What is a reasonable fund operating expense for a mutual fund?
The Yahoo article in finance today suggest an average expense of 1%, but says some costs can run as high as 2.25% (it even says they found some at 5%). So what is reasonable for an individual so he's not feeling like he's being gouged.
Public Comments
- None at all.....
- It will vary by the type of fund, but 1% is a reasonable maximum for a good no-load fund. Index funds should be considerably cheaper. Vanguard and T. Rowe Price, among others, have many excellent funds with E.R.s below 0.50%.
- costs differ by type of fund and management method. usually, the Vanguard fund for any given type/method has the lowest costs in the industry because their fund management company is 100% owned by the funds, not by some shareholders who are trying to get rich by selling you on them managing your money. {disclosure: I have no connection with Vanguard, nor do I have any position in any of their funds. I trade ETFs when I trade aggregrates of shares at all.}
- In theory the larger the fund, the lower the expense ratio can be because of economies of scale. Now there are some funds that have over 10 billion in assets. 1% of 10 billion is 100 million. That is a pretty big amount of expenses. A fund with only 50 million in assets and a 1.5% expense ratio has expenses of only 750,000. Consequently, just taking the expense ratio at face value without considering the size of the fund and also I might add its track record would not be considering the entire equation. A fund with 10 billion in assets should be operating with about 0.6% or less in expenses. Here are a couple of examples: Fidelity Growth Company Fund has 37 billion in assets and an expense ratio of 0.97%. That equates to almost 370 million in expenses. It has a 10 year return of 9.65% annually. Vanguard Windsor Fund has 22 billion in assets and an expense ratio of 0.31% but still that equates to 68 million in expenses. It has a 10 year return of 7.3% annually. Now let us consider a smaller fund. Templeton Russia & East European Fund has 370 million in assets and an expense ratio of 1.81% or 7 million in expenses. It has a 10 year return of 17.6% annually. Given these statistics which would you prefer to be invested in? The 37 billion fund with 0.97% expense ratio and a 9.67% annual return, the 22 billion fund with 0.31% expense ratio and a 7.3% annual return or the fund with 370 million in assets, a 1.81% expense ratio and a 17.6% annual return.
- You should get a fund with less than 1% expense ratio. I don't invest in anything with an expense ratio of more than 0.5%. One of my favorite funds has an expense ratio of 0.19%. See the link: It is tempting to buy funds that have high expense ratios and high past performance. However studies have shown that such funds rarely perform well in the future, despite their past success. See the second link:
- Expense ratios vary by market sector of the mutual fund in question. So smallcap stocks tend to have higher overall expense ratios than largecap funds because there is a lot more work involved in investing in small companies- more research, more trading, etc... Typically 1-2% is what I shoot for, depending on what kind of fund it is. Keep in mind also that for some funds, the expense ratio being a bit higher might be justified if it is consistently averaging higher returns compared to similar funds.
- 1% is most likely the average however I will pay more as long as the fund has a higher rate of return. If a fund turns over their portfolio either they are not making good decisions or they must turn over the portfolio's holdings due to changes in the economy. Sometimes a small profit is better than none at all. The end result is what really matters.
- The expense ratio (aka operating expense) varies. Index funds have it very low .. managed funds have it little higher and foreign fund very high .. My advise would be to compare a few funds in each category before you accept any .. Read more here: http://creating-wealth.blogspot.com/2007/06/how-to-select-mutual-fund.html
- look... this is a hot-button topic..... I say... and i'm sure people will disagree GREATLY.... you are paying attention to the wrong thing... find a great manager/management firm and look at the NET returns... to answer your question: in general .5% to 1.5% is common and fair... higher if you are in a sector-specific fund. there are many great managers that consistantly outperform the market... DO NOT look for the hot fund in a hot sector.. but look for a go anywhere do anything fund that preserves money in bad times and makes money in good. why should you care what they charge?.. do you ask how much the bank made off of your CD?? or do you look at your real return? a good manager... like a good lawyer.. and a good doctor .. will earn a good fee... and you should be happy to pay it. People who are wealthy understand this... and they are willing to pay 3% fee + 20% of returns to great hedge-funds.... One of my funds made 38% last year... net to me..and this is the 5th year of good returns...should i get mad if i learn they charged me 5% and the fund really earned 43% but i only netted 38% ??? no.... absolutely not. maybe they wont beat the market next year... i dont care cause in the long run i am ahead.. and i'm trusting that they are managing to not give back gains. i believe good management will outperform the market in the long run.. may believe otherwise which is why index funds are so popular. anyways... Cheers
