How many times have we heard a TV pitchman holler, "We deal in volume and pass the savings along to you!" Now imagine the same guy saying, "We deal in volume and pass the savings along to ... us!" That may be the secret snicker of your mutual fund company.
The question is, what are you going to do about it?
As the fund industry has swelled in the past dozen years $770 billion in assets to more than $4.5 trillion, creating huge economies of scale, average expenses charged to stock-fund investors have actually risen, from 1.28% to 1.55%. The same trend applies to bond funds, whose average expense ratio is 1.08%, versus 0.89% twelve years ago.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Scudder Development, an aggressive-growth fund with below-average returns, generates more than $12.5 million in fees each year from its 1.52% expense ratio. The gigantic Kaufmann fund grossed $67.9 million in 1999 by paying itself 1.94% of its $3.5 billion in assets.
Higher expenses hurt fund returns
By definition, expenses nip a percentage of your mutual fund assets each year. The higher the expense ratio, the harder it is to beat market indexes or category averages.
You're probably saying, I know that, I know that.
But the extent to which returns dwindle because of higher expenses may surprise you because the expenses are deducted before the fund reports results to shareholders.
We divided the 1,100-plus long-term-growth funds into two groups: those with expense ratios above the average for the category and those with ratios below the norm. On average, those with lower expense ratios returned two percentage points a year more than funds with above-average expenses the past five years.
So if you dropped $10,000 into a higher-expense long-term-growth fund five years ago, you'd have about $1,500 less today than if you'd invested in a lower-expense fund. And if you were saving for a long-term goal--say, retirement 25 years away--you'd have 50% more at the end of that time with the lower-expense fund. (This assumes a 10% return for the high-expense fund, versus a 12% return for the low-expense fund.)
The results are the same in virtually every other fund category--the low-expense funds return more, on average, than the high-expense funds. The exception is high-quality corporate-bond funds. In that category, the high-expense funds do better.
-
Stocks Close Down as Gold, Silver Spiral: Stock Market TodayA "long-overdue correction" temporarily halted a massive rally in gold and silver, while the Dow took a hit from negative reactions to blue-chip earnings.
-
Pay-As-You-Go vs. Monthly Plans: Which Saves More for Light Phone Users?Light phone users may be paying for data they never use. Here's how pay-as-you-go and low-cost monthly plans really compare.
-
Trump Nominates Kevin Warsh to Fed Chair. How Will This Impact Savers?Here's a look at how Warsh could influence future Fed policy if he's confirmed.
-
The U.S. Economy Will Gain Steam This YearThe Kiplinger Letter The Letter editors review the projected pace of the economy for 2026. Bigger tax refunds and resilient consumers will keep the economy humming in 2026.
-
Trump Reshapes Foreign PolicyThe Kiplinger Letter The President starts the new year by putting allies and adversaries on notice.
-
Congress Set for Busy WinterThe Kiplinger Letter The Letter editors review the bills Congress will decide on this year. The government funding bill is paramount, but other issues vie for lawmakers’ attention.
-
The Kiplinger Letter's 10 Forecasts for 2026The Kiplinger Letter Here are some of the biggest events and trends in economics, politics and tech that will shape the new year.
-
Special Report: The Future of American PoliticsThe Kiplinger Letter The Political Trends and Challenges that Will Define the Next Decade
-
What to Expect from the Global Economy in 2026The Kiplinger Letter Economic growth across the globe will be highly uneven, with some major economies accelerating while others hit the brakes.
-
Shoppers Hit the Brakes on EV Purchases After Tax Credits ExpireThe Letter Electric cars are here to stay, but they'll have to compete harder to get shoppers interested without the federal tax credit.
-
The Economy on a Knife's EdgeThe Letter GDP is growing, but employers have all but stopped hiring as they watch how the trade war plays out.
