Like TVs, Mutual Funds are Getting Cheaper. Here's Why:
September 30, 2019
By Tom Limoges
Assistant Vice President - Investments
Advances in technology are great for consumers. As technologies and processes improve, production costs lower and in turn so does the retail price of the item. Nowhere is this more evident than in the flat-screen television market.
Over the last 20 years, televisions have become thinner — and so have their retail prices. When I first started my career at SNB back in 2002, the average cost for a standard 40 to 42-inch flat panel TV was somewhere north of $2,500. A recent internet search reveals the same style of TV (now about one-third as thick) costs around $200.
In the investment world, we have seen a similar trend in the costs associated with investment options like mutual funds.
Actively Managed Mutual Funds are More Affordable
An expense ratio is a way to measure the cost that a company charges you to manage a particular mutual fund or exchange traded fund (ETF). For instance, if a mutual fund charges a 1 percent expense ratio, the annual cost of ownership would be $10 for every $1,000 you have invested.
As the chart above indicates, the average mutual fund expense has been falling steadily over the past two decades. Like lower technology costs, cheaper fund costs are a good thing for the consumer. Over time, improvements in technology, scale, and competition have all led to declining fund costs for investors.
One of the major sources of competition within the mutual fund industry has been a growing investor preference for index funds. What are index funds? Index funds are mutual funds that are managed to replicate the holdings of a particular investment index. For example, one of the largest indexes is the S&P 500 – holding the largest 500 US stocks.
Index Funds vs. Actively Managed Mutual Funds
Index funds are different from actively managed mutual funds. In an actively managed mutual fund, you may be invested in similar companies to an index fund, but still have the ability to adjust your weightings and holdings based on a belief that the fund, through selection and weighting, can outperform a particular index.
By design, index funds are lower in expense when compared to actively managed funds. However, actively managed funds can also have low costs, depending on the share class in which you're invested. Both low cost active and passive funds have attracted more investor dollars in recent years – as indicated by the chart below. As a result, competition has pushed funds to introduce new lower cost share classes.
With the amount of changes that are occurring in the investment world, how do customers know which mutual funds are the most cost-effective and high performing? No consumer wants to feel “buyer’s remorse” when they see a new flat screen TV on sale for half the price that they paid last month.
At Security National Wealth Management, we pay close attention to fund expenses for our clients and work with the mutual fund companies to ensure our clients are given the most appropriate and lowest cost fund available. So settle into your couch, grab the remote and flip the Netflix on your flat screen TV with peace of mind, knowing that your fund fees aren’t going to give you buyer’s remorse.