Faculty & Research

Abstract
In this paper, we present striking new evidence of systematic differences in prices across all US equity funds. We examine the residuals from regressions of fees (annual expenses and 12b-1 fees) on important fund characteristics, essentially allowing us to compare the fees of “identical” funds. We find that the average spread in residual fees across all funds over the sample is approximately 2.3%. The dispersion in fees has not decreased over time, despite the fact that significant numbers of new funds have entered and the aggregate amount of assets under management has increased substantially. An investor purchasing identical lower fee funds would have outperformed an investor purchasing higher fee funds by approximately 32% over our sample. We test a number of hypotheses to explain our results including a random fee, competition, strategic fee setting, and a service hypothesis, and are unable to explain the spreads in residual fees. Surprisingly, a main determinant of fees is the initial fee set by a fund, which varies little over time. Overall, our evidence is largely inconsistent with a competitive market for mutual funds.