In the first part of this series, I discussed the basics of mutual fund expenses. In this section I would like to explore the reality of how mutual fund expenses will impact your bottom line.
As of May 11, 2009, Schwab announced that it will reduce its expense ratio on several mutual funds. One in particular caught my eye: The Schwab S&P500 fund (SWPIX). This fund lowered its expenses from .36% to .09 %. This is a big jump!
As the Schwab S&P 500 Fund is a passive fund or index fund, the expense ratio has a big impact on your bottom line. Also, the Schwab S&P 500 fund should hold the same assets as any other S&P 500 fund, so now that the expenses are lower it could save you money.
Here’s an example of how fees will impact you bottom line. Since the Schwab fund just lowered its fees we can not use it as a historical example. The Vanguard S&P 500 fund currently has an expense ratio of .16%, while the Dreyfus S&P 500 fund has an expense ratio of .50%. The difference of these two fund’s returns on an annualized basis for 10 years is .39%. This difference is essentially the spread in their expense ratios over the last ten years since the fees do change over time. If the funds more or less hold the same assets, why buy the fund with the higher expense ratio and pay more money for the same product?
Exploring this further will illustrate the impact on your portfolio. A $100,000.00 investment in the Vanguard fund for the last 10years would produce a return almost $3400 higher than the Dreyfus fund based on historical data. While every S&P 500 fund will produce slightly different results (regardless of expenses), it’s important to be cognizant of the impact expenses can have on your portfolio. $3400 here and there can make the difference in your ability to reach your goals, so make sure you know where your money goes and what it costs you!
