Do you shop around when buying stuff? Do you drive to a different gas station to fill up to save a few cents? At what price does it make a difference to shop around for you?
I’ll be the first to admit, I rarely shop around. For most things, it’s just not worth it to me. For example, gas – I always go to what’s convenient for me, not necessarily the cheapest. Even if I save $0.10 per gallon, to fill my tank, that’s only $1.40. Simply not worth it. The same is true for groceries – I always go to the same place, I don’t look at sales, and I never coupon.
But when it comes to investing, I DO shop around. I shop around to find the lowest price mutual fund or ETF. What am I talking about? FEES. The reason is simple: fees can add up to $10,000 or more – and that’s real money that’s worth shopping around for.
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The Same 500 Stocks, Different Fees
Mutual fund and ETF fees irk me. They irk me because they are a necessary evil. I get it – it costs money to run a fund. You have to buy and sell the stocks, pay the advisors, pay for insurance, and more. But what’s silly is that you can have the same fund, with the same 500 stocks, and charge so many different prices – crazy!
A simple example is the S&P 500 mutual funds and ETFs. The S&P 500 is a list of 500 stocks created by Standard and Poor’s. Every S&P 500 mutual fund owns the same 500 stocks in the same amount – that’s the point, to track the S&P 500.
So, you’d think that all S&P500 funds are created equal? Well, you’re very, very wrong.
Here’s a breakdown of the fees on the top 5 biggest S&P 500 funds:
- SPDR S&P 500 (SPY) – 0.11%
- iShares Core S&P 500 (IVV) – 0.07%
- Vanguard S&P 500 (VOO) – 0.05%
- Schwab S&P 500 Index (SWPPX) – 0.09%
- Vanguard 500 Index Fund (VFINX) – 0.17%
As you can see, the most popular fund SPDR S&P 500 (SPY), actually charges over 2x as much as the Vanguard S&P 500 (VOO). That’s crazy, because it’s the same 500 stocks held in the same amount!
Why Fees Matter
Here’s why it matters though. That difference of 0.06% compounds the same amount that your portfolio grows – the expense ratio is always a percentage of assets.
So, if you had $50,000 and were adding $5,000 per year to your portfolio (say your Roth IRA), over 30 years, your expenses alone would be:
- SPDR S&P500 (SPY) – $26,451.55
- Vanguard S&P 500 (VOO) – $12,110.01
That’s a difference in fees of $14,341.54.
What’s even more shocking that SPY is the most popular fund by almost 10x what VOO is – SPY is worth $217 billion while VOO is worth $27 billion. Think of all of the people paying double in fees simply because it’s the “more popular” fund, even though they own the same 500 stocks!
Finding Out Your Fees And Lowering Them
One of the easiest ways to track your fees is to use an online personal finance app like Personal Capital. This FREE tool links all of your investing accounts and tracks your fees with their 401k Fee Analyzer. It will let you know what you’re paying in fees, so you can make smart decisions about changing your investments. And beyond that, it also keeps track of all of your investing accounts in one place for fee. If you’re not signed up, check them out: Personal Capital.
Do you look at the expense ratio when investing? Have you considered what your fees are costing you?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.