When you invest in a mutual fund or ETF, the fund company charges you a fee for managing that basket of stocks or bonds. These expenses are taken out via small reductions in the funds’ net asset value (NAV), and while the numbers can seem small they will compound quietly and relentlessly over time. Here are two illustrations from the Vanguard website:
Each percentage point in an expense ratio represents an annual charge of $100 against every $10,000 you invest in that fund. In other words, if you have $10,000 in a hypothetical fund with a 0.50% expense ratio, you’re charged $50 each year. So, a 0.15% expense reduction would save you $15, while a 0.15% increase would cost you an extra $15.
Vanguard consistently drops what they charge to investors as their own costs drop. I’m using this post to keep track of their 2014 expense ratio change announcements, highlighting the more popular index funds that I watch for use in my own portfolio.
|Fund Name||Expense Ratio (Jan 2014)||New Expense Ratio (Feb 2014)|
|Total International Stock ETF (VXUS)||0.16%||0.14%|
|FTSE Emerging Markets ETF (VWO)||0.18%||0.15%|
|Total World Stock ETF (VT)||0.19%||0.18%|
|Global ex-U.S. Real Estate ETF (VNQI)||0.32%||0.27%|
|FTSE All-World ex-US Small-Cap ETF (VSS)||0.25%||0.20%|
|Total US Stock ETF (VTI)||0.05%||0.05% (nc)|
|REIT ETF (VNQ)||0.10%||0.10% (nc)|
Also note that ETF expense ratios usually match the Admiral shares of the respective mutual fund.