Cut Those Fund Expenses

November 26th, 2007  |  Published in Mutual Funds

When it comes to investing, cutting expenses is just as good as, if not better than, increasing your rates of return. When you cut expenses, it’s a guaranteed 100% increase to your bottom line. The only way to potentially increase your rate of return is to increase your risk and even then the rate of return is hardly guaranteed.

How do you cut expenses in retirement investing? Easy, the first part applies only to those who have mutual funds. If you’re the index fund type, which I am, the key to finding the best return is simply comparing the expense ratios of each mutual fund. Fidelity’s Fidelity Spartan 500 Index Investor is Fidelity’s S&P 500 index fund (I think this is their S&P 500 Index fund), FSMKX, and it has an expense ratio of 0.10%. Vanguard’s is called the Vanguard 500 Index Fund, VFINX, and it has an expense ratio of 0.18%. That means, all things being equal, your return from Fidelity will be 0.08% higher than with the Vanguard fund because there are fewer expenses.

Now, why do the returns for the two funds differ? The YTD on the Fidelity fund is 10.81% whereas the YTD on the Vanguard is 10.77%, the difference there may lie in part with how quickly the fund reacts to changes in the index (and the fund fees). Ultimately, when you’re comparing index funds, you’re mostly comparing apples to apples so the returns should be very very close.

Another thing to remember is whether the brokerage has fees outside of the fund. In our example, I know that Vanguard has no annual account maintenance fees if you’re willing to accept electronic delivery of statements and prospectuses (prospecti?). I don’t know for certain but I believe Fidelity doesn’t have any account fees either but I’m not 100% sure.

If you’re investing in mutual funds with a little more excitement, say picking a particular industry or theme, then you have to compare returns in addition to expenses. In those cases the answer isn’t as cut and dry, but if you’re looking just at easy index funds, pick the cheapest one.

  

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