Today we introduce a new weekly series. Every week we will share a paper from a recent academic journal publication, which we deem worthy of reading. We give you a a quick snapshot in terms of: #Research Questions, #Academic Insights and #Applications.
Here is our first. Enjoy!
AN ANALYSIS OF THE EXPENSE RATIO PRICING OF SMB, HML, AND UMD EXPOSURE IN US EQUITY MUTUAL FUNDS
AUTHORS: SEAN GROVER and JARED KIZER
PUBLICATION: THE JOURNAL OF PORTFOLIO MANAGEMENT • FALL 2016
#Research Questions: 1) What is the portion of mutual funds and ETFs expense ratios that can be attributed to SMB, HML and UMD exposures?; 2) Do different fund and ETF companies price factor exposure differently?
#Academic Insight: The authors find that:
1) fund companies are charging positive expense ratios prices for the different factor exposures. Specifically, they charge, on average, 12 bps for SMB, 27 bps for HML and 72.5 bps for UMD.
2) not all fund companies price factors. DFA and Ishares price SMB. DFA, Ishares and SPDR price HML. Only Ishares and SPDR price UMD while Vanguard does not appear to price factor exposures.
3) there is significant pricing dispersion among fund companies. For instance, of the funds with similar loading (coefficient) to the SMB and HML factor there are 40 bps difference between the expense ratio of the cheapest and most expensive funds.
#Application: As we pointed out in a prior article (http://academicinsightsoninvesting.com/2017/01/06/will-etf-picking-be-the-new-job-for-the-stock-and-fund-pickers ) investors need to perform robust due diligence on factor investing (aka smart beta) products because differences among them exists both in terms of exposures and costs.