Are Northern Funds Worth a Look?

Mutual Funds from Northern Trust

Northern funds - investing
Taking a look at index funds from Northern Trust. Getty Images

If you've done any research for low-cost mutual funds, you may have heard of Northern Funds. Many of their index funds have lower expense ratios than those at Vanguard Investments.

Northern funds are managed by Northern Trust, which offers about 50 mutual funds, most of which are low-cost index funds.

Check Out the Low Expense Ratios on Northern Funds

If you think Vanguard and Fidelity have the lowest expense ratios in the mutual fund universe, you are only partially correct.

Some of the index funds at Northern Trust are competitive with (or are even lower than) the indexing champions. Here are a few examples, each followed by a comparable Vanguard fund:

  • Northern Mid Cap Index (NOMIX): Expense ratio 0.15%
  • Vanguard Mid Cap Index (VIMSX): Expense ratio 0.20%
  • Northern Small Cap Index (NSIDX): Expense ratio 0.15%
  • Vanguard Small Cap Index (NAESX): Expense ratio 0.20%
  • Northern Bond Index (NOBOX): Expense ratio 0.15%
  • Vanguard Total Bond Index (VBMFX): Expense ratio 0.16%

Northern Funds Advantage: Why Low Expenses Matter With Index Funds

At the very core of the advantage with index funds is their low expenses. When John Bogle started Vanguard Investments and created the first index fund, Vanguard 500 Index (VFINX), his idea was that since most professional, active fund managers don't beat the major market indices, in the long run, a low-cost mutual fund that passively tracked an index could perform better than the average actively-managed funds.

His theory would prove correct and now Vanguard is one of the biggest mutual fund companies in the world.

Does this mean that investors should always buy the index funds with the lowest expense ratios? The short answer is yes but there are other factors to consider and one such factor is tracking error, which is a measure of an index fund's effectiveness in replicating or "matching" the performance of the benchmark index.

Should You Buy Northern Funds?

This article features only the low-cost index funds offered at Northern Trust. Therefore investors interested in other funds will need to do research and analysis to determine if their other funds are worthy of consideration for purchase.

To determine if the low expense ratios on the index funds at Northern Trust combine with a low tracking error, a good place to start is to look at historical performance.

Look at past annualized returns, while taking the expense ratio into account. This will tell you how well the fund has tracked the benchmark index in the past. For example, if one of the passively-managed Northern funds has an expense ratio of 0.15% and the benchmark index has a 5-year annualized return of 10.00%, an index fund with a low tracking error might have an annualized return of roughly 9.85%.

Now compare that with another index fund from a mutual fund company like Vanguard or Fidelity. If the expense ratios are close (as in the examples above), and the annualized returns are the same or better for the Vanguard or Fidelity fund, you may want to consider buying Vanguard or Fidelity.

This is because, for example, if the expense ratio of a comparable Vanguard fund is slightly higher but its returns are identical or higher than the Northern fund, you'll know that the tracking is better on the Vanguard fund.

Bottom line: Lower expense ratios are preferred for index funds but you'll still want to look at historical performance before buying.

See also: Mutual Fund Analysis: 10 Things to Analyze (and 5 to Ignore)