Mutual Funds
Low Costs Mean Higher Returns
Every nickel you save on fees goes straight into your pocket, and index funds offer some of the best deals around.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, April 2006
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The old adage that you get what you pay for doesn't apply to investing. Indeed, some of the lowest-priced investments produce the most sparkling returns -- largely because every nickel you save on fees goes straight into your pocket.
Among mutual funds, for example, index funds offer some of the best deals around. A fund manager's skill isn't a key factor in running an index fund, which hews to its underlying benchmark, so expenses are essentially the only factor to consider. Fidelity Spartan Total Market Index fund (symbol FSTMX; 800-544-8888), which covers the entire U.S. stock market, levies expenses of just 0.1% annually. So do Fidelity Spartan U.S. Equity Index (FUSEX), which tracks the mainly large-company Standard & Poor's 500-stock index; Fidelity Spartan International Index (FSIIX); and other Fidelity stock index funds. A $10,000 investment would cost just $10 a year in expenses.
Invest a minimum of $100,000 and you'll pay even less, because Fidelity shaves the expense ratio of most of its stock index funds to 0.07% annually. Right now Fidelity's stock-index funds cost a bit less than Vanguard's. But with expenses generally between 0.18% and 0.2% annually, Vanguard's bond funds either match or undercut Fidelity's.
Principally because they're so cheap, exchange-traded funds -- index funds that trade on the stock exchanges -- are surging in popularity. Vanguard (800-635-1511) offers 23 Viper ETFs, with costs ranging from 0.07% annually for Total Stock Market (VTI) to a still-tiny 0.3% for Emerging Markets Stock (VWO). Barclays Global Investors (www.ishares.com; 800-474-2737) offers a similar lineup of iShares ETFs at comparable prices. In addition to broad-based ETFs, Vanguard and Barclays both offer ETFs that invest in individual industries, such as energy and technology.
One downside to ETFs is that you pay brokerage commissions whenever you buy and sell them. If you make regular investments, traditional index funds may end up costing less.
There are plenty of first-class actively managed funds that also charge low fees. For instance, large-company standout Selected American Shares (SLADX; 800-243-1575) costs only 0.65% annually when you buy direct from Selected. Dodge & Cox International (DODFX; 800-621-3979), another top performer, charges 0.7% -- much less than most foreign funds. And midsize company fund Vanguard Selected Value (VASVX; 800-635-1511) costs just 0.51%.
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