Investors, Save Big on Mutual Fund Fees
Investment firms announce fee cuts for mutual funds and exchange-traded funds.
Mutual funds and exchange-traded funds are getting cheaper than ever. But if you don’t keep an eye on the bargain racks, it’s easy to miss out on some big savings.
In recent months, major fund firms have been steadily shaving fees in a race to attract price-sensitive investors. In June, Fidelity Investments announced fee cuts on 27 index funds and ETFs. BlackRock cut fees on 15 iShares ETFs in early October, followed days later by Charles Schwab, which cut the expenses of five ETFs. Core holdings such as the Schwab U.S. Aggregate Bond and iShares Core S&P 500 ETFs now cost 0.04% annually, or $4 for each $10,000 invested.
Management fees aren’t the only prices falling in the fund world. More and more mutual funds that have traditionally carried a “load,” or sales charge, are available without the loads in no-transaction-fee supermarkets, such as those operated by Fidelity and Schwab. And while investors must normally pay a commission to trade ETFs, hundreds of ETFs are now available commission-free on platforms operated by Vanguard, TD Ameritrade, Fidelity and others.
To be sure, many of the latest fee cuts apply to funds that were already dirt cheap—and trimming 0.01 or 0.02 percentage point off a fund’s expense ratio won’t rock investors’ world. But if your current fund holdings charge 1% or more, or you’re paying mutual fund loads and ETF trading commissions, it’s time to take a hard look at ways to trim your expenses. With so many lower-cost options available, “you shouldn’t feel locked in” to pricier investments, says Russel Kinnel, director of manager research at Morningstar.
Fees take a bite directly out of your returns. In every asset class, the cheapest funds are far more likely than the priciest ones to survive (rather than being liquidated or merged with other funds) and to outperform their category, Morningstar found in a 2016 study.
Slash Your Costs
To find low-cost funds, use Kiplinger.com’s Mutual Fund Finder or Morningstar’s mutual fund and ETF screeners. You can also enter a fund’s name in the search box at Morningstar.com and click the “quote” tab to see whether the fund’s fees are high or low for its category.
Before dumping pricier funds in favor of lower-cost options, look at ways to minimize any tax consequences. If you’re holding highly appreciated high-cost funds in a taxable account, for example, perhaps you can also sell some losers to offset the gains. If switching to lower-cost funds will trigger a tax bill, the Financial Industry Regulatory Authority’s Fund Analyzer can help determine whether the move is worth it. Enter the fund names, investment amount, expected return and holding period to compare the total dollar cost of holding various funds.
To sidestep fund loads, invest through no-transaction-fee supermarkets offered by Fidelity, Schwab and others. Load funds from firms such as J.P. Morgan and Morgan Stanley are now available without loads on such platforms. And American Funds, known for low-cost, high-quality funds, made its funds available without a load through Fidelity and Schwab in October.
When browsing the supermarkets for no-transaction-fee funds or commission-free ETFs, keep your eye on total fund costs. The supermarkets typically charge the funds a fee for putting their products on the shelf—and that can drive up fund expense ratios. You may save money by buying the “house brand”—the Schwab funds at Schwab or the Vanguard funds at Vanguard, says Dave Nadig, chief executive officer of ETF.com.
Stay on the lookout for further fee cuts. While it may seem that ETFs charging 0.03% or 0.04% are scraping bottom, it’s theoretically possible for some ETFs to charge no fees. Some ETFs can generate 0.1% to 0.2% of assets per year by lending out shares in their portfolios to short-sellers who want to bet against the stock, Nadig says, and that “could effectively pay the issuer to do their job.”
He thinks it’s more likely, however, that the higher-end fees will fall. “There are quite a few funds charging north of 70 basis points,” or 0.7%, he says. “That’s still pretty expensive.”