The Persistence of Fee Dispersion among Mutual Funds

Previous work shows large differences in fees for S&P 500 index funds and other funds, and
suggests that investors suffer wealth losses investing in high-fee funds when similar low-fee funds
are available. In contrast, the neoclassical model of mutual funds (Berk and van Binsbergen, 2015)
argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net
alphas are equal to zero. We show that fees matter from an investor perspective. We document (a)
a strong negative association between net-of-fee fund performance and fees in a sample of all US
and international equity funds, (b) economically large, robust, persistent, and pervasive fee
dispersion in the mutual fund industry, and (c) important economic effects for investors. During
the sample period, the mutual fund industry has generated a total value lost (i.e., a negative net
value added) of 125 billion USD, coming predominantly from high-fee funds.