Minimize Your Investment Management Costs with Exchange Traded Funds - dummies

Minimize Your Investment Management Costs with Exchange Traded Funds

By Russell Wild

Most exchange traded funds (ETFs) are cheap, which is one of the things you will love about them. The difference between a typical mutual fund that charges 1.4 percent and a typical ETF that charges 0.2 percent adds up to a lot of money over time.

MoneyChimp, a very good financial website, offers a fund-cost calculator. Invest $100,000 for 20 years at 8 percent and deduct 0.2 for expenses; you’re left with $449,133. Deduct 1.4 percent, and you’re left with $359,041. That’s a difference of about $90,000. The after-tax difference, given that most ETFs are highly tax-efficient index funds, would likely be much greater.

Because the vast majority of ETFs fall into the super-cheap to cheap range (generally 0.1 to 0.5 percent), the differences among ETFs won’t be quite so huge. Still, in picking and choosing ETFs, cost should always be a factor.

Of course, with ETFs, you often pay a small trading fee every time you buy and sell. That too should be examined and minimized. Do all your trading online, and choose a brokerage house that gives you the best deal. If you’re going to make frequent buys and sells, either choose ETFs that you can trade commission-free, or opt instead to build your portfolio with mostly low cost, no-load index mutual funds.