Low-cost mutual funds - Why costs matter | Vanguard (2024)

FAQs

What is a low-cost mutual fund? ›

Low-cost index funds are an inexpensive way for people to build a diversified investment portfolio. These funds are suitable for both new and experienced investors, and the best low-cost index funds allow you to meet your investment goals while aligning with your risk tolerance and investment time horizon.

Funds typically pay their regular and recurring, fund-wide operating expenses out of fund assets, rather than by imposing separate fees and charges directly on investors. (Keep in mind, however, that because these expenses are paid out of fund assets, investors are paying them indirectly.)

Index funds hold investments until the index itself changes (which doesn't happen very often), so they also have lower transaction costs. Those lower costs can make a big difference in your returns, especially over the long haul.

Mutual funds incur two types of fees: sales charges (or sales commissions) and management fees. Sales charges are the fees charged to individual investors when they buy and sell mutual funds shares (these fees are generally called loads). Management fees are the fees payable by the fund to the fund's service providers.

The lowest-cost index fund may not be the best performing index fund. Be sure to weigh other factors such as market capitalization and sector focus when evaluating index funds. It's also important to remember that past performance does not indicate future performance.

Low-cost index funds are pooled investments with low expense ratios or annual management fees.

Mutual fund expense ratios are typically between 0.25% and 1% of your investment in the fund per year. Actively managed funds are usually more expensive than passively managed funds. Index funds and exchange-traded funds are typically the cheapest funds.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are typically lower than what you would pay as an individual investor.

Most index funds and a small group of actively managed funds don't charge a load. No-load index funds are the most cost efficient mutual funds to buy because they have smaller operating costs.

How do index funds work? Index funds don't try to beat the market, or earn higher returns compared to market averages. Instead, these funds try to be the market — by buying stocks of every firm listed on a market index to match the performance of the index as a whole.

Do mutual funds have a lower cost than index funds? ›

Because they don't require active management, the fees and the expense ratios of index funds tend to be lower, which means they can often outperform higher-cost funds, even without beating them.

Mutual funds allow investors to dollar-cost average over time and reinvest dividends, enabling compound growth. However, taxes on capital gains distributions and dividends can make them less tax-efficient. While mutual funds provide diversification, they still carry market risk based on the underlying securities.

High and Low Ratios

A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.

All mutual funds charge fees and expenses, some of which you pay directly (like sales charges and redemption fees) and others that come out of the fund's assets (to pay for such things as managing the fund's portfolio, or marketing and distribution).

Vanguard S&P 500 ETF (VOO)

Expense ratio: 0.03 percent. That means every $10,000 invested would cost $3 annually. Who is it good for?: Great for investors looking for a broadly diversified index fund at a low cost to serve as a core holding in their portfolio.

Costs, fees & minimums. See how Vanguard's low-cost approach can help you make the most of your money. You'll never pay a commission to buy or sell Vanguard mutual funds or ETFs in your Vanguard accounts.

The biggest difference between them is that ETFs trade intraday at various prices during exchange hours and index mutual funds can be bought or sold only after the market closes each day, at a fund's net asset value.