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investors already understand – and so many more still don’t — mutual funds are expensive, tax-inefficient, outdated investment vehicles. And yet, more than half of American households own a mutual fund, helping power an $11.6 trillion industry.
That’s a market that isn’t going away anytime soon – but it’s certainly one that investors can and should be a lot smarter about if they choose to keep mutual funds in their portfolios. So here’s a basic question for any prospective buyer: Are the biggest and most popular mutual funds really worth your money?
The answer isn’t as easy to find as you might think: While Morningstar and many other companies provide ratings on mutual funds, they look at them in isolation of the greater marketplace. They analyze and compare mutual funds only to other mutual funds – which are often equally as flawed. They don’t consider “outside” options such as ETFs.
As such, we offer here a more unbiased view of the ten largest U.S. mutual funds — pointing out the pros and cons of both active and passive funds, while simultaneously suggesting real alternatives. Almost all of these funds come in different shares classes, each with their own fee structure, and are ranked by assets under management as reported by Morningstar.
1. Pimco Total Return (PTTAX) — Assets: $263 billion
Topping the list is Pimco Total Return, a bond fund managed by the famous Bill Gross. Mr. Gross has quite a reputation in the fixed income world, and for good reason—his long-term track record is very good. He made some poor market calls in 2011, namely shortening the fund’s duration and reducing Treasury exposure. As a result, he missed out on the drop in interest rates which drove a solid rally in the latter half of the year. Only time will tell how frequent these slip ups occur. The net annual expense ratio for A shares is 0.85% (with a 3.75% front end load) and 1.60% for C shares, although some of the other classes have lower fees. The institutional shares, for instance, cost about 0.46% per year.
Solid long-term track record
Capable management team with extensive experience in fixed income
The portfolio’s duration is now a little longer than we would like
While it hasn’t created major issues so far, the significant assets base could limit its ability to move in and out of the best investment
Depending on the share class, this fund can be expensive
It’s hard to argue with exposure here. Following the 2011 slip up, Gross increased duration and benefitted from falling rates in 2012, and has since reduced duration again.  So despite its large size this fund remains relatively nimble. In the end, it may depend on what share class is purchased. Each holds a different set of fees, and paying anything over 1% annually is hard to justify for a bond fund, especially considering the existence of cheaper ETF alternatives.
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