Typical Expense Ratios of Mutual Fund Types
Written as a percentage of a mutual fund's average net assets, the expense ratio is the total annual operating expense of the fund. Expenses paid from the assets of the mutual fund are paid indirectly by investors, as compared to upfront sales load charges. Comparing the expense ratios of similar funds and choosing the less expensive option can literally increase the value of an investment by thousands of dollars over an extended number of years.
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Decreasing Trend
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According to the Investment Company Institute, mutual fund expense ratios have been decreasing industrywide since 1980, with the expense ratio for mutual funds that invest in stocks averaging at 0.99 percent in 2008. Mutual funds that invest in bonds have decreased in expense ratios during the same time period, down to an average of 0.75 percent. Although expense ratios vary somewhat based on the types of assets in which the fund invests, according to the Investment Company Institute, as a general rule, the larger the mutual fund, the lower the expense ratio.
Passively Managed Funds
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Mutual funds that hold assets corresponding to a benchmark index typically have the lowest expense ratios of funds that invest in stocks. For example, a fund which mirrors a major stock market composite index such as the S&P 500, purchases stock in the companies included in the index in direct proportion to the weighted average of the index. The assets are then left to grow or decline just as the S&P 500 grows or declines. An example from the bond category is a mutual fund with holdings that track the Barclays Capital Aggregate Bond Index. Funds that invest in bonds typically have lower expense ratios than stock funds, and funds with only money market assets generally have expense ratios lower than bond funds.
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Comparing
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In choosing from among a group of mutual funds, an investor may look comparatively at expense ratios plus annualized return, or past earnings of the fund. However, since historic performance of a fund is no guarantee of future potential, other factors to consider include if the assets of the fund add diversification to an existing portfolio. For example, an individual with all his investment dollars in equities may want to comparison-shop among only bond funds when making a new purchase. As of March 2011, typical expense ratios for actively managed no-load mutual funds holding only bonds range from average lows around 0.5 percent up to highs of 1.25 percent.
Check the Prospectus
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When comparing gross expense ratios of similar funds, it is important to read the prospectus of each fund. The U.S. Securities and Exchange Commission requires that the prospectus of a mutual fund list all the expenses shareholders will pay. Management may waive a portion of the typical expenses charged by mutual funds. In this case, the net expense ratio, what the investor will actually pay out-of-pocket, will be less. For example, a brokerage may offer clients access to thousands of mutual funds with an incentive that if the client purchases shares of funds managed by their organization or an affiliate, instead of a competitor's funds, a portion of the expenses will be waived.
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References
- CBS Money Watch: Is Your Mutual Fund Ripping You Off?
- Investment Company Institute: Section 5: Mutual Fund Fees and Expenses
- Investment Company Institute: 2010 Investment Company Fact Book
- U.S. Securities and Exchange Commission: Invest Wisely: Mutual Funds
- "Charles Schwab On Investing"; Mutual Fund One Source; Spring 2011
