According to Jonathan Clements, index mutual funds with low fees are gaining popularity and attracting more investors who are trying to get the most for their money.
This is driving more fund companies to lower their fees to compete. Fidelity, as mentioned in the article, has capped its index fund expenses at 0.1%.
Suppose you have a $200,000 portfolio and you shift to lower-cost funds, cutting your annual fund expenses to 0.5% from 1.5%. If all funds earn the same 7% a year before costs, your new portfolio would balloon to $700,000 after 20 years, versus less than $600,000 if you had stuck with the higher-cost funds.
That’s a solid argument to me. But what’s going to happen when fund companies are not earning as much as they used to, even while cutting their own expenses? It will be time to start looking for new hidden fees silently appearing under the radar.
Updated April 10, 2008 and originally published July 19, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.