Morningstar: How Expense Ratios and Star Ratings Predict Success

Essential reading for any mutual fund investor.  Even Morningstar, whose star ratings are widely watched in the industry, finds and readily admits that *expenses* are a better indicator of future performance.

From the article:

The star rating is a measure of risk- and load-adjusted returns, so naturally I want to know whether the star rating is able to predict future risk- and load-adjusted returns.

and then:

If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.

and:

Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.

and finally:

Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you’ll be on the path to success.