If you own shares in an S&P 500 Index fund, your expense ratio should be the same as those of any other fund that tracks the 500 Index, right? Wrong.
If you own shares in an S&P 500 Index fund, your expense ratio should be the same as those of any other fund that tracks the 500 Index, right? Wrong. Even though S&P 500 index funds are made up of the same basic basket of stocks, their expense ratios can range from a rock-bottom 0.08% to a high of 2.3%. On a $10,000 investment, that’s the difference between paying $8 a year to let the fund company handle your money and paying $230. For money-conscious investors, the choice between funds should be simple.
Adding to the puzzle, however, is the fact that cash inflows to the more expensive funds grew at a faster rate last year than the cheaper funds. At least part of the reason for that phenomenon, say stock market analysts, is that more investors looked for help from financial advisors during the market crash. Most of the pricier funds have high expense ratios because they are sold through financial consultants and part of the consultant’s compensation is built into the fund’s expenses. Advisor-sold funds also tend to be small and can’t take advantage of the huge economies of scale that bigger funds have.
While getting advice from a investment counselor may make some sense, if his/her recommendations include index funds, a savvy investor may want to act on that advice by dealing directly with low-cost index fund companies like Vanguard, Fidelity, and TIAA-CREF. These companies offer low-cost index funds, some with expense ratios as low as 0.08%.