Exchange traded funds (ETFs) are often touted for having lower expenses than mutual funds. Of course, both fund types have administrative costs for the funds maintenance. However, actively-managed mutual funds have additional fees attached to pay for a fund manager. The fee tends to be anywhere from 0.50% to 1.0% of fund assets each year, according to Amanda B. Kish for The Motley Fool. These fees can vary even greater than that though, depending on the type of mutual fund. For example, fees for international funds are typically higher than fees for domestic funds. ETFs passively track indexes without a fund manager involved.
Mutual funds also have 12b-1 fees, which allow funds to pay for marketing and distribution directly out of the fund’s assets. This was set up in the 1980s to help funds attract new assets. But there are funds that are closed to new investors and still charge a 12b-1 fee. There might be some reform coming soon, but it is important to know that this fee can be tagged onto a mutual fund.
So without a fund manager and without 12b-1 fees, ETFs tend to have lower fees than mutual funds. Some low-fee, broad-market ETFs to consider include the SPDRs (SPY) at 0.8% and PowerShares QQQ (QQQQ) at 0.2%.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.