Mutual fund expense ratio12/29/2023 ![]() ![]() The upshot? It’s all about your objectives. Regardless of whether the fund beats the market in a given year, you’ll have to keep paying the fund’s annual expense ratio. But beware-a number of studies have concluded that, in a typical year, most funds fail to outperform the broader market. If you’re buying a fund with a high management fee, you are essentially paying for alpha, or the fund’s ability to beat the broader market. Or you may be willing to pay a higher 12b-1 fee if you’re buying the fund on a platform that offers research, support, and guidance of real value to you. You may be willing to pay more for a fund managed by a person or team that you believe understands the markets. Is a Higher Expense Ratio Worth It?įees aren’t the entire story when it comes to mutual funds. For example, in 2021, the average expense ratio of actively managed equity mutual funds was 0.68%, versus just 0.06% for equity index funds. ![]() Index funds typically have much lower expense ratios. Other funds simply invest according to an index that covers an entire market (e.g., the S&P 500), or a market sector, such as U.S. For such funds, the management fee is by far the largest component of the expense ratio. One reason for the wide discrepancy in fees is that some funds are actively managed, meaning they have a portfolio manager and team of analysts who actively research, select, buy, and sell securities in the portfolio. That’s why it’s important to examine the fees charged by a given fund before you buy. They come out on a regular basis, regardless of how the fund performs, and can vary widely from fund to fund. But the fees charged by the mutual fund are known. “Past performance does not indicate future results,” as the boilerplate disclaimers say. No one can predict future returns on a given fund.
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