A $10,000 investment today that compounds at an annualized 7% a year will be worth around $76,000 in 30 years. If the $10,000 compounds at an annualized 7.9% it will be worth nearly $98,000. That’s $22,000 that slips right through your fingers.
Or consider if you were to contribute $6,000 a year for 30 years to an IRA. ($6,000 is the current maximum IRA contribution for anyone younger than 50.) At a 7% annualized return you would have around $606,000 or so in 30 years. Earn a net 7.9% and you will have about $720,000.
The half-hearted transparency of expense ratios
Investor confusion is completely logical given the absurd way funds and ETFs are allowed to report their expense ratios.
The expense ratio is not a line item that shows up in your statements. Your statement is your account value after the expense ratio has been deducted. Out of sight, out of mind.
That said, it’s super easy to find a fund or ETF expense ratio. If you log in to your account, you likely will see links for “fund facts,” or fees, and on that page the expense ratio will be clearly listed. Or plug a fund’s ticker symbol into a search engine, and the top return will be a data box that includes the expense ratio.
It’s worth the time to make an expense ratio inventory check of all your investments. If you’re investing in funds with expense ratios of more than 0.50% or so you might be missing out on an opportunity to earn more by paying less.
A low-cost target to consider
In the same State Street Global Advisors survey, participants who reported they felt they understood expense ratios said that an annual expense ratio of no more than 0.60% should be considered as “low cost.”
That is a serious overshoot. There are many low-cost index mutual funds and ETFs that charge 0.10% or less. In its most recent survey of fund fees, Morningstar said the average asset-weighted expense ratio for U.S. stock index funds was 0.09%. For a taxable bond fund the average was 0.10%. International stock index funds had an average charge of 0.20%.