Low Index Fund Fees, An Investors Friend
Low cost passive index funds allow investors to get exposure to a diversified basket of assets at a very low cost. Typically the funds track stock or bond indexes such as the S&P 500 Index or the Barclays US Aggregate Bond Index. Two well known funds are the Vanguard Total Stock Market Index and the Vanguard Total Bond Market Index. These Vanguard funds are the cornerstones of many “lazy” low cost portfolios. Money saved in fees means more money to reinvest and hence increase compounding of returns. Low index fund fees are a friend to passive investors and competition between fund management companies is driving fees even lower.
The table below shows an example of some low cost index fund ETFs along with their expense ratio and tracking index:
|Issuer||Ticker||Type||Index||Expense Ratio||Fact Sheet/Website|
|Charles Schwab||SCHB||ETF||Dow Jones US Broad Market Index||0.03%||SCHB Fact Sheet|
|Vanguard||VTI||ETF||CRSP US Market Index||0.04%||VTI Fact Sheet|
|Focus Shares||FMU||ETF||Morning Star US Market Index||0.05%||Focus Shares Website|
As you can see the fund’s expense ratios are between 3-5 basis points. For an investment of $10,000 a basis point represents a fee of $1 per year. Or $3-$5 per year total for these funds. That is cheap.
Are All Index Funds Cheap?
Are all index funds cheap? The answer is no. There is at least one we have come across that is outrageously expensive. The product has plenty of cheap competitors and offers no differentiation yet it still carries high fees. That fund is the Rydex S&P 500 index fund from Guggenheim Investments. The fund comes in three share classes of mutual funds:
|Mutual Fund Ticker Symbol||Share Class||CUSIP||Expense Ratio|
In this case the expense ratios are over 1.5% or 150 basis points. To compare apples to apples lets look at some equivalent S&P 500 index funds from competitors.
|Mutual Fund Ticker Symbol||Fund Manager||CUSIP||Expense Ratio|
The Rydex fund’s expense ratio is 12x higher vs the Vanguard equivalent product and 50x high vs the Charles Schwab equivalent. In fact the Rydex S&P 500 index fund expense ratio is comparable to some actively managed mutual funds. In addition you may be subject to additional fees called “loads” which can be taken at time of purchase or time of sale.
The True Cost of High Fees
1.58% may not seem like a big deal in the grand scheme of things. But the true cost comes over a long time horizon. Assume you invested $100,000 over 20 years and earned 7% per year over that time period. The chart below illustrates in that situation what your investment would be worth and how much you will have paid in fees. The results are staggering!
Investing in the lower cost funds makes you roughly $100,000 richer. You save roughly $50,000 in fees. In addition the money you saved stays invested into the fund. The power of the extra money compounding over the life of the investment is powerful.
Despite how similar the products may appear on the surface not all index funds are created equal. Even if they track the same index. It is critical as an investor that you perform due diligence and know what you are buying.