Expense Ratios [Post 25]

Perhaps one of the simplest ways to maximize potential returns isn’t to jump in and out of the hottest investment funds with bells, whistles, and a legendary manager but instead find passive funds with minimal expenses and hold them indefinitely.

When it comes to investment funds, one important factor to consider is the expense ratio.

In general, passive funds tend to have lower expense ratios compared to active funds. This means they cost less to own and have an advantage in terms of potential return.

Consider two funds, Fund A and Fund B. Fund A has an expense ratio of 1.5%, while Fund B has an expense ratio of 0.2%. Fund A would need to outperform Fund B by 1.3% just to break even with its total return due to higher costs.

Studies, like SPIVA (S&P Indices versus Active), have shown that over the past 15 years, around 93.4% of all funds have underperformed the S&P 500 index.1 This suggests that not only do active funds cost more to own, but they also tend to perform worse than simply investing in the market as a whole.

So, when analyzing investment options in an account such as a 401k plan, it's worth considering expense ratios. Opting for low-cost funds that provide exposure to different classes and regions could be a wise choice for maximizing net returns in the long run. Investing isn’t always easy, but it can be simple.

Indices are not available for direct investment and do not reflect internal fund expenses.

1. S&P Dow Jones Indices. (2022). SPIVA U.S. Scorecards. https://www.spglobal.com/spdji/en/research-insights/spiva/