Ratios above 1.5% are considered high. In this article, we explore the meaning of the expense ratio, its formula, how it works, and its impact on returns with relevant examples.
Depends on what the fund is. If you're looking for a big index fund, like a total market or S&P 500, I think anything over . 10% is unreasonable. If you're looking at a total bond fund, I think anything over . 25% is unreasonable. If it's some unique / sector ETF, . 89% isn't necessarily terrible.
Low expense ratio: VOO has an expense ratio of 0.03%, one of the lowest among S&P 500 ETFs. This is cost-effective as the value of the investment grows over time.
What is the Expense Ratio? The expense ratio is the percentage that denotes the amount of money you are paying to the AMC as a fee to manage your investments. In other words, it is the per-unit cost for running and managing the mutual fund.
Typically, any expense ratio higher than 1 percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more. And that's real money for you and your retirement.
SPY is more expensive with a Total Expense Ratio (TER) of 0.0945%, versus 0.03% for VOO. SPY is up 28.31% year-to-date (YTD) with +$7.13B in YTD flows. VOO performs better with 28.36% YTD performance, and +$103.99B in YTD flows.
Mutual fund expense ratios can vary widely, typically ranging from 0.1% to over 2%. Low-cost index funds often have expense ratios below 0.5%, as they aim to track a specific market index and have a passive management style with lower turnover.
Invesco QQQ's total expense ratio is 0.20%. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance quoted.
A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days. For passive funds, the average expense ratio is about 0.12%.
For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio. In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends.
The SPY comes with an 0.09% expense ratio, which is the ETF equivalent of fund management fees. An investor who invests $100,000 into the SPY ETF must pay $90 as management fees.
For a typical 401(k) plan, the expense ratio should be no higher than 2% and more likely in the 1.0% to 1.5% range. The lower the expense ratio the better, with higher fees eating into profits.
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
Average Return
In the past year, QQQ returned a total of 24.57%, which is slightly higher than VOO's 23.44% return. Over the past 10 years, QQQ has had annualized average returns of 18.38% , compared to 13.11% for VOO. These numbers are adjusted for stock splits and include dividends.
QQQ is a better choice for short-term traders and institutional investors who prioritize liquidity and fast, efficient trades. It's also favored by those comfortable with paying a slightly higher expense ratio in exchange for its well-established market position and massive daily trading volume.
Most passively managed ETFs have lower expense ratios than actively managed mutual funds, but not all ETFs are friendly when it comes to fees. While the lowest-cost ETFs tend to have expense ratios less than 0.10%, the highest cost ETFs have expense ratios exceeding 10%.
SPY has an expense ratio of 0.09%, which, while low, is still higher than that of VOO,'s 0.03%, one of the lowest expense ratios for S&P 500 ETFs. This makes VOO more cost-effective for long-term investors, as expense ratio differences compound over time and impact returns.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
That's why he often recommends they buy exchange-traded funds (ETFs) instead of picking individual stocks. Berkshire actually holds two of them in its portfolio: The Vanguard S&P 500 ETF (VOO -1.52%), and the SPDR S&P 500 ETF Trust (SPY -1.53%).
For example, you might buy SPY if you want to trade actively, or even venture into day trading, because of its high volume. You might consider buying VOO to hold over the long term because of its lower expenses.
For most investors, it probably doesn't make sense to own both. VTI and VOO both provide great diversification at a low cost. If you hold both in your portfolio, you'll have a lot of overlap between the two. However, you may find that your retirement plan at work doesn't offer a total stock market index fund like VTI.