What is the Highest Expense Ratio You Pay On the Mutual Funds You Own? Plus a Comparison With the National Average

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Several months ago, I posted the following poll on the top left of the sidebar on My Personal Finance Journey for readers to respond to:

What is the highest mutual fund expense fee/ratio you pay on the funds you own?


There was a great response to this question, and it was very interesting to learn about you all’s fund-buying tendencies. Shown on the pie chart below is a break-down of the responses that were received broken down in to 7 expense ratio fee categories.

Overall, it was great to see that the expense ratio category that received the largest number of responses was the 0.1% or less category. This is great news! This means that most of you all, like me, have chosen to resist active mutual fund management and instead invest the smart way (passive investing) by using index mutual funds or ETFs! In fact, almost 1/2 of all of the votes received indicated that people paid less than 0.5% as the highest expense ratio for their mutual funds. Wonderful!

Comparison with the Rest of the United States – Average Mutual Fund Expense Ratios


As I always like to do when I analyze the result of polls here on My Personal Finance Journey, I figured it would be interesting to see how the responses compare to the current mutual fund expense ratio averages seen in the United States. 
According to the Investment Company Institute in a study published on April 23, 2012, the average mutual fund expense ratio paid by US investors in 2011 was 0.79%, or 79 basis points. 
Taking this in to consideration, the pie chart below shows how the MPFJ reader responses compare to this 0.79% average. As you can see, 62% of the readers on MPFJ pay less than the national average. Again, this is great news! 

However, there was 38% of the reader responses that indicated paying over this national average. What this indicates is that there is still a very significant opportunity for people to save money by selecting different mutual funds in order to minimize their costs.

But, Isn’t Paying a Higher Mutual Fund Expense Ratio (Above 0.79%) Worth it if the Fund Has Outperformed the Market for the Last X Number of Years?

In short, the answer to this question is unfortunately ‘no.’ 

Higher expense ratios or front-end/back-end sales loads are often rationalized by actively managed mutual funds as being ‘worth it’ because the fund has outperformed the market in the last X number of years by X%.   Examples of this include the American Growth Mutual Fund and the CGM Focus Fund.

While this train of logic sounds good (after all, in most other professions, if someone has performed well in the past, you’d expect good performance going forward), it has been proven time and time again in nearly every investing book I have read that this logic simply doesn’t work in the investing world because there are too many external variables that the fund manager cannot control.

For more reading on this, I’d recommend reading A Random Walk Down Wall Street, What Wall Street Doesn’t Want You to Know, or Stocks for the Long Run by Burton Malkiel, Larry Swedroe, and Jeremy Siegel, respectively.

But, the good news is that there is a simple way to avoid paying these high costs for mutual funds – using passively managed index mutual funds or ETFs. For example, the average expense ratio of all Vanguard mutual funds is only 0.20%, with Vanguard index funds having an average expense ratio of only 0.16%. By selecting any of these types of funds, you can save yourself and your family big money and allow your long-term savings to compound more quickly.

How about you all? What is the highest mutual fund expense ratio you pay on the funds you own? Is it above or below the national US average expense ratio of 0.79%?


Do you typically employ active management or passive management in your mutual fund selection? Why do you choose one or the other? 


Share your experiences by commenting below!

Comments

  1. The highest expense ratio I currently pay is about 0.80%, which is for an emerging market fund. It is semi-actively managed, but it also incurs higher fees due to trading in emerging exchanges.
    My recent post Disaster-Proof Your Household Finances

    • Thanks for sharing Robert! I just looked, and the index fund I have with Vanguard for their emerging markets fund has a 0.3% expense ratio, but then again, it is passively managed so it makes sense for it to be lower. Who operates the fund that you have?
      My recent post Saving Money on Your Health Insurance

  2. investlike1percent says:

    how sad is that there is no correlation between expense ratio and irr. dont mind paying if it meant, we got more for our money.

    why do high expense funds exists?

    • That's a good question, and one that I ask myself a lot. I think one answer is that with most things in life, the more work/expertise someone puts in to something, the more success will be incurred. However, that doesn't seem to be the way it works in investing.
      My recent post Saving Money on Your Health Insurance

  3. Tie the Money Knot says:

    I really like index funds, personally. I'm sure some actively managed funds can be great investments in some years, and could be a good fit for some folks. To me, index funds and keeping expenses low is a nice way to go.
    My recent post Are Separate Accounts for Spouses a Fallacy?

  4. @TekGems says:

    I pay 0.19% for VFORX: https://personal.vanguard.com/us/funds/snapshot?F

    I think you’re better off being a professional poker player than being an active investor. At least with poker, you can really keep track of your record. With active investor, they can just dump the 20% that do not perform and make their performers look even better. I’ve lost trust in an already murky area when it comes to active management.

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