Market Overview

With Actively Managed Funds, Be Wary Of Expense Ratios

In terms of return, the S&P healthcare sector is the best year-to-date performer.

If stocks from that space are leading the pack, then it makes sense you'd see health care mutual funds also sporting nice gains for 2014. Still, remember to be wary of expense ratios.

One leading fund, for example, is the Fidelity Select Health Care Portfolio (FSPHX). The fund holds about 77 percent of its assets in U.S. stocks, 21 percent in overseas stocks and the remainder in cash.

Up 16 percent year to date, this is an actively managed fund, with top holdings that range from Actavis plc (NYSE: ACT), to McKesson Corporation (NYSE: MCK), to Shire PLC (NASDAQ: SHPG).

Fidelity Select Health Care has a large-cap tilt, although small caps are represented. For an actively-managed fund, the expense ratio is also not bad, at 0.76 percent.

Now trading at record highs, buyers who want exposure to the large-cap, global health care space may want to wait for a pullback.

A Different Example

Another health care vehicle with slightly less of a large-cap tilt is the Prudential Jennison Health Sciences Fund (PHLAX). In comparison to its Fidelity-managed peer, the Prudential fund carries a significantly higher expense ratio of 1.18 percent.

Related Link: Why Invest In Mutual Funds?

The return numbers illustrate why this matters.

Prudential's year-to-date return is 17.25 percent, a little higher than the Fidelity Select. However, because of the higher fees, this fund has to work harder to deliver returns to investors.

A Broader Take

Put simply, one can't count on actively managed funds to trounce an index on a consistent basis, while offsetting potentially higher fees. Keep that in mind when evaluating actively managed funds.

The S&P health care sector has advanced by more than 15 percent in 2014. In comparison, the Vanguard Health Care Index Fund Admiral Shares (VHCIX) is more or less tracking this basket of stocks; it sports a year-to-date return of 15.90 percent and an expense ratio of 0.14 percent.

That cost is right in line with the SPDR Health Care Sector ETF's (XLV) expense ratio of 0.16 percent.

Vanguard's stated objective with the fund, in fact, is to track performance of the MSCI U.S. Investable Market Index/Health Care 25/50, a commercial index that contains health care stocks of all shapes and sizes.

With almost exactly the same composition as the two aforementioned actively managed funds, it's just one case where a lower expense ratio can lead to better profits for investors.

Disclosure: At the time of this writing, Kate Stalter had no position in the equities and funds mentioned in this report.

Posted-In: actively managed funds healthcare stocks mutual fundsHealth Care General Best of Benzinga

 

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