For starters, investors can easily look up their fund investment’s fees through the provider sites or on a prospectus sheet. If an investor held $100,000 in a fund that comes with a 1% annual expense ratio, he or she is paying $1,000 per year for utilizing the fund. However, the fees are typically deducted from the investment’s overall performance, so investors rarely perceive the cost in a dollar figure.
“People would be much more sensitive to costs if they received an actual bill,” Benz added. “They look at these little innocuous-looking percentage ratios, and it doesn’t look like a big deal. They see half a percentage point versus one percentage point, and it doesn’t look like a big difference.”
However, over a long time frame, the higher fees add up to real dollar costs. For instance, Housel points out that someone who pays an industry-average of 0.74% for a stock mutual fund and invests $500 per month for 30 years will pay $33,615 more than an investor who utilizes a low-cost stock index fund that charges 0.05%, assuming both funds realize an average 6% annualized return before fees. [How Cheap Are ETFs?]
More investors are beginning to realize that the higher fees associated with active mutual funds are weighing on overall returns. For example, U.S.-equity ETFs have an average 0.53% expense ratio, and some of the cheapest index-based ETFs come with a 0.04% expense ratio, according to XTF data. [What an All-ETF Portfolio Does for You]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.