When you invest through a fund’s ETF the cost of buying and holding the fund is typically the largest driver for your annual returns; ETFs typically charge less in fees than standard mutual funds. The two options to fund performance.
The market is moving, but your fund manager is not.
There are many different fund managers that cover a wide range of companies in an efficient way.
So you have two options:
Buy a fund and expect your fund to have a similar performance to the best index fund, and/or
Buy an ETF and expect your ETF to provide you with the same return as the market.
Why are indexes so hard to value? It is not rocket science to figure out that the average value of the stock market is between 90–100%. As a result the price of the actual index is much higher than the actual value. Therefore every dollar invested in an index fund is worth far more than the annual expense ratio which is the difference between the actual value of the index and the average of the return of the individual funds that use it.
It does not sound good to get a high returns, then pay only a low expense ratio.
The index’s expense ratio often seems low. That is because it is! Many investors are too confident that because their fund is more than 2% lower in expenses than the benchmark, then they must be doing a good job.
Why is it so hard to value an index fund? Because you cannot know that the actual cost of an index fund is different from its cost of funds. It will take a long time to really tell this apart. Most investors are willing to settle for a 0.75% annual expense ratio but not be satisfied if they cannot get the same return as the benchmark index.
One way is to look closely at their fund’s performance across a broad market. That is easy to do for a fund which tracks a broad market which has a constant dividend/stock ratio (D/S). But what about a fund that tracks a narrow market which has a constant stock/Bond ratio?
The index’s expense ratio is a proxy for how cheap its benchmark outperforms its index.
If the expense ratio is high in the narrow-market fund you own, that means that you are overpaying for your index fund. On your investment plan you will be using this fact to evaluate the performance of all of your fund categories.
If the expense ratio in the narrow-market