![]() If that fund charged a middling 1% expense ratio all those years, a $10,000 investment in that fund at the beginning of 1992 would be worth only $154,400 at the end of 2021. On the other hand, take a hypothetical average mutual fund, whose average return before fees would have equaled the return of the S&P 500 (a realistic assumption). A $10,000 investment in VFINX on Januwould have been worth $201,600 at the end of 2021, or 97% of the value of the pure index. ![]() One such fund, the Vanguard 500 Index Fund (VFINX), has a current expense ratio of 0.18%. The closest investment available to an individual would have been to buy shares in a low-fee S&P 500 index fund. But it wasn’t possible to invest in the index without fees. If it were possible to invest in the S&P 500 without having to pay any fees, a $10,000 investment in the S&P on Januwould have been worth $208,400 on Dec. The average annual return on the S&P 500 with all dividends reinvested for the 30 years ending 2021 was 10.65%. ![]() Over an investor’s lifetime, the expense ratios she pays on her funds can make a huge difference in the size of her nest egg.Ĭonsider this real-world scenario. But the fees are deducted every year, so the total paid out grows exponentially over time. Many studies over the years, including the 2019 study by Personal Fund, have shown that on average, every dollar in fees that an investor pays the fund manager only decreases the investor’s wealth by a dollar.ĭifferences in expense ratio of less than 1% might seem minor. But you can’t expect a mutual fund with a 1% expense ratio to perform better than a comparable 0.2% expense ratio fund. And unlike some other kinds of products, the adage “you get what you pay for” doesn’t apply to mutual funds.Ī $100,000 Mercedes is probably more comfortable, safer, more reliable and has more horsepower than any $20,000 car. The higher the expense ratio, the more of the investor’s potential wealth goes to the fund manager. The lower the expense ratio, the more the investor keeps. The expense ratio represents the portion of one’s investment that the investor hands over to the fund manager every year. He answered, “The first thing to look at is the expense ratio”. Nobel Prize winning economist William Sharpe was once asked in an interview how to decide which mutual fund to invest in. What is the Importance of a Mutual Fund’s Expense Ratio to Investors? ![]() But a similar fund with a 0.2% expense ratio would have lost a less horrible 2.72%. long-term bond fund with an expense ratio of 1% would have lost 3.52%. The Bloomberg US Long-Term bond index lost 2.52% in 2021. While stocks had a great year in 2021, bonds had a terrible year. The fees are subtracted from the investor’s shares whether the fund is gaining or losing value. An investor in a similar fund that charged a 0.2% expense ratio would have seen their shares rise 28.5%. (The exact math is more complicated, but this is a decent approximation). If the fund charged an expense ratio of 1%, its investors would have seen the value of their shares by 28.7% – 1%, or 27.7% for the year. For example, if a fund invested in every stock in the S&P 500 index in the same proportions as the index, it would have gained 28.7% in 2021. The fund’s costs are withheld as a fee from each investor’s shares of the fund, in proportion with the expense ratio. The expense ratio directly measures what it costs an investor to own shares of the fund. 1% is a middle-of-the road expense ratio for many types of funds. For example, if a fund had an average of $10 billion in assets in 2021 and paid $100 million in expenses that year, its expense ratio for 2021 would be 1%, or 100 basis points. ![]() These costs are borne by the fund’s investors and reported as an expense ratio, or percentage of the average net assets of the fund.Ī mutual fund expense ratio is sometimes expressed in basis points (abbreviated bps), where a basis point equals. There are many costs involved in running a mutual fund or ETF – e.g., salaries, research, accounting, marketing, shareholder communications, and the manager’s profit. Learn more about expense ratios so you can select the mutual funds and ETFs most likely to generate the highest returns. Expense ratios are crucial to investors because the fees paid can reduce the investor’s returns.Ī fund’s expense ratio is determined by dividing its total annual fees by the value of its assets. A fund’s expense ratio indicates the percentage of an investment that a shareholder pays in fees to the fund manager. Mutual funds and Exchange-Traded Funds (ETFs) incur costs that are passed along to the fund’s shareholders, in the form of fees deducted from every share. ![]()
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