As religions go, the low-fee religion is a pretty good one, dramatically raising returns for investors who stick with it for decades.
But it pays to take a reality check once in a while, else a religion turn into a damaging cult. When it comes to fees, returns, tax rates and other numbers, it is best not to get obsessive over tiny differences.
The brokerage firm Charles Schwab (Stock Quote: SCHW) recently announced cuts on expense ratios for six of its eight exchange-traded funds, making them the cheapest in the industry in their categories.
Just about any fee cut is good for investors, and Schwab customers will certainly benefit. But by how much?
For the Schwab U.S. Broad Market ETF (Stock Quote: SCHB) the annual expense ratio will fall to 0.06% from 0.08%. An investor with $10,000 in the fund will therefore pay $6 in annual fees instead of $8. Investing that extra $2 a year isn’t going to produce much, even if it compounds for decades.
Of course, the more important question is how the fund’s fees compare to those of comparable funds. The Schwab fund, basically tracking all U.S. stocks, competes with the Vanguard Total Stock Market ETF (Stock Quote: VTI), which has a 0.07% expense ratio. So the investor with $10,000 could save $1 a year choosing Schwab over the Vanguard Group.
Schwab obviously gets bragging rights to the lowest fees in the industry, which should be helpful in marketing.
But with a difference this miniscule, investors should focus on other issues. Unfortunately, the relatively new Schwab fund does not have three- and five-year return data to compare with Vanguard’s. In other cases, those figures would certainly be worth looking at. And investors should zero in on the after-tax returns reported by Morningstar Inc. (Stock Quote: MORN), the fund-data company. It’s under the “tax” tab on each fund’s home page.
If all things are equal, or so close as to be virtually equal, there’s nothing wrong with choosing one on the basis of convenience. If you already have an account with one firm, it might be nicer to get one set of statements instead of two. Or maybe you’d find one firm easier to deal with.
Keep in mind that many financial services companies offer more benefits to investors with larger portfolios. Consolidating assets with one firm could therefore earn you free financial advice, a quicker phone response or other perks. Though fees may be the same on two firms’ funds, there may be other fees worth considering, such as low-balance fees, or annual account maintenance charges.
Also, whenever you are offered an exceptionally low fee or fee waiver, find out whether it’s permanent.
And look into other limitations. Some mutual funds, for instance, impose redemption fees when money is taken out soon after it is invested.
Finally, when looking at ETFs, consider trading commissions. Some firms, such as Schwab, Vanguard and Fidelity Investments, waive commissions for customers trading house-brand ETFs. That could be an important consideration if you trade frequently, much more important than saving a few bucks a year on the expense ratio.
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