How do funds charge their investors for holding their ETFs and Index Funds?
This is something we will turn our attention to in the article.
10 years ETFs and Index Funds were the lonely outsiders in the investing room.
Today, they are the most popular class of investment. Global investors seem to be shifting toward passive investments as the skeptics on active management continue to grow.
Between January and March this year, investors ploughed roughly $197 billion dollars into ETFs, a quarterly record according to ETFGI, a London-based consultancy.
The Importance of Fund Costs
It is difficult to ascertain exactly why ETFs are receiving this attention. Part of the reason is the growing skeptics of active managers and how they have failed to beat the market over the past decade.
As the argument goes, active managers struggle to outperform the market and they charge high costs while doing this. Many argue that investors would be better buying into a fund that tracks the entire market at a lower-cost.
It must be noted however, that not every fund is cheap. Let us look at the importance of pricing in funds and how the price of a fund can be calculated.
The Expense Ratio
The expense ratio is the total cost of the fund and it is paid out every year.
For instance, if a fund has an expense ratio of 1% that means you will pay $1 each year for every $100 you have invested. If the expense ratio is .75%, you will owe 75 cents.
The difference between an expense ratio of 1% and .75% may seem negligible, however it really adds up over time.
If you invested $10,000 every year over forty years at a 7% rate of return, you would have accumulated $1,605,000 with an expense ratio of 1%. If the charges were .5% however, you would have made roughly $1,855,000 – a difference of $250,000.
We have looked at how funds charge investors. Fees are a cost that many people do not consider. By keeping a focus on your investment costs, you can raise the prospect of healthy returns in the future.