Apr 30th, 2008
Why Costs Matter: A Fund Comparison
It’s been said time and time again; when investing, costs matter. Costs (many different types, such as loads, expense ratios, and commissions) all eat into your bottom line. It’s for this very reason that I recommend discount brokers, no load funds, and passively managed index funds with low expense ratios. All of these things keep your costs low and, additionally, keep your taxes low if the funds are held in a taxable account. But how much do they really matter?
Let’s compare a couple of funds that track the same index, both low cost and no load, and see what the difference is: the T. Rowe Price Equity Index Fund (PREIX) and the Vanguard Index Trust 500 (VFINX). Both of these funds track the S&P 500 index. If you take a look at the two, their performance over the years seems to be essentially identical. Their yields are close, although Vanguard beats out T. Rowe Price slightly in this regard (2.09% vs. 1.83%). But where the Vanguard fund really shines is in its expense ratio: 0.15% vs. 0.35%. The T. Rowe Price fund’s expense ratio is more than twice as much!
That said, the T. Rowe Price fund is a fine fund from a fine fund family (and in fact, I own a T. Rowe Price fund, so it’s not like I don’t like them). In fact, a bigger difference that is really telling is that using Yahoo Finance, funds of this type average an expense ratio of 1.11%. 1.11% for an S&P 500 index fund is ridiculous! The Vanguard fund is 1/7 the cost, and the T. Rowe Price fund 1/3 the cost. While these may not seem to be a big deal now, when your account starts hitting six and seven figure amounts, these costs can make a huge difference.
Why pay more if you don’t get more? Just remember this: when comparing funds, costs always matter, and low is better.
Indeed, it only really makes sense if you’re getting fantastic results which make up for the fees. But it’s hard to guarantee that.
Anyway, if I’m going to invest in the same fund, I might as well get the most for my money.
Ah yes, I HOPE to be in the six or seven figure club one day!