Author Topic: Understanding Expense Ratio  (Read 2420 times)


  • 5 O'Clock Shadow
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Understanding Expense Ratio
« on: August 15, 2017, 09:33:24 AM »
Would you mind helping me understand is it worth selling a fund to save on the Expense Ratio? We are new to investing & are now trying to understand making smarter decisions going forward.
Little background:
Nov. 2016-Found out about IRAs, opened acct & put $5500 in Fidelity for '16
Feb. 2017-Opened IRA at ME & put $5500 for '17

We moved our Fido acct to ME because of the balance requirement to get discounts on bank accts, but just noticed today that the ER on Fidelity's IRA is .09% while ER for VTI is .04%. I know we are not talking about a lot of money yet, but does it make sense to sell the the FSTMX (mutual fund) & just purchase VTI (etf) to get the ER down to just .04% at ME? 

The ME representative was great, he helped me calculate how much we are spending a year on each fund but he said keep in mind with mutual funds there will be capital gains & long/short.....We both noticed that even with the capital gains with FSTMX, VTI is still paying more in the long run. He of course said he couldn't direct me in which way to go which I understood. I apologized for keeping him on the phone but he said he enjoy getting calls like this because most people are not interested in this type of info.

So do most people sell one type to purchase another type in the same class just to save on ER? Sell the FSTMX to just have VTI to make life easier. We are still so new but if I knew what I know now we could have left the FIDO acct & just add $5500 in 2018 to the IRA to bring the ER down in 2018.

Or maybe it's not that big of a deal, we are just talking a couple of dollars right now??? I did mention to the ME rep that we could just move it back to Fidelity, of course they don't want that. He even mention they would reimburse the transaction fee to sell the FSTMX to purchase the VTI if we leave it at ME.

Thank you for helping me make sense of this. Please know that I'm not stressing over this but I'm really enjoying trying to understand the logistics behind what we are investing in & how to save over the long run.

Side thought: Have you ever trained someone & realized that they learn better by watching or you showing them how to do the task vs. a person reading it & getting it right away? I enjoy reading & there is a lot on this site to read but has anyone came across any videos that actually explain how to invest the MMM way? For me it may click a little better.


  • Magnum Stache
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Re: Understanding Expense Ratio
« Reply #1 on: August 15, 2017, 10:55:33 AM »
As far as the expense ratio, most people don't pay attention.  For those that do, like me, even with larger amounts invested I wouldn't worry about the 5 basis point difference you noticed.  Sure, put it on your list of nice things to do some day, but you're only talking about $5 per year at this point.  I would optimize elsewhere for now - make sure you make your contributions as soon as possible each year, make sure your taxes are optimized, earn a raise at work, get on the right cell phone and Internet plan for your needs, do your estate planning / will / living will, etc.

As far as your PS, I'd suggest check out Mike and Lauren's YouTube channel.  They have some finance videos where they discuss the 4% rule and some other typical early retirement fare.


  • Walrus Stache
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Re: Understanding Expense Ratio
« Reply #2 on: August 15, 2017, 11:00:03 AM »
0.09% is a great expense ratio. 0.05% is even better. With an $11,000 balance, the 0.05% difference in expense ratios would save you approximately $5.50 per year. If this was a taxable account where there might be capital gains tax, this isn't a very compelling reason to switch. Capital gains taxes aren't a concern within an IRA, but Merrill Edge might charge trading commissions for these funds. If that's the case it could take years to come out ahead. The rep said they might reimburse these fees, but it would probably take another phone call to get them to follow through. I don't know about you, but the amount of money involved before I feel that talking to customer service is worthwhile is a bit higher than $5.50.


  • 5 O'Clock Shadow
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Re: Understanding Expense Ratio
« Reply #3 on: August 15, 2017, 02:47:48 PM »
seccondcor521 & seattlecyclone,

Thank you both immensely! I appreciate you taking time to mentally 'talk' this out with me. I won't stress over a couple of dollars with the ER, Life is just too valuable.

I am excited to check out the YouTube finance videos;-)

I know there is debate going on in other threads right now but please know that there are newer ones like myself that appreciate this site so much & the valuable knowledge that I receive every time I come to this site. This site has literally changed our financial life. Thank you Everyone!


  • Handlebar Stache
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Re: Understanding Expense Ratio
« Reply #4 on: August 15, 2017, 10:53:30 PM »
Heres a good basic investment course. Ignore that its Canadian - focus on the fundementals.

His videos also free on youtube.

Car Jack

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Re: Understanding Expense Ratio
« Reply #5 on: August 16, 2017, 07:48:03 AM »
I use both mutual funds and ETFs.  I like to use ETFs in my taxable account because there is no taxable gain until I sell.  I simply have to keep it for over a year and the cap gain becomes long term capital gain, so I'll pay less tax.  Both MFs and ETFs will throw off dividends, so those are taxable and you'll get that right from the start.  But after a year, they're qualified dividends.  I am not sure if it's different for mutual funds but I don't think you have control over that like you do with ETFs.

To answer your question......sure.  I'll sell out of one fund if a significantly lower ER fund or ETF that does the same thing appears.  This has occurred a lot lately as the ER war between Vanguard, Fidelity, and Schwab has raged.  I honestly don't think a difference of a couple basis points (0.02%) matters but if the difference is 5, I'll move.  Some years ago, I moved $260k from my Fidelity international into a new Vanguard account and bought developed international over about 5 basis points.  Good for $130 in savings.  As it turns out, with the current ER wars, Fidelity is now cheaper, but only by a basis point.

If you want to find the lowest ERs, don't leave out Schwab.  SCHB (broad market, like total market) and SCHX (similar to S&P 500) are both 0.03%.  Unless you have some number of millions to get the uber cheap ERs in Fidelity, these are as cheap as you can get.

Another option to consider if you really, really have to have Vanguard is to buy Vanguard ETFs at TDAmeritrade.  With enough money to invest, you can collect a bonus coming in.  Then sign up for no fee ETF trades and choose from a dozen Vanguard ETFs.  I hold VTI at TDAmeritrade because I like this Vanguard product but I don't like the bankers hours Vanguard holds and I don't like talking to some high school kid at Vanguard who knows nothing if I call with a question.


  • 5 O'Clock Shadow
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Re: Understanding Expense Ratio
« Reply #6 on: August 16, 2017, 08:03:38 AM »
Heckler thank you for the videos! I've only made it through one video & he is really good. I can't believe how watching the suggested videos are making it click.....Strange how we all learn differently.

CarJack thank you so much for sharing personally what you are doing. It's great to know what people are doing but even better to know why people are making those choices. So thank you again!

LOL....when we first started all this back in November of course I call Vanguard & was transferred 3 times to 3 different people, after getting off the phone I looked at my husband & said I am more confused than when I got on the phone....
I really appreciate what Vanguard stands for but interacting with them it leaves a lot to be desired.