Watch Out For High Fund Fees

It's hard to believe that a year has gone by since Vanguard founder Jack Bogle died. It is also hard to overstate Vanguard's impact on the investing landscape in the U.S. You probably have benefited from Vanguard's pioneering ways, though you may not be aware of it. If you own a passive (index) mutual fund or exchange-traded fund (ETF) with extremely low fees, thank Vanguard, which popularized the ideas that fees are the enemy of investment performance, and the best way to mitigate high fees is to invest in indexes.

As happens in nearly any industry, competition has led to lower costs. Over the past decade, investors in index funds have seen their fees drop by almost 40%. Vanguard got the ball rolling on this issue, but most fund companies have followed suit at least to some extent. BlackRock, which owns the iShares ETF brand, has become the other dominant player in the index fund market. The two are a bit like the Verizon and AT&T of funds.

Two Great Tastes That Taste Great Together

The combination of index funds and low fees, meanwhile, is like chocolate and peanut butter. Each is great on its own but put the two together and you really have something special.

That's because the two are complementary. Fees, as we mentioned earlier, can really chip away at investment performance. This is a fairly easy concept to grasp, and yet it's an easy thing to miss as well. Fund companies don't send you a bill, after all. You don't "feel" the expense the way you might when you see, say, an automatic payment come out of your checking account. But fees will get you, year in and year out, whether your fund is doing well or doing poorly.

So you want low fees. And the best way to get them is via index funds.

Index funds are generally cheap because their whole point is to mimic an index. Technologically speaking, this isn't that hard: If a stock is added to or dropped from an index, the fund adds or drops it; if the index rebalances, the fund rebalances. This is known as passive investing.

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Samar Abuwarda, MSc 1 year ago Contributor's comment

Interesting article..i think fees will decline in the future when funds incorporate Artificial Intelligence and block chain technologies in their trading..some funds today are relying on quantum algorithms to spot arbitrage opportunities in active investment..in the asset allocation graph, I perceive a 28% allocation to growth stocks to be an interesting finding..may be this represent a shift in investment sentiment that favoured value stock for a long time..