January 15, 2015

Every mutual fund has an expense ratio. What is it? Who pays it? How can you reduce it dramatically?

3 thoughts on “January 15, 2015”

  1. Garrett Haag says:

    The expense ratio is the yearly cost that you pay to hold that fund, it it generally taken out on a daily basis when the fund is updated. You really dont see the money come out because it is generally a few cents. The expense ratio take away from your return so you want the lowest one you can get. The expense ratio has no reason to be above .33% a year. You can keep it as low as .05% a year at Vanguard. You can reduce your expense ratio by holding larger fund that have higher minimum balances. At Vanguard they are Admiral Shares. They require you to have $10,000 in the fund to get the lower rate. It is important to have the lowest costs on your funds. You can only get that with no load index funds. Managed funds will always have higher yearly costs and expense ratios.

  2. Mike Dunlop says:

    An expense ratio is essentially the price the fund company charges the investor to manage the fund. It is the money that pays the wages of the fund manager. The expense ratio is divided among all of the shares of the fund and paid annually. The ratio is expressed as a percentage of the share price. The more shares you own, the more money you will pay in expenses. Expense ratios vary dramatically among funds. Some funds that have expensive fund managers and trade actively will demand a higher expense ratio. These are known as actively managed funds. Other funds that own a more consistent holdings and have lower management fees are sometimes referred to as passively managed funds. An example of this may be a low cost index fund from Schwab or Vanguard. You can reduce your expense ratio by researching the funds you are interested in and analyzing their costs. Be sure to factor the cost into your net return when performing your analysis, as a fund with a 10% return and 4% expense ratio is not nearly as good as a fund with a 8% return and a 0.1% expense ratio.

  3. Mike Finley says:

    Those were great answers, gentlemen. Let’s review.

    (1) The expense ratio goes to the people who run the mutual fund.

    (2) YOU pay it when you own a mutual fund. You will not get a bill. You will not see it come out, but it will. A look at the prospectus or some type of fund fact sheet will highlight this number. It must be shared with you.

    (3) You can dramatically reduce it by owning broadly diversified passively managed index funds. Why pay 1% or more a year when you can pay .3% or less per year? The answer is you shouldn’t.

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