WalletPrep

PrintBack to the lesson

WalletPrep worksheet · Investing

What is a good expense ratio?

Name ____________________ Date __________

Key ideas

  1. Fee in dollars equals balance times the ratio. $40,000 × 0.85% = $340 a year. $40,000 × 0.04% = $16 a year. The gap grows as the balance grows.
  2. Under 0.10% is low for index funds. Many broad stock and bond index funds charge this little. Specialty and actively managed funds usually charge more.
  3. The fee is charged in good and bad years. Returns can be negative. The fee never is, so it is one of the few parts of investing you control.

Vocabulary

Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Expense ratio
The yearly fee a fund charges, shown as a percentage of what you have invested in it. It comes out of the fund automatically.
Mutual fund
A fund that pools money from many investors to buy stocks, bonds or other assets, priced once a day after the market closes.
ETF
Exchange-traded fund: a basket of investments that trades on a stock exchange throughout the day, like a single stock.

Work it out

Marco, 40, has $40,000 in an old 401(k) fund charging 0.85%. He could move it to an index fund charging 0.04%. He leaves it alone for 25 years. Assume 7% a year before fees.

  1. Yearly fee at 0.85%
  2. Yearly fee at 0.04%
  3. Extra cost in year one
  4. After 25 years at 0.04%
  5. After 25 years at 0.85%
  6. What the higher fee costs

Check yourself

  1. You have $25,000 in a fund with a 0.60% expense ratio. About how much do you pay in fees each year?

    • A. $15
    • B. $60
    • C. $150
    • D. $600

  2. Which expense ratio is lowest for a broad US stock index fund?

    • A. 0.03%
    • B. 0.45%
    • C. 1.10%

  3. A fund shows a gross expense ratio of 0.40% and a net expense ratio of 0.25%. What do you pay right now?

    • A. 0.40%
    • B. 0.65%
    • C. 0.25%
    • D. Nothing until you sell

Your turn

Log in to your 401(k) or IRA and write down each fund you own, its balance and its expense ratio. Multiply each balance by its ratio and add them up. That total is what you pay in fund fees each year.

www.walletprep.com/learn/expense-ratios/ · Free to print, copy and share for non-commercial classroom use.

Answer key

What is a good expense ratio?

Work it out

  1. Yearly fee at 0.85%$340
  2. Yearly fee at 0.04%− $16
  3. Extra cost in year one= $324
  4. After 25 years at 0.04%$226,751
  5. After 25 years at 0.85%− $185,388
  6. What the higher fee costs= $41,363
  1. Year one fees: $40,000 × 0.85% = $340, and $40,000 × 0.04% = $16. The gap is $340 − $16 = $324.
  2. After fees, the return is 7% − 0.04% = 6.96% versus 7% − 0.85% = 6.15%. Grown monthly for 25 years, $40,000 becomes $226,751 versus $185,388.
  3. $226,751 − $185,388 = $41,363. Real returns vary and can be negative, but the fee gap applies every single year.

Check yourself

  1. C. $150 $25,000 × 0.60% = $25,000 × 0.006 = $150 a year.
  2. A. 0.03% 0.03% is $3 a year per $10,000. Many broad index funds charge under 0.10%.
  3. C. 0.25% The net ratio is what you pay after a fee waiver. Waivers can end, so the fee could rise toward the gross figure later.