Title

Mutual Fund Trading Costs and Diseconomies of Scale

Publication Type

Working Paper

Publication Date

3-2015

Abstract

Larger mutual funds underperform smaller funds even though they have lower percentage transaction costs. Larger funds hold and trade a larger fraction of bigger, more liquid stocks, which leads to lower percentage transaction costs than smaller funds. Smaller funds outperform larger funds primarily when small cap stocks outperform large cap stocks. Overall, we find that it is not trading costs but fund holding characteristics, especially the market capitalization of stock holdings, that drive diseconomies of scale in the mutual fund industry.

Keywords

Mutual funds, transaction costs, fund size, stock size, fund performance

Discipline

Finance and Financial Management

Research Areas

Finance

Additional URL

http://ssrn.com/abstract=2350583