Are all No-Load Funds Equal?

Monday, November 5, 2018 | MarketBeat Staff
Are all No-Load Funds Equal?

One obstacle that investors face is the abundance of choice that exists in investment options. This is becoming more of an issue with the prevalence of mutual funds, which has opened up the world of investing to a much broader section of society. Choosing a mutual fund is like walking into an ice cream shop. There are flavors of mutual funds for just about every kind of risk appetite: aggressive growth, growth, and income, income. And there are different types of funds for achieving those objectives: index funds, balanced funds, mid-cap funds, large-cap funds, small-cap funds – even sector funds like energy, technology, or international.

But even if an investor can navigate around all of that, they are faced with the issue of understanding the real cost of owning a mutual fund. And this can be more critical than parsing through the multitude of fund categories, because how much a fund charges in fees can have a harmful effect on an investor’s overall return. Fees exist in any asset class, but the world of mutual funds has a language all its own. Some of this is because investors can get confused between the fees that they receive from their investment advisers or brokers and the fees that come from the fund itself.

One of the key differences between mutual funds is whether the fund is a load-bearing or a no-load fund. This article will go into great detail about no-load funds. In addition to defining what a no-load fund is, we’ll go over the history of these funds and we’ll review the benefits and potential risks involved with these funds.

What are no-load funds?

To understand what a no-load fund is, let's first define a load-bearing fund. When a mutual fund charges a load per transaction, it means there is a sales fee tied to each transaction. Fortunately for investors, there is enough competition in this space to help keep these fees relatively low and competitive. The standard load for most funds is somewhere between 4% and 6%. A no-load fund, by contrast, does not charge a sales fee for transactions. This makes these fees a very popular alternative for investors, particularly as they are becoming more familiar with the need to rebalance their portfolio from time to time and shift assets from one class to another.

An appealing attribute of no-load funds is that investors can find an equivalent no-load fund for virtually any load-bearing fund. The only difference, in most cases, is the absence of sales fees on trades.

How mutual funds make money

It’s fair to ask, if a no-load fund doesn’t charge a sales fee then how does the fund make money? The fact is that no-load does not mean “no fees”. Every mutual fund has fees. No-load funds, like all mutual funds, have “carry fees” which are fees that help pay the salary of the fund’s investment advisors. These fees are part of a fund’s average expense ratios and will be different depending on the fund chosen. Generally speaking, you can find a no-load fund with an expense ratio that is as much as 0.5% less than an equivalent load-bearing fund. With the benefits of compound interest and a lack of principal depreciation, an investor can save thousands of dollars over time.

The investment manager of the fund will also receive a fee based on the fund’s growth. But this is good for investors because it puts the investment manager in a position where they only make money when the fund makes money. Although this does not ensure that the manager is a fiduciary, it does put them closer to this role because it helps ensure they will stay true to the fund’s stated objectives.

Where do loads fit into all this? In general, mutual funds don't make money off of any loads. So why charge a load then? Loads are paid to the investment advisers or brokers (i.e. the professional money managers) who offer these funds to their clients. So why aren't all mutual funds no-load funds? The answer is that many investors prefer the security of having an adviser monitor their fund, conduct the research, and when the time comes to execute trades on their behalf. One of the drawbacks to this is that, in some cases, the advisor is already receiving a commission from the client. So in a sense, they are getting paid twice. Once for recommending the fund and the other from the load they receive on a trade. While the loads are not necessarily a significant cost, particularly for investors who are committed to a buy-and-hold strategy, they can add up.

The other concern, which also speaks to compensation, is whether or not a broker is a fiduciary. If they are a fiduciary then they are contractually obligated to make all the decisions in your best interests, not theirs. If an adviser is a fiduciary, then it may be more profitable in the long run to invest in load-bearing funds. However, if you are comfortable doing your own research and conducting your own trades, then there really is no reason to own a load-bearing fund.

A history of no-load funds

The first no-load funds were introduced in the 1970s. This coincided with the first index funds that allowed individual investors to own the entire market.  No-load funds, like mutual funds in general, really become popular in the 1980s. With more and more employers offering their employees the ability to start open 401(k) and IRA accounts, which had the advantage of replacing traditional pension accounts, competition became fierce. One way funds broke through the clutter was to market the “no-load” feature of their funds.

What are the risks associated with no-load funds?

To an inexperienced investor, a no-load fund can be like fat-free Oreo’s. Someone on a diet can be tempted to eat more than the recommended serving size because, after all, they're fat-free. No fat, no consequences. That flawed thinking can exist with no-load funds. Since there is no charge for making trades, there can be a temptation to trade too frequently, particularly when moving money from one fund to another can seem as easy as transferring money in your bank. But funds have different objectives – and risks. Investors who make trades without performing the proper due diligence run the risk of having returns that are significantly reduced compared with buy-and-hold investors.

Another risk is that while an investor may be able to secure more of their total return by protecting it from fees, there is no guarantee that the fund will actually perform better, and for any investment this should still be the major criteria for determining whether or not it’s a good investment – is it meeting your investment objectives? 

A third risk, sadly, is that there are many advisers who will not offer these funds to their clients because they will not get paid anything for doing so. This means that less knowledgeable investors can be steered into load-bearing funds even when the no-load equivalent may be a superior option.

Are all no-load funds equal?

It’s fair to ask that if the fee structure is essentially the same, what’s the difference between one fund and another? The reality is, like so many things in life, quality matters. Vanguard introduced the first no-load fund and is still one of the leading providers of no-load funds. Other major players include T. Rowe Price, Fidelity and Dodge & Cox. Investors who are looking to invest in no-load funds should look at resources such as Kiplinger and Morningstar for objective evaluations of funds for all investment objectives.

And, of course, some no-load funds are less expensive than others. Here is a small sampling of some of the least expensive no-load funds by category.

Investment Objective


S&P 500 Mutual Fund

Schwab S&P 500 Index

Total U.S. Equity Mutual Fund

Fidelity Spartan Total Market Index Fund

Large Cap Value Mutual Fund

Fidelity Series 1000 Value Index Fund

Large Cap Growth Mutual Fund

Vanguard Growth Index Signal

Mid-Cap Mutual Fund

Fidelity Spartan Mid Cap Index Advantage Fund

Small Cap Mutual Fund

Northern Small Cap Index

Energy Sector Mutual Fund

Vanguard Energy Investor Shares

Health Care Sector Mutual Fund

Vanguard Health Care Sector Mutual Fund

Financial Sector Mutual Fund

Fidelity Select Banking Portfolio

Material Sector Mutual Fund

Voya Global Resources Portfolio

Technology Sector Mutual Fund

Fidelity Software and Computer Services Portfolio

Utilities Sector Mutual Fund

Fidelity Select Utilities Portfolio

Discretionary Sector Mutual Fund

Fidelity Select Consumer Discretionary Portfolio

*Source: Mutual Fund Education

The best source for any investor who is looking for detailed information regarding fees, particularly when comparing one fund with another is in a fund’s prospectus. These can usually be found online, or by contacting the fund’s Investor Relations department.

The bottom line on no-load funds

There are over 14,000 mutual funds available to individual investors and many of these are no-load funds. No-load funds do not charge the sales fees of load-bearing funds and for this reason, are considered a low-cost option for the do-it-yourself investor who is comfortable doing their own research and conducting their own trades.

Although they do not impose a sales charge, a no-load fund does have fees just like other funds. However, these fees are generally lower than those charged by load-bearing funds. Like load-bearing funds, the fund managers of a no-load fund are paid a small fee if the fund performs well. This, however, is a benefit to investors because it helps ensure that the fund manager will stay true to the fund’s objectives.

While many industry analysts predicted that no-load funds would completely replace load-bearing funds that have not been the case. And perhaps with good reason. Many investors still want the security that comes from having a dedicated advisor. If these investors remain disciplined and avoid making excessive trades that may benefit the advisor, but not boost their return, then these funds can generate a positive return.

Like any investment vehicle, a no-load fund is not without risks. Although most of the risks associated with no-load funds are not necessarily inherent with the fund, but with investor psychology. The absence of sales fees on trades may encourage novice investors to make trades too frequently which can ultimately hurt the fund’s performance. Another risk is that an investor can be fooled into thinking that just because a fund is no-load it will automatically perform better than a load-bearing fund. That is not true, and investors should still perform their due diligence to ensure that a fund is actually performing in a way that will help them meet their investment objectives.


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