Actively managed funds continue to languish while low-cost index funds gobble up assets. By the end of 2016’s third quarter, outflows from pricey actively managed funds topped $200 billion, according to Bank of America data. And while full-year data for all funds isn’t available yet, Morningstar says investors took a record $19.3 billion out of BlackRock’s U.S.-based actively managed mutual funds last year.
That’s to the benefit of low-cost, passive index funds — especially exchange-traded funds (ETFs). At the end of November, assets under management for ETFs listed around the world topped a record $3.44 trillion — up from $1.3 trillion just six years ago!
Fees are one of the most pivotal drivers of the migration to passive products. The average expense ratios for U.S. equity and fixed income ETFs are 0.41% and 0.28% per year, respectively. The average fees for actively managed equity and bond funds are more than triple in both cases.
What does that mean? An investor paying 0.41% is paying $41 annually on every $10,000 they have invested. Let’s say you’re even paying double that, at 0.82%. That’s $82 annually. Doesn’t sound like a lot, sure, but consider that $10,000 invested in the cheaper fund will become $67,295 with a 7% rate of return over 30 years. The more expensive fund will come in at $59,462 — so that’s nearly $8,000 lost to fees and opportunity cost!
Investors looking to make broad bets on various parts of the market can do so for a song thanks to cheap indexing. Today, then, we’ll look at some of the best low-cost index funds to buy now.