Sep 29, 2014
We wonder how many investors possibly understand this extremely simple concept. ETFs do NOT HAVE SHARE CLASSES. Mutual funds have share classes for one reason -- to make more fees for the fund company and brokers.
Below is image highlighting the tradeoff in 2 classes of Janus Unconstrained Bond Fund. Bill Gross the manager just manages one large sum and probably doesn't even look to see which share class has the assets --- it doesn't matter to him, he just buys and sells bonds for the aggregate portfolio. But for investors, the fund is divided into segments.
In this case, you could go with Class A shares which have a 4.75% sales front load fee and an expense ratio of 1.08%. Or you could buy Class C shares and pay no front load --- but pay a 1.83% expense ratio and owe 1.00% as a back load --- when you sell it you are stuck an extra 1%.
Now think about it from a brokers perspective. Which do you want your clients to buy? If you have incentives to push load funds, perhaps you stick your clients with the A shares because your firm gets that juicy 4.75% upfront fee. However, note the 12b1 fees. Class A has a 0.25% 12b1 and Class C has a 1.00% 12b1 fee. What is a 12b1 fee? It's an ongoing kickback from the fund company to any outside broker who puts their clients in that fund. So for example, you are a broker that works for a company that is not Janus --- Janus will pay you an ongoing fee forever to keep your clients in it. That fee is IN ADDITION TO whatever management fee you charge your clients. The great part about 12b1's is that they are hidden!
Do ETFs have 12b1 fees? Nope. So doesn't that make you wonder, why would a broker ever put a client in an ETF when they can earn 1.00% forever from Janus? The problem with those silly ETFs is that how do you make any money off them? Exactly. This is the very essence of the problem. Yet ETF assets continue to grow and grow and grow. How is that? Because many investment advisors are content with simply charging a straightforward fee and do the right thing and don't buy fees with loads and 12b1's. Fees like 12b1 fees have been totally outlawed in other countries as too much of a conflict of interest. But not in the USA.
That all said, Janus C shares might be a RELATIVE bargain compared to many hedge funds. Happy investing.
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