the land of mediocre investment performance. At our family-run investment company and in our newsletter we focus exclusively on low-cost bond funds – you should too.