Jul 31

Tip For Lowering Your Mutual Fund Fees - Buy ETFs Instead

Lower mutual fund expensesInvestors are now paying an average of 0.93 percent in fees on their assets in mutual funds for the U.S. stock market. These expenses may not look like much for the first year, but compounded over 30 years, you are looking at thousands of dollars in expenses paid to a mutual fund company from your pocket.

The average investor has recently seen some mutual fund fees lowered. This is mostly because of their competition from exchange-traded funds, or ETFs. Most ETFs are similar to index mutual funds but usually charge very low fees (as low as 0.10 percent). But ETFs trade like a stock, and can be bought or sold through a brokerage at any time during the day. The many other advantages (and some disadvantages) of ETFs are outlined in Seeking Alpha's Guide to ETF Investing, and you can research expert opinion on the various ETFs on our ETF Investor site.

To see the impact of mutual fund expenses, look for the expense ratio. You can find it in the fund's prospectus or call your mutual fund company and ask. To calculate the amount of your expenses over time use a calculator such as, DinkyTown's. Be prepared to feel some pain. Then buy ETFs instead.

Comments

  • Ne asilil...

    Aug 10
  • It's effectively a difference of less than 0.10% per year in the expense ratios between the lowest-cost ETFs (usually linked to the S&P 500) and a comparable open-end mutual fund. If you are doing periodic investments (as you should), the commissions on buying the ETFs can overwhelm this very modest cost savings, even if the commissions themselves are modest. Buying and selling over the course of the trading day only really matters if you are a trader, not a long term investor; saving 0.08% in annual expenses is immaterial when you actively buy and sell.

    Finally, consider the liquidity of the ETFs you are using. There are several that I watch closely - a few more specialized ones - that only trade a few thousand shares a day. The bid/ask is a lot higher than in almost any other area of the market outside of the BB ($0.12 - $0.15 spreads, occassionally higher), and it oftentimes *seems* that you can't get filled; buying at the market rather than using a limit order inevitably seems to mean paying more than the posted ask price. You need to be careful, and there IS a cost here; a $0.10 spread on a $50 ETF is effectively a cost of 0.20% - not the end of the world, but when you are doing the trade to save a whopping 0.08% in management fees, well, there goes all the benefit.

    Other things, too - does having a brokerage account open (presumably with little to no trading activity) cost more than opening up a direct mutual fund account with Vanguard?

    In any case, stated expense ratios are important, but really are a very, very limited benefit to using ETFs (if at all). I use a lot of ETFs in my practice, but generally as a way to either get a focused investment without buying a basket of stocks, or in cases where I can't find a good, open-to-new-investments, actively-managed fund in an asset class (got any small-cap value ideas?).

    Jul 31