ETF and mutual fund expense ratios
As exchange-traded funds (or ETFs) continue to gain popularity on account of offering investors a low-cost alternative to many popular mutual funds, the case for ETFs remains strong.
Expense ratios for mutual funds are generally higher than ETFs’ expense ratios when we compare funds that own a similar category of investments. The average equity mutual fund charges between 1.3% and 1.5% in expense ratio, while the average equity ETF charges just 0.57%.
Comparing large-cap blend equities
- Are Vanguard products
- Belong to the large-cap blend equities category
- Track the S&P 500 index
- Invest in the 500 key large-cap U.S. firms, including names like Apple (AAPL), Exxon Mobil (XOM), and Google Inc. (GOOG)—these three stocks make up 7.39% of their portfolio
However, while VFINX has an expense ratio of 0.17%, VOO has an expense ratio of just 0.05%.
Considering an initial investment of $100,000 and taking the market average returns of 5% in each of these funds, the fund value would be:
The chart above clearly shows that the VOO ETF delivers higher value than the VFINX fund over time. Both ETFs are similar in every aspect, except for the expense ratio—which is substantially higher for VFINX. The above example deals with a $100,000 initial investment. For higher investments, the difference would of course be even more significant.