Author Topic: What is a reasonable expense ratio for a fund today?  (Read 1064 times)

FIRERoad

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What is a reasonable expense ratio for a fund today?
« on: May 23, 2018, 02:10:52 PM »
So, I'm new to the site.  I've been reevaluating my investment allocation.  Would like to semi retire in the next 3-5 years around 40 so that is my time frame.  Going to start maxing out pre-tax and plan pipe line rollover or other strategy after semi retirement if needed or after fully retired. I have case study thread in the appropriate section if you need more details.

So my questions:

The original post on this site states a .15 for a popular Vanguard index fund.  I am noticing that to be the norm for many funds and other cheaper options from other competitors, similar to the ETFs.  So, has the threshold for expense ratios dropped?  What is the new low?

401k - through work

I currently have the Vanguard Wellington Balanced Fund. 
Expense ratio is .17 
Performance long term seems to be around 7%+

I am considering switching to an S&P500 index type fund.  I do not have the Vanguard equivalent fund but there is a Northern Trust NTGI S&P500 Index fund
Expense ratio .06
Performance long term seems to be around 9%+

Would it be worth switching at this point?  I'm not terribly disappointed in the return from the balanced fund and less volatility but the higher return potential and and lower costs are attractive.


 IRA and ROTH - through TD Ameritrade (Scottrade) account

I currently have the IRA (previous employer 401k rollover) in a Vanguard Target 2045 fund.
Expense ratio .15
Performance long term seems to be around 8%+

I have unlimited options in this account.  The 401k will eventually roll into this IRA.  Should I choose lower expense ratio and simpler S&P500 index type fund same as above? I could probably find the same Northern Trust fund here.

The ROTH is mostly in cash and individual stocks right now.  Looking to simplify that an get it all or mostly invested in a fund.  Eventually I'll start the pipeline into this account.  I don't trade often but would like to minimize those fees as well.  Are there any benefits in having the ROTH funds in anything other than another simple index fund considering the growth here will not be taxable?

Thanks.


nereo

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Re: What is a reasonable expense ratio for a fund today?
« Reply #1 on: May 23, 2018, 02:29:11 PM »
Re: What is the new low
Plenty of passive index funds from several brokers are at or below 0.05%.  'Balanced Funds' (those that include bonds and adjust based on your age) are in the 0.1-0.18% range.

re: Would it be worth switching?
Consider the cost and the service to answer that question.  For cost - at 0.05%, every $100,000 invested has $50 in fees per year.  At 0.15 it's $150.  Is $100 every year per $100k worth it to switch?  Maybe not if your balance is $3,000 ($1.50 saved).  Definitely yes if your balance is $600,000 ($600 saved/yr).  Service: are you happy with what you have and is it worth the cost (Fees) you pay?

re: Should I choose lower expense and simpler SP500 fund?
What does your Asset Allocation look like?  What do you want to be invested *in*?  hint, look to your Investor Policy Statement (or create one if you don't have one).

re: ROTH funds. 
If you are going to have bonds in your portfolio, tax-advantaged accounts are a good place to have them.




Radagast

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Re: What is a reasonable expense ratio for a fund today?
« Reply #2 on: May 23, 2018, 03:36:54 PM »
I'd say 0.20% is the cut off right now. There are quite a few Vanguard balanced, international, or tax exempt bond funds at or under that which are useful enough to justify their cost.

You might be able to make a case for funds as expensive as 0.40%, but beyond that they get harder to justify unless you feel you "need" emerging market small caps or frontier markets.

PDXTabs

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Re: What is a reasonable expense ratio for a fund today?
« Reply #3 on: May 23, 2018, 04:09:58 PM »
I'd say 0.20% is the cut off right now. There are quite a few Vanguard balanced, international, or tax exempt bond funds at or under that which are useful enough to justify their cost.

You might be able to make a case for funds as expensive as 0.40%, but beyond that they get harder to justify unless you feel you "need" emerging market small caps or frontier markets.

I concur. VTWSX is 0.19% right now.

MustacheAndaHalf

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Re: What is a reasonable expense ratio for a fund today?
« Reply #4 on: May 24, 2018, 05:15:23 AM »
@FIRERoad - You compared an S&P 500 index fund to Wellington Balanced Fund, which makes me wonder if you know the contents of the balanced fund.  It holds about 1/3rd bonds and 2/3rds stocks.  A better comparison would be to VTI (total US stock market ETF) and BND (total US bond market ETF), in the same proportions.

VTI has an 0.04% expense ratio, and BND an annual expense of 0.05%.  So in the same mixture, you could achieve a 0.043% expense ratio invested passively, instead of actively.

This also highlights another problem: unless you're near retirement, 1/3rd bonds is excessive.  You want mostly equities, not as much in bonds.  You can see this in target date funds, which hold only about 1/10th in bonds for those far from retirement.

I'd suggest you shift to the S&P 500 index for two reasons.  One being you can save on expense ratio, even if 0.06% is the only option in your retirement plan.  And second, it will get rid of the 1/3rd bond allocation you hold right now.  If balanced funds were the only way you can stomach the market, then they might have a place in your portfolio.

FIRERoad

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Re: What is a reasonable expense ratio for a fund today?
« Reply #5 on: May 24, 2018, 06:24:03 AM »
Re: What is the new low
Plenty of passive index funds from several brokers are at or below 0.05%.  'Balanced Funds' (those that include bonds and adjust based on your age) are in the 0.1-0.18% range. Thank you.  I guess I don't remember the passive funds being this low but good to know these are the new lows.

re: Would it be worth switching?
Consider the cost and the service to answer that question.  For cost - at 0.05%, every $100,000 invested has $50 in fees per year.  At 0.15 it's $150.  Is $100 every year per $100k worth it to switch?  Maybe not if your balance is $3,000 ($1.50 saved).  Definitely yes if your balance is $600,000 ($600 saved/yr).  Service: are you happy with what you have and is it worth the cost (Fees) you pay?  I guess I can say it has been worth it to me the past few years as I kind of have just "set it and forget it" on retirement accounts and have focused on saving cash and paying off the house.  The pre-tax accounts are over $100k and will be aggressively funded the next few years so the fees will start adding up and I want to take a little more active approach at tracking and re-balancing.

re: Should I choose lower expense and simpler SP500 fund?
What does your Asset Allocation look like?  What do you want to be invested *in*?  hint, look to your Investor Policy Statement (or create one if you don't have one). I chose this fund over the target funds or all stocks index funds after a bit of recovery from 08.  Working in the automotive industry, seeing the volatility in employment, markets,  and knowing I don't want to work full time until traditional retirement age was my logic in making this choice.  But I am debating going a little more risky the next few years and as I partially retire and reduce my costs and increase my comfort level with my financial situation. Either way, I can still lower my expense.  I can go all in to the S&P500 fund or I see NT also offers a low cost bond index fund which I can use to recreate the balanced fund allocation between these two and just re-balance it myself.

re: ROTH funds. 
If you are going to have bonds in your portfolio, tax-advantaged accounts are a good place to have them.
This is what I was thinking.  Could one have the same approach in this account with more stable and high dividend yielding stocks?  I am still debating keeping a small portfolio of these type of stocks in the ROTH (T, VZ, DUK, BEP, STOR, WELL).  It is nice to see those quarterly dividend payouts add up.  Reminds me of the days of 5-6% money market accounts and CDs.


FIRERoad

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Re: What is a reasonable expense ratio for a fund today?
« Reply #6 on: May 24, 2018, 06:25:10 AM »
I'd say 0.20% is the cut off right now. There are quite a few Vanguard balanced, international, or tax exempt bond funds at or under that which are useful enough to justify their cost.

You might be able to make a case for funds as expensive as 0.40%, but beyond that they get harder to justify unless you feel you "need" emerging market small caps or frontier markets.

Thank you!  Makes sense.

FIRERoad

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Re: What is a reasonable expense ratio for a fund today?
« Reply #7 on: May 24, 2018, 06:38:49 AM »
@FIRERoad - You compared an S&P 500 index fund to Wellington Balanced Fund, which makes me wonder if you know the contents of the balanced fund.  It holds about 1/3rd bonds and 2/3rds stocks.  A better comparison would be to VTI (total US stock market ETF) and BND (total US bond market ETF), in the same proportions.  Thank you for the response but take it easy, relax.  Was just trying bounce my observations off of folks a little more current or engaged in these things.  I was under the impression that the .17 was about the best I could do and then saw lower cost options and wondered and why I asked.  I understand the contents of the balanced fund.  I switched to this after funds had recovered some from 08.  Working in the automotive industry and watching this was a bit of a roller coaster at the time.  I also wanted a less hands on approach at the time. Considering taking the risk up a notch and cut my expense if possible.

VTI has an 0.04% expense ratio, and BND an annual expense of 0.05%.  So in the same mixture, you could achieve a 0.043% expense ratio invested passively, instead of actively. Yes, thank you for pointing these two out.  I will check them out for the IRA and ROTH as I have them available to me in those accounts.  Not that familiar with ETFs. I also noticed I do have an option for another NT bond index fund in the 401k that would allow me to essentially do the same thing here in combination with the S&P500 index fund and cut my expense. 

This also highlights another problem: unless you're near retirement, 1/3rd bonds is excessive.  You want mostly equities, not as much in bonds.  You can see this in target date funds, which hold only about 1/10th in bonds for those far from retirement.

I'd suggest you shift to the S&P 500 index for two reasons.  One being you can save on expense ratio, even if 0.06% is the only option in your retirement plan.  And second, it will get rid of the 1/3rd bond allocation you hold right now.  If balanced funds were the only way you can stomach the market, then they might have a place in your portfolio.

Yeah, as I explain above, it was a way to stomach the market after 08 and not pay attention to them too much while I shifted my focus to house payoff.  I'm in a different position now.  Maybe....  but good to know I have lower cost options and how low is low.

Car Jack

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Re: What is a reasonable expense ratio for a fund today?
« Reply #8 on: May 24, 2018, 09:36:42 AM »
Most houses allow you to bring up a list and then sort on fees.  I'm most familiar with Fidelity and I'll first get the type of fund.....say US equity.  Then I'll set the minimum investment to $25k because....well....I don't have $100M min that some funds have.  Then sort by net ER.  Bam.  500 and sometimes total US market are at the lowest ER.  I choose funds using pretty strict 3 fund criteria and low ER.  If my savings bonds are not used, I think my average, overall ER is about 0.042%.  I use Fidelity, Vanguard, Schwab and TDAmeritrade.

FIRERoad

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Re: What is a reasonable expense ratio for a fund today?
« Reply #9 on: May 24, 2018, 04:09:17 PM »
Most houses allow you to bring up a list and then sort on fees.  I'm most familiar with Fidelity and I'll first get the type of fund.....say US equity.  Then I'll set the minimum investment to $25k because....well....I don't have $100M min that some funds have.  Then sort by net ER.  Bam.  500 and sometimes total US market are at the lowest ER.  I choose funds using pretty strict 3 fund criteria and low ER.  If my savings bonds are not used, I think my average, overall ER is about 0.042%.  I use Fidelity, Vanguard, Schwab and TDAmeritrade.

Thanks! I've been doing just that and getting familiar with the TD Ameritrade platform.