When putting money to work in your retirement portfolio, investors are better off with low-cost, index-based exchange traded than actively managed funds that could end up significantly diminishing overall returns.
In a recent discussion with analysts, Vanguard Group founder John Bogle argues that fees are all that matters when it comes to a retirement plan’s success, reports Mitch Tuchman for MarketWatch.
Bogle contends that the exorbitant fees found in active ETFs do not justify the off chance that the manager would beat the market. Specifically, Bogle points out that fees could wipe out the benefits of yields on stocks, or over 63% of an investor’s money.
Research has shown that stocks have generated an annualized return of between 6.5% and 7% after inflation. Supporting the higher returns relative to other investment types, reinvested dividends have helped juice gains. Over the years those reinvested dividends amount to a hefty sum as the compounding effect accelerates.
Even though Bogle has been a staunch critic of ETFs, Vanguard offers two of the most popular dividend stock ETFs on the market.
The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend-related stock ETF, with almost $20 billion in assets under management. VIG provides exposure to high-quality stocks with steady income growth, tracking stocks that have raised their dividends for at least 10 consecutive years. The ETF comes with a 1.98% 12-month yield. [Income-Generating ETFs for a Long Retirement]
The Vanguard High Dividend Yield ETF (NYSEArca: VYM) is the fourth largest dividend stock ETF, with $9.6 billion in assets under management. The fund includes stocks that are expected to pay a dividend over the next 12 months and ranked by their forecast dividend yield. VYM has a 2.83% 12-month yield.
However, fees would eat away at the yield return. For instance, the average mutual fund charges investors 1.2% in fees, whereas the average stock dividend yield is about 1.9%. Consequently, Bogle points out that investors are only left with just 0.7% in net yield to reinvest. In contrast, VIG and VYM both have a 0.10% expense ratio, and non-leveraged stock ETFs have an average expense ratio of 0.54%, according to XTF data. [Build a Dirt-Cheap Portfolio With These ETFs]
“We eat up all of our dividends with stock expenses,” Bogle said at the Bogleheads’ annual meeting last week. And the “industry you could easily say doesn’t give a damn.”
Some may argue that their managers beat the market, which would justify the higher fees. However, over the long term, active managers typically underperform the market. According to the S&P Dow Jones’ SPIVA research, the majority of active managers underperform their benchmarks in the long run. [Indexology: Ouch. That’s gonna leave a mark]
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.