Expense Ratios on Mutual Funds

[jIM_Ohio]

I own a few funds with higher ERs that .8%. The .6% difference is tiny. Like $60 per year for every $10,000 invested.

Returns are what matter, and ER is not the best predictor of mutual fund performance/ mutual fund returns.

[atomicrc11]

disneysteve, what I meant when I said I don't meet the minimum was in doing my own investing, for instance owning three vanguard funds such as a stock market fund, small cap fund and bond fund wouldn't make sense because I could only open 1 fund with 5k. To do that, I need to have more money to invest. Currently I am paying 0.86% expense ratio.

[disneysteve]

disneysteve, what I meant when I said I don't meet the minimum was in doing my own investing, for instance owning three vanguard funds such as a stock market fund, small cap fund and bond fund wouldn't make sense because I could only open 1 fund with 5k.

That's true, but you are currently in a 2040 fund. You could switch to Vanguard and do the same with a min. of 3K and cut your ER from 0.86 to 0.21%.

[Broken Arrow]

One thing I did notice is most of the Vanguard fund VTIVX has most of it's investments (60%) in Vanguard's Total Stock Market Index fund. With the Banc of America fund BFHZX, it has large cap, mid cap, small cap, international and bond funds from the Columbia family of funds in it. Is it better to go with something that has more in the general stock market or are all these underlying funds in BoA helping get a better return?

Well, the purpose of a Total Stock Market fund is to capture the... total stock market. Large caps, mid caps, small caps... everything. So, from a casual point-of-view, it's the same as having several funds designed to capture each major caps.

Of course, if you want finer-grain control (to place greater or lesser emphasis in certain caps), then of course, TSM would not be right for you. For others, to simply mirror the overall performance of the entire stock market is good enough, and TSM simplifies that process greatly.

So, the answer to your question is, once again: It depends (on how far you want to get involved with investing).

[markusk]

I know that some of you get Money Magazine....so I'm sure some of you heard this before....that studies have shown that over time, index funds beat "actively managed funds" because most/all fund managers eventually end up "chasing the market" AND, over time (25-35 years?), the 0.5% difference in fees (or whatever the difference is) between actively managed funds vs index funds, end up costing investors tens of thousands of dollars in lost compounded interest?

--Just asking some of the more experienced folks on this forum.

[sweeps]

Numerous studies have shown that expense ratio is the single best predictor of future fund performance. Sure there are a few funds that have beaten the market consistently... but that's out of thousands. They get a vastly disproportionate amount of attention and media coverage.

Oh and don't forget the dramatic effects of survivorship bias.

[Hypersion]

Numerous studies have shown that expense ratio is the single best predictor of future fund performance. Sure there are a few funds that have beaten the market consistently... but that's out of thousands. They get a vastly disproportionate amount of attention and media coverage.

Oh and don't forget the dramatic effects of survivorship bias.

Asset allocation is the best predictor of future returns. ER is a distant second.

[disneysteve]

Asset allocation is the best predictor of future returns. ER is a distant second.

Asset allocation is the best predictor of how your portfolio will do.

ER, however, relates to how a particular fund will do.

[Broken Arrow]

Er, I don't want too get bogged down in this topic that which has been a source of much controversy elsewhere.

Real quickly, I believe that ER (along with loads and fees that we pay) are the best factor that affects our net return. The reason why I say this is because we can not control, much less predict, how well a fund will perform into the future. However, we are very much in control of how much we are willing to pay for fund managers and brokerages to manage our investments.

The popularity towards low cost investing has not been a bad thing for us little people. For example, it has forced Fidelity to make its Spartan fund ERs artificially low just to compete with Vanguard's, who in turn, is attempting to hold its position through the creation of Admiral shares.

If you ask me, this kind of competition is good for us, and I say we keep pushing this issue and keep voting with our dollars.

And yes, there are quite a bit of studies done by people who have won Nobel Prizes that suggest passive index funds can perform just about as well as actively managed funds in the long run (especially when you factor in a low ER).

I'm not a direct fan of index funds per se. I'm technically a fan of anything that can generate a decent net return (given its relative risk), and the index fund is certainly capable of that.

That said, the other option is to have your investments out-pace the 2% cost difference... because, that's how much my 401k brokerage is charging me. Ugh. Anyway, it's possible, but the amount of time, energy, and risk you have to take on scales up dramatically.... It's an avenue that I am not opposed to, seeing as how I have more time and enthusiasm than money. But again, unless you really have the inclination, I say low-cost index funds will do just fine.

[sweeps]

Asset allocation is the best predictor of how your portfolio will do.

ER, however, relates to how a particular fund will do.

Well put, Steve.

[Saban]

Quick question, so with the expense ratio fees...how is the deduction taken?

Is the expense ratio deducted from the total account balance within each fund, and if so, will the expense ratio deduction be shown as a deduction on my statement? (This is within a 401(k) if that matters)

Also, what is the normal time of the year when the Mutual fund deducts the expense ratio?

[disneysteve]

Quick question, so with the expense ratio fees...how is the deduction taken?

Is the expense ratio deducted from the total account balance within each fund, and if so, will the expense ratio deduction be shown as a deduction on my statement? (This is within a 401(k) if that matters)

Also, what is the normal time of the year when the Mutual fund deducts the expense ratio?

The expenses are deducted ongoingly throughout the year before the money ever reaches your account, so it doesn't actually show up on your statement.

[Hypersion]

Asset allocation is the best predictor of how your portfolio will do.

ER, however, relates to how a particular fund will do.

I disagree. Take a money market fund and a tech stock fund. The difference in returns and standard deviation between the two funds has much more to do with the difference between the asset allocations than the difference between ER.

[disneysteve]

I disagree. Take a money market fund and a tech stock fund. The difference in returns and standard deviation between the two funds has much more to do with the difference between the asset allocations than the difference between ER.

You are using asset allocation to mean something different. It typically refers to how you choose to divide the investments in your portfolio- how much to large caps, how much to small caps, how much to international funds, etc. Asset allocation doesn't generally refer to how a particular fund invests its holdings (though a fund of funds will have a particular allocation, as with a target retirement fund).

When I said that ER relates to how a particular fund will do, I meant in comparison to other funds of the same type. So if you look at two S&P 500 Index funds, for example, assuming everything else is equal, the one with the lower ER is likely to outperform the one with the higher ER.

[jIM_Ohio]

Er, I don't want too get bogged down in this topic that which has been a source of much controversy elsewhere.

Real quickly, I believe that ER (along with loads and fees that we pay) are the best factor that affects our net return. The reason why I say this is because we can not control, much less predict, how well a fund will perform into the future. However, we are very much in control of how much we are willing to pay for fund managers and brokerages to manage our investments.

Expenses are a factor which affect return, but I would hardly call them the most significant factor.

3 examples:
1) If ER ratios were the driving factor behind performance, then it could be argued bond funds have lower returns than equities because they have higher expense ratios (bond funds usually have higher ER than corresponding equity funds). Bonds return less because they have less risk, and they have higher expenses because they are tougher to trade, and are traded in more finite amounts.
2) If ER were the driving factor in returns, it could be expected that ETFs and money funds with lower expenses would have better returns than mutual funds which invest in equities.
3) my experience suggest that the highest ERs are the worst performing funds, but at top 50% level, expenses are much less of a predictor. So avoid high expenses, but pinching pennies to get lowest expense possible is making expenses wag the return dog.

I would also add that as an investor, I have no control over a funds expenses or the returns of the fund. Suggesting an investor can control the expenses of a fund is misleading. You can control the expenses of the funds by selecting this fund or that fund, but once invested, the investor really has no bearing on the expenses.

The popularity towards low cost investing has not been a bad thing for us little people. For example, it has forced Fidelity to make its Spartan fund ERs artificially low just to compete with Vanguard's, who in turn, is attempting to hold its position through the creation of Admiral shares.

If you ask me, this kind of competition is good for us, and I say we keep pushing this issue and keep voting with our dollars.

And yes, there are quite a bit of studies done by people who have won Nobel Prizes that suggest passive index funds can perform just about as well as actively managed funds in the long run (especially when you factor in a low ER).

These studies are flawed in that they don't choose specific funds, and just use indexes to prove their point. They also come up with rationalizations to explain away out performance.

I'm not a direct fan of index funds per se. I'm technically a fan of anything that can generate a decent net return (given its relative risk), and the index fund is certainly capable of that.

This is the issue at hand- get a return for a given level of risk. I agree 100% with this philosophy.

That said, the other option is to have your investments out-pace the 2% cost difference... because, that's how much my 401k brokerage is charging me. Ugh. Anyway, it's possible, but the amount of time, energy, and risk you have to take on scales up dramatically.... It's an avenue that I am not opposed to, seeing as how I have more time and enthusiasm than money. But again, unless you really have the inclination, I say low-cost index funds will do just fine.

For an investor which does not want to work at things too much, I think index funds have a place. For investors which are willing to take time to learn more and manage investments more, there are better choices. Not all managed funds are created equal.