Are you taking advantage of lower fees?
Investors paid less in 2018 to own open-ended mutual funds and exchange-traded funds (ETFs) than ever before, according to recently released research from Morningstar.
The Chicago-based provider of independent investment research’s annual fee study found that the asset-weighted average expense ratio was 0.48% in 2018, a 6% decline from the previous year. “This is the second-largest year-over-year percentage decline we have recorded since we began tracking the trend in asset-weighted average fees in 2000,” Morningstar’s Adam McCullough said.
The bottom line is that investors saved an estimated $5.5 billion in fund expenses compared with 2017 fee levels. A look at what you’re paying in expenses for your mutual funds and ETFs is important. Over time, fees compound and diminish returns.
As Vanguard pointed out several years ago, you don’t only lose “the tiny amount” of fees you pay, you also lose the growth that money might have had for years into the future. In this example, a $100,000 investment with 6% annual returns over 25 years and no costs or fees amounts to $430,000. If, however, you paid 2% annually in costs, after 25 years you would have only about $260,000. The 2% you paid out each year would wipe out 40% of your account value.
Morningstar’s study, released in late April, found that investors are paying 26% less in asset-weighted average fees than they were five years ago, 40% less than a decade ago, and roughly half as much when the average fee was 0.93%. Among the big factors, particularly during 2018, has been the intensifying competition among asset managers to lower fees and gain market share.
Want some guidance?
Are you taking advantage of lower fees for your portfolio? If so, that’s obviously a good thing for returns over time, so long as the funds you’re picking align with your goals in terms of where you are on your road to securing assets for your retirement.
As we said last month, it might be a good time to consider changing some things around even if you’re happy with your funds’ performance, given the significant appreciation that U.S. markets have been experiencing thus far in 2019.
Another area to focus on is to track how your actively managed fund is doing versus funds that passively track an index. Morningstar found that investors in active funds paid about four and a half times more than passive-fund investors on each dollar in 2018. That was the widest disparity between fees for active versus passive funds since Morningstar began tracking fees in 2000.
In addition, only 38% of active U.S. stock funds survived and outperformed their average passive peer in 2018, down from 46% in 2017, according to Morningstar. Chasing “alpha,” or the active return on an investment against a market index or benchmark, can not only be costly, it can also result in underperformance.
Are you happy with your funds’ performance or does it make sense to change some things around?
If so, just don’t act too quickly. Selling decisions you make now could have tax consequences later in the year when you get your financial information together for filing your 2019 taxes next year. Let’s talk and see if you’re paying too much, or if your portfolio is too risky. We’re available for portfolio reviews. Just call the office to set up a time that’s convenient for you.
