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Fund Spy

Funds Aimed at Timers Rake in Fees

Lofty expenses and steep trading costs plague these offerings.

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Costs matter. The mantra of Vanguard founder Jack Bogle is ignored by fund investors at their own peril.

Yet many fund investors aren't aware of the degree to which high expense ratios and trading costs can take a bite out of long-term returns. That's particularly true of those who try to time the market through mutual funds designed for that purpose, because they tend to hold such offerings for relatively short periods. The two fund shops of note that cater almost exclusively to timers--Rydex and ProFunds--appear to take advantage of that fact. Most of these shops' funds, which allow an unlimited number of exchanges and typically track or sell short common benchmarks--many also employ leverage--carry high price tags. They also impose significant hidden costs on shareholders.

For example, the no-load shares of  Rydex OTC (RYOCX), which tracks the Nasdaq 100 Index, levy an annual 1.22%. That's a steep expense ratio for an index fund with a $1 billion asset base. To make matters worse, manager Michael Byrum has done a poor job of tracking his bogy; the fund's five-year, pre-expense annualized loss of 8.58% through the end of June trails the index by 62 basis points. That shortfall is, in part, a result of shareholders' unfettered trading: The fund's fluctuating asset base forces Byrum to constantly rebalance the portfolio, resulting in far higher portfolio turnover than that of the index, which means higher trading costs. For the past 18 months, in an attempt to boost performance, Byrum has over- and underweighted some of the stocks in the index using quantitative models. However, that has backfired, putting the fund further behind the benchmark.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.