How much weight do you give to expense ratios

[motley]

Curious about how people see this. It seems it's rather hyped IMO - while I get all things being equal, choose lesser expenses, I'm a bottom line kind of guy, so if I think a fund is better than another, I'm not going to get wrapped up too much in one having a bigger expense ratio than another.

 

[Montecfo]

Fund expenses are a data point. Overall performance and fund portfolio is the key. Certainly you would pick the lower expense fund of two comparable ones. But rejecting a fund only due to expenses makes little sense in my view.

 

[Surewhitey]

If you want specific exposure to smaller, more concentrated investments, maybe a smaller chunk in managed funds will cost you a little & be worth it. I always thought Vanguard Prime Cap was an over performer and the 9x fee was worth it. Looking at it this morning, it has under performed the S&P for the past 1-5 years. 10 years just barely out performing...

165 vs 503 stocks invested... A big chunk is healthcare and big tech. A lot of LLY and lots of chip stocks in the top 10.

 

[DrRoy]

For index funds/ETF's, which is all I hold, they are important for net return.

 

[Dtail]

For index funds/ETF's, which is all I hold, they are important for net return.

Same here and heavily agree.

 

[Midpack]

 

[Montecfo]

All other things being equal anyone would choose 6% over any lower rate.

But I don't think that was the question.

 

[athena53]

All other things being equal anyone would choose 6% over any lower rate.

But I don't think that was the question.

I agree. I look at the return net of expenses and how they're performing relative to benchmarks. If the extra expenses are justified by higher return, I'm OK with that.

 

[imbatman]

I've made great money over the years (this year too) buying discount priced CEFs, and those ER would bring you to tears (they have interest and leverage expenses)

 

[MarieIG]

Fund expenses are certainly a consideration for me. If I want an S&P or total index fund I am not going to shell out anything in excess of deminimus expenses. Moreover, while there may be exceptions most funds haven't outperformed the S&P long term.

That said I like to dabble a little, but just a little, although I don't consider funds with loads.

 

[VanWinkle]

I agree. I look at the return net of expenses and how they're performing relative to benchmarks. If the extra expenses are justified by higher return, I'm OK with that.

Including trading costs and tax expense of forced capital gains that may not be included in the return net of expenses?

 

[sdtech]

I have moved everything to fidelity zero rate funds. It's a nice fairy tale to believe paying the expense ration nets you higher returns, but unless they cherry pick some dates the base index funds almost always beat the managed funds over time.

 

[Montecfo]

I've made great money over the years (this year too) buying discount priced CEFs, and those ER would bring you to tears (they have interest and leverage expenses)

Same. And yes expenses are high, but analysis reveals the reasons which are good ones. CEFs are excellent short to mid-term trading/investing vehicles.

 

[Montecfo]

I have moved everything to fidelity zero rate funds. It's a nice fairy tale to believe paying the expense ration nets you higher returns, but unless they cherry pick some dates the base index funds almost always beat the managed funds over time.

No fairy tale. You just have to know what you are buying.

 

[momoney]

No fairy tale. You just have to know what you are buying.

I see Fidelity has a CEF screener tool. How does one become savvy in CEF buying?

 

[bloom2708]

The difference between .1 and 1.0 over 40 years matters a whole lot, so I care quite a bit.

Anything over .5% you should have to justify and anything over 1.0% is suspect. Over 2% is criminal. I'm thinking of you Edward Jones.

 

[Montecfo]

I see Fidelity has a CEF screener tool. How does one become savvy in CEF buying?

Start somewhere like investopedia. Understand the different type of mutual funds.

Screen for some you might like. Look at what they hold, performance over time and very importantly whether it trades at a discount or premium.

Go to the distributors website. Read everything there about the fund.

 

[Qs Laptop]

Repeat after me: "It's total return."

So if a fund has a total return of 45.0% over 5 years and charges 0.70% expense ratio and another similar fund has a total return of 39.8% over the same 5 years and charges 0.50% expense ratio I choose to pay the higher expenses because the company has a better track record.

It's the same idea in sales. A salesperson that gets 4% commission turns in $300,000 in sales in a month. Another salesperson gets 5% commission and turns in $350,000 is sales in a month. And this has been consistent for years. Who do you hire?

 

[Qs Laptop]

I have moved everything to fidelity zero rate funds. It's a nice fairy tale to believe paying the expense ration nets you higher returns, but unless they cherry pick some dates the base index funds almost always beat the managed funds over time.

Really? Compare Fidelity Blue Chip Growth fund (FBGRX) to any S&P500 index fund over any 3, 5, 7, or 10 year period.

 

[OldShooter]

Morningstar has reported multiple studies that they have done showing that the only reliable predictor of mutual fund performance is low cost.

Part of the problem is that funds with higher costs tend to be funds that are trading more. The market impact costs, even though they're hidden from us, tend to dominate the performance of the fund

 

[Koolau]

No fairy tale. You just have to know what you are buying.

When I figure that out, I'll quit worrying about fund expenses. In the mean time, I'll stick with extremely low cost index funds which is part of my plan. I'd never suggest there isn't a better "plan" out there, but this one has served me fairly well and doesn't require me to be very involved.

I much prefer to sit on my couch and let my index funds make me more money because of their lower expenses than most managed funds - in the long run.

My one experiment in managed funds is Vanguard (pssst) Wellesley at about 0.23% ER. I'm thinking about dumping it, but inertia is a powerful force in a couch potato's life. It's also a small portion of my AA. YMMV

 

[pjigar]

A couple of points:
* In general, it is extremely rare for most funds or asset classes to outperform public markets consistently over a long periods of time (decades). Lookup Callan Periodic Table, Risk adjusted returns, etc. Past returns of any fund may not continue in the future but the expense ratio will.
* I like to think about the impact of expense ratio in relation to SWR. i.e. additional 0.5% expense ratio for 4% SWR means I get to spend 12.5% less money which is significant IMHO.

I tried to chase returns at the expense of expense ratio (pun intended) and the risk in my earlier days of investing. I kept transaction records for every investment and realized that I wasn't even keeping up with the market after little over a decade. So finally I accepted the reality and stuck to index investing. YMMV.

A very simple fact of public market is that all the data is available to public and hence by definition no-one has a competitive edge over the others. Market trading is a zero-sum game. Having said that, a very small minority of fundamental based value investors can beat the market as a whole but they can also be wrong for a very long periods of time. It takes a very special kind of genetic+mental makeup and a lot of hard work to be a value investor who can stand against the crowd for most of his/her life.

 

[Qs Laptop]

I much prefer to sit on my couch and let my index funds make me more money because of their lower expenses than most managed funds - in the long run.

"Index funds make me more money than most managed funds..."

Yes, that is the trick--finding the minority of managed funds that beat the index. They are out there and they are not hard to find. Almost all comparison charting tools has the benchmarks available as a comparison. It's fairly easy to pick a fund and then click on chart, then compare, then click on S&P index fund, then 3 year, then 5 year, then 10 year timeframes.

 

[OldShooter]

Really? Compare Fidelity Blue Chip Growth fund (FBGRX) to any S&P500 index fund over any 3, 5, 7, or 10 year period.

I'm curious. Do you have total return numbers for both funds? Comparisons like this are often flawed by using only price return for the S&P and ignoring its total return including dividends.

 

[Qs Laptop]

A couple of points:
* In general, it is extremely rare for most funds or asset classes to outperform public markets consistently over a long periods of time (decades). Lookup Callan Periodic Table, Risk adjusted returns, etc. Past returns of any fund may not continue in the future but the expense ratio will.

True, it is hard to beat the index every year over long periods of time. But good managed funds that do beat the index can have a bad year and even so, it's cumulatively so far ahead of the index over time that the total returns over the past 10, 15, 20 years far exceeds the total returns from the index fund over that period.