Small Costs = Big Returns
Lower costs dramatically accelerate investment returns! This post continues our conversation on Exchange Traded Funds, 2nd of the big 3 investment choices. Last time we noted the typical huge net cost difference between ETFs and mutual funds. This dramatically affects the return for many retail investors. Switching to ETFs offer most mutual fund holders the potential to more than double their net return!
This Part 6 of the White Top View Series, Investment Choice a discussing the basic choices for investing. Links to all parts of the White Top View Series, Investment Choice are at the end of this post.
Most of that is saving the high costs of mutual fund management buried in the MER or management expense ratio.
Shocking Management Expense Ratios!
Expenses for both ETFs and mutual funds expressed as the Management Expense Ratio or MERs. MER fees paid to management as compensation for running the fund. Comparing MERs between the most ETF and mutual fund choices shocks mutual fund investors.
Some ETF MER costs are below 20 basis points! That is a spectacularly low fee! A basis point is 1/100 of 1%. That is 0.01%. Or compared to a dollar, a basis point is one penny! So under 20 basis points is very low – even cheap! The digital age delivering value!
Compare that to the all too common 2½% MER of many mutual funds. An outrageous difference of 1,470.59%! Over 14 times as much! That means for every $1.00 in MER fees paid to manage an ETF, the comparable amount for a mutual fund is $14.71! For the same service! Shocking!
The choice for an investor is clear. But wait! There’s even more!
As bad as that sounds it actually can get worse yet! Mutual funds have more costs beyond the MER! Costs also include slippage during buying and selling, direct transaction cost like commissions are fully passed on to the investor.
Put simply, slippage is the difference between the bid and ask price. The details and full discussion would fill a book. Getting into that discussion is considerably beyond our purpose so suffice it to say ETFs are a cost-effective alternative mutual fund investors should seriously consider.
Be a Friend – Low Costs Can Double Investment Returns
Help any friend, parent or grandparent that holds mutual funds a huge favor. Tell any them about basic ETFs. I also think that they should fire any financial advisor that put them into high cost mutual funds.
The advisor got paid very well for putting them in and keeps getting paid very well every year for keeping them there. Those costs all come returns that could go into their pockets. Those costs are all unrecoverable and a continuing unconscionable rip off, in my view!
If you or anyone you care about holds mutual funds, do not hesitate; dramatically and instantly improve the potential for considerably better returns. Plan, take the action needed to move and enjoy the advantages.
Be outraged but be careful. A mutual fund holder needs to get quality and objective advice. Don’t just run for the door. Pay close attention to all costs associated with exiting. Trailer fees or deferred sales charges (DSC) and other obscure costs can take a big bite. Take care and put together an exit strategy that works to your advantage.
As ever more investors learn about and jump on the lower cost ETF ride, the opportunities and advantages over mutual funds will become common knowledge. Spread the word! The move is on!
Mutual funds are seeing redemptions as funds flow into ETFs. Over $1 billion in mutual funds redemptions occurred in the year past while $10 billion flowed into ETFs. This is a very good thing.
Generally speaking, most basic ETFs are financial vehicles like or similar to a publicly listed mutual fund but with very low costs.
Next we will touch lightly on the range of other ETFs so you are aware of another large group of offerings. If they are ever suggested to you as an investment, you need an awareness of them. In contrast to the basic ETFs the exotic and advanced ETFs are not for beginners.
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Have a prosperous day!
These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.
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Links to the White Top View Series, Investment Choice