Investments fees

Investments fees

It is important to focus on expense ratios! They are a key factor in long-term investment success. Here's a breakdown of common expense ratios you might find at Fidelity, Charles Schwab, and Vanguard, along with explanations.

Understanding Expense Ratios

An expense ratio is the annual fee that all investors in a mutual fund or ETF pay. It's expressed as a percentage of your total investment and covers the fund's operating expenses, including management fees, administrative costs, and marketing/distribution fees (12b-1 fees). Even a small difference in expense ratios can lead to a significant difference in your returns over decades due to the power of compounding.

General Range of Expense Ratios

• Actively Managed Funds: These funds typically have higher expense ratios, often ranging from 0.50% to 1.50% (or even higher). This is because there's a team of professionals making active decisions about which securities to buy and sell.

• Passively Managed Index Funds and ETFs: These funds aim to track a specific market index (like the S&P 500) and generally have much lower expense ratios, often ranging from 0.02% to 0.20%. Their lower cost comes from less active management.

Specific Examples from Fidelity, Charles Schwab, and Vanguard:

These three companies are known for offering a wide range of low-cost options, particularly in their index funds and ETFs.

Fidelity:

• Fidelity ZERO® Index Funds: Fidelity is unique in offering a line of index mutual funds with 0.00% expense ratios. These include:

  • Fidelity ZERO® Total Market Index Fund (FZROX)

  • Fidelity ZERO® Large Cap Index Fund (FNILX)

  • Fidelity ZERO® Extended Market Index Fund (FZIPX)

  • Fidelity ZERO® International Index Fund (FZILX)

• Other Low-Cost Index Funds: Many of Fidelity's other index funds also have extremely low expense ratios, often in the range of 0.015% to 0.075%. For example, the Fidelity 500 Index Fund (FXAIX) has an expense ratio of 0.015%.

• Actively Managed Funds: While Fidelity offers many low-cost options, they also have actively managed funds with higher expense ratios, which can range from 0.40% to over 1.00%, depending on the fund's strategy and asset class.

Charles Schwab:

• Schwab ETFs: Charles Schwab is well-regarded for its low-cost ETFs. Many of their core equity and fixed-income ETFs have expense ratios as low as 0.03% to 0.08%. Examples include:

  • Schwab US Large-Cap ETF (SCHX): 0.03%

  • Schwab U.S. Broad Market ETF (SCHB): 0.03%

  • Schwab International Equity ETF (SCHF): 0.03%

  • Schwab Emerging Markets Equity ETF (SCHE): 0.07%

• Schwab Intelligent Portfolios: For their robo-advisor service, Schwab Intelligent Portfolios, they don't charge an advisory fee, but you still pay the expense ratios of the underlying ETFs, which generally range from 0.02% to 0.16% (with an average around 0.13%).

Vanguard:

• Industry Leader in Low Costs: Vanguard is renowned for its low-cost investment philosophy. Their average expense ratio across their mutual funds and ETFs is famously low, around 0.07% (asset-weighted average).

• Vanguard Admiral™ Shares: These share classes offer lower expense ratios for investors who meet higher minimum investment thresholds. For example:

  • Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): 0.04%

  • Vanguard S&P 500 Index Fund Admiral Shares (VFIAX): 0.04%

• Vanguard ETFs (Vanguard's ETFs are essentially share classes of their mutual funds): Similar to their mutual funds, Vanguard's ETFs also boast very low expense ratios, often in the range of 0.03% to 0.20%. Examples include:

  • Vanguard S&P 500 ETF (VOO): 0.03%

  • Vanguard Total Stock Market ETF (VTI): 0.03%

  • Vanguard FTSE Developed Markets ETF (VEA): 0.05%

Key Takeaways:

• Focus on Low-Cost Index Funds/ETFs: For long-term retirement savings, especially for broad market exposure, prioritize funds with the lowest possible expense ratios.

• "Zero" is Real: Fidelity's zero-expense ratio funds are a fantastic option for truly minimizing costs.

• Check the Prospectus: Always look for the expense ratio in the fund's prospectus or summary prospectus before investing.

• Small Percentages, Big Impact: Reiterate that even a difference of 0.50% in an expense ratio can translate to tens of thousands, if not hundreds of thousands, of dollars lost over a 30-40 year investing horizon due to the power of compounding.