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Investors Leading a Low Cost Revolution

Shopping around can save you money at the grocery store, the car dealership, and perhaps most importantly, in your investment portfolio. More investors than ever realize that one of the keys to a successful investment experience is managing costs. Need evidence? Mutual fund expense ratios—the annual charges paid to cover management fees as well as the administrative costs of operating a fund—have been coming down, with the average expense ratio falling 29% over the last 14 years, according to industry trade group the Investment Company Institute.[1] Another study by Morningstar noted even more substantial savings—a 27% drop in fees for funds and ETFs over the last 10 years.[2]

A closer look at the expense decline suggests that it is investors pushing costs lower rather than investment companies becoming more shareholder friendly. In 2013, investors directed 95% of mutual fund inflows into funds whose fees were in the lowest 20% of their categories, according to Morningstar. That’s a dramatic shift from the 1990s, when a mere 56% of inflows went to the cheapest group of funds.[3]

The lowest-cost investment options are also most likely the best-performing ones—a concept clearly understood by today’s investors. As economist Mark Carhart noted in a 1997 study on mutual fund performance, “persistent differences in mutual fund expenses and transaction costs explain almost all of the predictability in mutual fund returns.”[4]

More and more investors are adopting the gospel of Vanguard founder Jack Bogle and making cost a priority. The growth of the Internet and ubiquity of social media has effectively communicated the cost message to millions of investors. The millennials, who came of age during two of the most damaging bear markets in history (2000-2002, and 2008-2009), and seamlessly compare prices for nearly everything online, are gravitating toward the most cost-effective means of gaining investment exposure.

A low return environment has also elevated the importance of costs. During the lost decade from 2000 to 2009, the S&P 500 delivered a total return of -9.1% —its worst ever 10-year performance.[5] Annual expenses of 1.0%, for example, would have left investors with even worse declines. While no one can control the vicissitudes of the capital markets, you can control what you pay to participate in those markets.

Folio Investing realizes the drag that investment expenses present. The company was founded on the premise of providing investors a transparent, low-cost alternative for building wealth through customized baskets of securities called folios. We minimize costs as much as possible by offering folios as a no-fee alternative to funds and ETFs—although you can use funds and ETFs in your folios to access bond, commodity, and index investments. Even our Ready-To-Go Folios are free—the only expenses are those imposed by any underlying funds or ETFs. We also provide access to an unlimited number of Folio accounts and trades[6] for a single flat fee. Now in the seventh year of the current bull market, return expectations for stocks have been pared back—making cost control more crucial than ever.

 

[1] Investment Company Institute. “2015 Investment Company Fact Book: Mutual Fund Expenses and Fees.”

[2] New York Times. “Fees on Mutual Funds Fall. Thank Yourself.” May 9, 2015

[3] BenefitsPro.com. “Decline in Mutual Fund Expense Ratios Helping Savers.” May 20, 2014

[4] The Journal of Finance. “On Persistence in Mutual Fund Performance.” March, 1997.

[5] Investopedia. “Definition of Lost Decade.”

[6] For up to 2,000 security trades in windows per calendar month under our Folio Unlimited Plan; fifty cent ($0.50) fee for each additional security trade in a window during that month.

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