If You Want To Invest In An ETF Or A Mutual Fund, Be Sure To Understand This Term
- 3 years ago
Mutual funds and exchange-traded funds, or ETFs, are valuable parts of a long-term investment stock portfolio.
Managed by professionals, they allow you to buy into companies and securities that you may not have been able to on your own.
But while both mutual funds and ETFs are considered low-cost investment products, they do cost money.
So before you sign up for any of them, the most important thing to look at is the expense ratio--an umbrella term that covers all sorts of costs and fees.
It's usually a percentage of the annual net assets in the fund and is deducted directly from the fund's gross assets.
Even a small difference in a fund's expense ratios can result in significantly more fees paid or saved over time.
For example, take $20,000 invested for twenty years at a 5% rate of annual, compounded growth.
A fund with an expense ratio of 0.25% would return $50,595 at the end of twenty years. But a fund with an expense ratio of 1% would return just $43,822!
Managed by professionals, they allow you to buy into companies and securities that you may not have been able to on your own.
But while both mutual funds and ETFs are considered low-cost investment products, they do cost money.
So before you sign up for any of them, the most important thing to look at is the expense ratio--an umbrella term that covers all sorts of costs and fees.
It's usually a percentage of the annual net assets in the fund and is deducted directly from the fund's gross assets.
Even a small difference in a fund's expense ratios can result in significantly more fees paid or saved over time.
For example, take $20,000 invested for twenty years at a 5% rate of annual, compounded growth.
A fund with an expense ratio of 0.25% would return $50,595 at the end of twenty years. But a fund with an expense ratio of 1% would return just $43,822!