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INDICE WE TRUST

indice_we_trustIf you own a mutual fund you may be bleeding from big fees and weak performance. Stock mutual funds charge anywhere from 1.00%-3.00% in management fees and bond mutual funds charge from 0.50% to 1.25% in management fees. While these funds are professionally managed, only 30% beat the overall market in any given year. More and more Americans are now discovering index funds. Index funds or electronically traded funds (ETFs) mirror the a stock market index such as the S&P 500 (most popular). The index fund holds shares of all the stocks in the index. Therefore, however the market goes is how your investment goes. Since you essentially own a sliver of all the companies in the index fund you get diversification. The real kicker is the fees for an index fund generally run from 0.05% to 0.30%. Assuming you are paying a 2.00% management fee for a stock mutual fund, and comparing it with an index fund charging you 0.10%, the difference is HUGE. For example, if you invest $100,000 into a mutual fund charging you a 2.00% annual fee, you will pay $2,000 annually. By contrast, if you invest $100,000 into an index fund charging a 0.10% annual fee, you will pay $100 annually.

Over the long-term a stock mutual fund can cost you thousands of dollars. Furthermore, a stock or bond mutual fund is a “crap shoot” as 70% deliver at or below market results. By contrast an index fund delivers 100% of the market at a super low rate and gives you a “set it and forget” investment strategy.

Another slam against equity or stock or bond mutual funds is the fact that you pay the management or expense fees regardless of the performance. For example, the Oppenheimer Commodity Strategy Total Return Fund delivered a five-year annualized return of -14.61% and has an expense ratio (management fees) of 2.12%. Another example, the Rydex Inverse Government Long Bond Strategy Fund delivered a -13.70% five-year annualized return with an expense ratio of 2.40%. Yet another, Ivy Global Natural Resources Fund produced a -12.60%% five-year annualized return with a 2.20% expense ratio. Pity the poor saps who poured money into these mutual funds. To see the performance of other mutual funds visit www.nerdwallet.com.

When it comes to ETFs or index funds, the costs are incredibly low as mentioned above. For example the SPDR S7P 500 ETF has a 0.09% annual fee. This means if you invest $100,000 you will pay an annual fee of just $90. Another example is PowerShares QQQ Trust which charges a 0.20% annual fee and iShares Russell 2000 ETF which charges a 0.25% annual fee. Vanguard is another great source of index funds and they charge a 0.10% annual fee for all their funds.

If you are still not convinced that an index mutual fund is the way to go consider that Warren Buffett, John Bogle and Charles Schwab all personally love index mutual funds or ETFs. Join millions of other investors who say “Indice We Trust.”

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