Fees

According to a May 2014 WSJ article, after 30 years, a $200,000 mutual fund investment (8% gross annualized return) grows to $1.4 million after paying the typical mutual fund annual fee of 1.25%. This was the average expense ratio for mutual funds for 2013 (source: Morningstar). The same investment grew to $2.0 million if annualized returns were the same but a 0.04% annual expense ratio (source: ETF.com).

The entire $600,000 difference above is solely due to annual expenses (0.04% vs. 1.25%). The $200,000 investment with a 1.25% annual fee pays $2,500 a year initially; the $200,000 invested in a fund with a 0.04% expense ratio initially pays $80 the first year.

The expense ratio peak for mutual funds was reached in 2003, when the typical fund charged 1.47% a year. Consider a $100,000 invested in the Vanguard 500 Index Fund (0.05% expense ratio). Assuming a gross return of 8.00% (7.95% after annual fund fees), the investor would have > $990,000 after 30 years. The average mutual fund investor with the same 8% gross return would have $710,000 after paying the typical annual fund expense.

According to ETF.com, the least expensive large cap ETF is Schwab U.S. Large-Cap (0.04% annual expense ratio). Some ETF analysts believe the investor should also focus on an ETF’s bid-ask spread; it should not be > 3 cents for a stock ETF and 5 cents for a bond ETF.

ETFs: Lowest Expense Ratios  [May 2014]

 

	ETF Category	Expense Ratio	Category Average
Schwab U.S. Large Cap  (SCHX)	Large Cap	0.04%	0.46%
Schwab U.S. Broad Mkt.  (SCHB)	U.S. Total Market	0.04%	0.31%
Schwab U.S. Agg. Bond  (SCHB)	U.S. Quality Bond	0.06%	0.15%
Schwab U.S. Small Cap  (SCHA)	U.S. Small Cap	0.08%	0.33%
Vanguard Intern’l Stock  (VXUS)	Foreign Total Stock	0.14%	0.39%
Vanguard Total World  (VT)	Global Stocks	0.18%	0.50%
DJ-UBS Commodity  (DJCI)	Broad Commodities	0.50%	0.82%

Investors who want to reduce ongoing fees should consider the following options: [1] paying for advice hourly (LetsMakeaPlan.org or GarrettPlanningNetwork. com); or [2] get advice solely over the Internet [LearnVest.com ($300 initial prep + $19 a month), Wealthfront, Schwab, TradeKing, TD Ameritrade, or USAA].