John Huggard says that an A-share mutual fund costs 5.2 percent per year

By John L. Olsen, CLU, ChFC, AEP

Olsen & Marrion, LLC


Here is John Huggard's comparison of an A-share mutual fund versus a variable annuity. I may use this in one of my classes as an example of flawed and misleading analysis.

A-share mutual fundVariable annuity
Annual Expense Ratio1.50%2.20%
Annual Income Tax Loss2.20%0.00%
Commission0.80%0.00%
Trading Costs0.70%0.50%
Total5.20%2.70%

This chart is from slides Huggard uses in connection with his book, "Investing with Variable Annuities: 50 Reasons Why Variable Annuities may be better long-term investments than mutual funds."

Consider this: Annual income tax loss: What does that refer to? It can refer only to the fact that investors in many A-share equity mutual funds (especially actively managed ones) incur income tax liabilities annually. Presumably, the 2.2 percent is the portion of the assumed total return for the fund that is taxable each year.

OK, let's assume that this is right. If so, the distributions from the mutual fund will not be largely tax-free (because we paid tax on the turnover each year). But distributions from the variable annuity will be fully taxable as ordinary income to the extent that they represent gain.

There's a name for comparisons like this.