Everyday investors make index funds cheaper

The ordinary investor doesn’t consider fees when weighing mutual and index funds.

This is a problem because as NerdWallet explains, these charges can dig deeply into your estimated returns over the course of your lifetime.

The most egregious of these fees, the expense ratio or investment fee, is charged by all funds and it is measured as a percentage of the total investment in the fund.  For instance, an index fund with a 1 percent expense ratio is up 6 percent at the end of the year.  They take out their fee and leave the investor with the 5 percent leftover return as their profit. Due to the way returns compound over time, the difference could add up to hundreds of thousands of dollars for even modest investors.

Typically, funds with the highest fees are those that are “actively managed” and attempt to beat the market and can sometimes offer a better return even with their fees.  More often than not, however, they fail to live up to expectations.

Fortunately, more and more people have figured out that fees are a significant threat to their returns. USA Today reports that people are beginning to take their money out of expensive mutual funds and move it into less expensive index funds. By speaking with their wallets, consumers have forced the industry to take a good look at how much they are charging in fees, and many are adjusting downward just to stay competitive.

In 2016, $63 of every $10,000 invested in stock mutual funds actually went towards fees. That figure was down from $67 in 2015 and $104 just two decades ago. This shows an apparent drop in fees over the years as more financial players enter the market and help to provide more options for consumers.

With more options, most people tend to go with the cheapest option, everything else being equal. Although companies must charge some amount of money to profit from their services, modern technology means that they are able to do so with much less overhead. All of this is a win for the average investor.