Lower expense ratios boost returns from "summary" of All About Index Funds by Richard A. Ferri
The concept of lower expense ratios boosting returns is a fundamental principle that all investors should pay attention to. Expense ratios are the annual fees charged by mutual funds or exchange-traded funds (ETFs) to cover operating costs. These fees are deducted from fund assets, which means they directly impact investor returns. When expense ratios are high, they eat into investment returns, leaving investors with a smaller portion of the overall gains. On the other hand, lower expense ratios mean that more of the investment returns stay in the investor's pocket. Over time, this can have a significant impact on the overall performance of an investment portfolio. For example, let's say you have two funds that both generate a 7% annual return before expenses. Fund A has an expense ratio of 1%, while Fund B has an expense ratio of 0.2%. At the end of 30 years, Fund A would have grown to $574,349, while Fund B would have grown to $761,225. That's a difference of $186,876, all because of the difference in expense ratios.- Investors can potentially increase their long-term returns without taking on any additional investment risk. This is why it's important to pay close attention to expense ratios when selecting investment funds. While past performance and other factors are important, expense ratios should not be overlooked, as they can have a significant impact on the overall performance of an investment portfolio.
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