True Fund Costs: Energy Sector

This report focuses on providing investors the true costs incurred when investing in Energy ETFs and mutual funds. A key component of our fund ratings, Total Annual Cost (TAC) accounts for all the costs borne by investors, including transaction costs and many other fees. Expense ratios often drastically understate the total cost of a given fund.

Figure 1 shows ETFs and mutual funds in the Energy sector whose expense ratios understate their TACs by the most.

Figure 1: Funds With Most Misleading Expense Ratios

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Source: New Constructs, LLC and company filings

ProShares Ultra Oil & Gas (DIG) has the greatest disparity between its TAC and expense ratio amongst ETFs. While the difference seems small now, over time that difference adds up. More importantly, you deserve to know your true costs of being in any ETF.Saratoga Energy and Basic Materials Portfolio (SBMBX)has the most misleading expense ratio amongst mutual funds in the sector as its expense ratio is 2.81 percentage points lower than the fund’s actual Total Annual Costs. 2.81 percentage points is a large difference. Over just 10 years, 2.81% compounds to 32%. I think most investors would like to know about such a large additional cost before they put their money into SBMBX.

A key takeaway for fund investors here is that they should focus on the Total Annual Cost of funds, not just the expense ratio as it can be misleading.

The average TAC for ETFs in this sector is 0.55% and for mutual funds it is 2.57%. We recommend investors focus on funds with TACs that are below these averages. See our ETF and mutual fund screener to get the TACs on 7200+ ETFs and mutual funds. I strongly recommend that investors avoid funds that charge far above-average TACs as it will be extremely difficult for these funds to consistently earn returns above a less-expensive benchmark.

Figure 2 shows the number of ETFs and mutual funds with TACs above the average and below the average.

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Disclosure: NewConstructs staff receive no compensation to write about any specific stock, sector, or theme.

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