Fund expenses get a lot of attention and for good reason:  a fund’s expenses are a drag on its performance. But does knowing funds’ expenses help you select which funds are most likely to perform well in the coming months or years? No. Expenses matter, but other factors matter even more.

If funds all had the same performance returns, choosing low expense funds would make perfect sense because the lower the expenses, the more of the return you’d get to keep. But returns often aren’t even in the same ballpark. For example, in the May 2012 issue of NoLoad FundX the best performing core fund  for the 12-months ending April 30, 2012 was T. Rowe Price Blue Chip Growth (TRBCX), which gained 11.8%, and the worst performer was iShares MSCI EMU (EZU), which lost -26.4%—a difference in return of 38.2%.

The range of fund expenses is much smaller. Expenses in Class 3 range from a low of 0.07% to a high of 2.0%—a difference of 1.93%. Interestingly, TRBCX and EZU, have very similar expenses: 0.77% and 0.52%, respectively. If you’d chosen EZU simply because it had slightly lower expenses, however, you’d have experienced much lower returns over this time period.

Below we plotted the 159 funds in Class 3 based on their 12-month returns through April 30, 2012, and their expense ratios. You can see that there is little correlation between low expenses and higher performance.

This chart (above) looks back only at the last year, but we’ve found the same holds true over much longer time periods. The second chart, below, looks at a larger group of diversified funds – 303 funds in all – and over a much longer time period of nearly 22 years (December 31, 1989 through September 30, 2011).

In this larger group of diversified funds, you can see most of the fund’s expense ratios fall between 0.5% and 2%, while the annualized returns over this nearly 22 year time period of time range from around 3% to nearly 15%.  (The top 20 top performers are circled in yellow and show a range of expenses from low to high.)

For more on our nearly 22 year study of 306 diversified mutual funds, click here.

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