Most traditional mutual funds are run by a professional manager. Even if the mutual fund does not outperform, the manager does have to get paid, and this is part of the expense that mutual funds incur.
“Because mutual funds charge much higher fees than ETFs (on average about 1.4% of assets), the funds need to do better than the ETFs just to match their performance after fees. If an ETF with an expense ratio of 0.1% returns 8% per year before fees than a mutual fund with an expense ratio of 1.4% must return 9.3% before fees just to match the ETF’s performance,” Timothy Green wrote for The Motley Fool. [ETF Fee War Ups Competition in Fund Industry: Fitch]
The biggest problem with mutual funds charging such high fees is that over time, they cut into returns. Investors have become much more cost-conscious as it has become difficult to earn income in this low yield market. Protecting principal is more important than ever. Investing in a broad-based ETF is an efficient way to gain exposure to the entire stock market at a reasonable cost. [ETF Fee War: Investors Win]
Tisha Guerrero contributed to this article.