Advantage ETFs

I saw this posted over at Meb Faber's twitter feed and the info seems to have come to him via Morgan Stanley.  What this is showing is the difference in fees charged by Exchange Traded Funds {ETFs} vs. Mutual Funds.  As you can see the average cost advantage of ETFs  compared to mutual funds is one of their significant investment advantages.  The money saved in fees to you is money you have to invest.  It can add up over time.  Paying an extra $100 in fees each year is a $1,000 you don't have after a decade.  

First though let me tell you what you're viewing using the first line under ETFs as an example.   Under US Equity we see that the expense ratio {the fee charged by the management firm to basically run the ETF} can be as little as 3 basis points {bps} to a high of 308 bps.  The average is 40 bps but since the ETF world is dominated by a few very large players it is probably better to take a look at the weighted average column produced above.  On US Equity the weighted average is 16 bps.  

Now simply compare that weighted average column to the of for actively managed open-end mutual funds and the average is 130 bps or the passive indexed funds where the average is still 101.  Basically on a $10,000 investment where there is a strong possibility you will find similarly invested funds you are looking at paying $16 on average in fees in an ETF versus an average $101in a passively managed mutual fund or $130 in an actively managed fund.  Also remember that many mutual funds are closet indexers anyway.

You can follow this cost comparison down by each category and there seems to be no group where mutual funds hold the cost advantage. Also note that most mutual funds haven't outperformed their investment benchmarks in years!

Back Monday.