Clean Shares Explained: Definition, and How It Works, and Examples

Clean shares emerged in 2017 as a response to regulatory changes and the push for greater transparency and fairness in the investment industry, particularly in the realm of mutual funds. These shares were designed to address concerns regarding hidden fees, conflicts of interest, and the lack of clarity surrounding the true costs of investing.

Unlike traditional mutual fund share classes, clean shares have standardized pricing across the board, making it easier for investors to compare costs and understand what they’re paying for. By eliminating front-end sales loads and annual 12b-1 fees for fund services, clean shares aim to reduce unnecessary expenses and ensure that investors receive the full value of their investments.

However, it’s important to note that while clean shares offer greater transparency and lower costs compared to other share classes, they may still incur fees for investment management and administrative costs. Additionally, advisory firms may tack on their own fees for the services they provide, so investors should carefully evaluate the overall cost structure before investing in clean shares.

To better understand how clean shares work in practice, let’s consider an example using the Washington Mutual Investors Fund (AWSHX) from Capital Group.

The class A fund shares of AWSHX charge a maximum load of 5.75% and have a net expense ratio of 0.56% per year. In comparison, the T share class of the same fund charges an annual fee of 0.59% and a maximum sales load of 2.5%. Clean shares of AWSHX, however, have no sales load attached to the transaction, offering investors a more cost-effective option for investing in the fund.

By comparing the costs and benefits of different share classes, investors can make more informed decisions about their investments and ensure that they are getting the best possible value for their money.

Let’s explore more examples to illustrate the benefits of clean shares. Consider the XYZ Growth Fund, which offers multiple share classes, including Class A, Class C, and clean shares. The Class A shares come with a front-end sales load of 5.75% and an annual expense ratio of 0.75%. The Class C shares have a higher annual expense ratio of 1.25% but do not impose a front-end sales load. In contrast, the clean shares of the same fund have no front-end sales load and a lower annual expense ratio of 0.50%. This example highlights how clean shares can offer cost savings and greater transparency compared to other share classes within the same fund.

While clean shares offer many benefits, it’s essential for investors to consider alternative investment options that may better suit their needs and preferences. One such alternative is exchange-traded funds (ETFs), which are similar to mutual funds but trade on stock exchanges like individual stocks. ETFs often have lower expense ratios and greater liquidity compared to mutual funds, making them an attractive option for many investors. However, ETFs may not be suitable for all investors, particularly those looking for actively managed investment strategies or exposure to specific asset classes. By exploring clean share alternatives, investors can make more informed decisions about their investment portfolios.

Clean shares differ from other mutual fund share classes primarily in their fee structure and pricing transparency. Unlike other share classes, clean shares have standardized pricing and do not include front-end sales loads or annual 12b-1 fees for fund services.

Clean shares benefit investors by providing increased transparency and lower costs compared to other share classes. With standardized pricing and the elimination of certain fees, investors can more easily understand the true cost of investing and potentially enjoy higher returns on their investments.

Clean shares may include fees for investment management and administrative costs. However, they do not include distribution fees or commissions. Advisory firms may also charge their own fees for the services they provide, so investors should carefully evaluate the overall cost structure before investing.

Clean shares may not be suitable for all investors, as some may prefer the simplicity of other share classes or may not fully understand the implications of investing in clean shares. Investors should carefully consider their investment goals, risk tolerance, and time horizon before investing in clean shares.

Investors can compare clean shares with other share classes by examining factors such as pricing transparency, fee structure, and potential for higher returns. By evaluating the costs and benefits of different share classes, investors can make more informed decisions about their investments.

Alternative investment options to clean shares include exchange-traded funds (ETFs), which often have lower expense ratios and greater liquidity compared to mutual funds. However, ETFs may not be suitable for all investors, so it’s important to carefully consider alternative investment options based on individual needs and preferences.