What Are They And Why Are They Important?

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When it comes to investing, you’ve likely heard the arguments for putting your hard-earned money into exchange-traded funds (ETFs) or mutual funds to diversify your portfolio or to allocate more of your portfolio toward conservative investments like bonds as you age . Before you begin the investing process and siphon away thousands of dollars for retirement or other future financial goals, there’s one term you should absolutely familiarize yourself with: expense ratios.

Expense ratios can eat away at your investment earnings, so it’s important to know what they are and how they work. Below, Select takes a look at what expense ratios are, why they’re important and how they can vary by fund type.

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Defining expense ratios

Expense Ratios

Expense Ratio net fee Net earnings after 30 years
0.6 $53,949.86 $451,415.35
0.5 $45,419.06 $459,946.15
0.3 $27,816.33 $477,548.88

Actively vs. passively managed funds

Investing on your own

Vanguard

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll

  • fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)

  • Bonuses

  • Investment vehicles

    Robo advisor: Vanguard Digital Advisor® GONNA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading other: Vanguard 529 Plan

  • Investment options

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    Retirement planning tools

For investors who prefer a more hands-off approach, robo-advisors can be a good choice since they use an algorithm to curate your investment portfolio, periodically buying and selling investments based on your personal financial goals. Robo-advisors typically charge a management fee, which, like an expense ratio, is represented as a percentage.

For example, having an annual management fee of 0.25% means you’ll have to pay the robo-advisor company $25 for managing $10,000 of investments. Keep in mind that this fee is charged on top of the expense ratio you’ll have to pay for each fund you’re invested in. Select ranked Betterment and Wealthfront as the best robo-advisor services.

Wealthfront

On Wealthfront’s secure site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

  • Bonuses

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial planning for college planning, retirement and homebuying

bottom line

Publisher Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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