An Analysis of the Expense Ratio Pricing of SMB,
HML, and UMD Exposure in U.S. Equity Mutual Funds

Abstract

The expense ratio price of U.S. equity market exposure is close to zero with funds such as the Vanguard Total Stock Market Index (ticker: VTSAX), which charges an expense ratio of just 5 bps. An interesting, and more difficult, question to answer is, How much are mutual fund companies charging investors to gain exposure to small-capitalization, value, and positive momentum stocks? The authors answer this question using monthly returns data for low-cost mutual funds and ETFs in tandem with Fama–French three- and Carhart four-factor equity pricing models and current fund expense ratio levels. They indeed find strong evidence that fund companies charge for exposure to individual factor premiums. Additionally, they find significant variation in how aggressively factor exposure is priced, both across fund companies and across portfolios offering identical levels of factor premium exposure.