Average Expense Ratios for Mutual Funds

How to Know if Your Fund Has a Good Expense Ratio

wallet_money_low cost funds
Keep more of your money with low expense for mutual funds.. Getty Images

Comparing expense ratios is like comparing apples and oranges -- some types of funds will naturally have higher expense ratios than others. Therefore, when analyzing mutual funds, it's good to know the average expense ratio for the particular type of fund you are analyzing, then try to find the best funds that also have below-average expenses.

Average Expense Ratios By Fund Type

There are plenty of good mutual funds with below-average expense ratios to choose from in the universe.

Therefore don't settle for expensive when you can have inexpensive AND high quality! Here is a breakdown and comparison of average expense ratios for basic fund types:

Large-Cap Stock Funds: 1.25%
Mid-Cap Stock Funds: 1.35%
Small-Cap Stock Funds: 1.40%
Foreign Stock Funds: 1.50%
S&P 500 Index Funds: 0.15%
Bond Funds: 0.90%

Never buy a mutual fund with expense ratios higher than these! Notice that the average expenses change by fund category. The fundamental reason for this is that research costs for portfolio management are higher for certain niche areas, such as small-cap stocks and foreign stocks, where information is not as readily available compared to large domestic companies. Therefore the added research needed by the mutual fund analysts and managers will naturally drive the operation costs of the mutual fund higher.

Note: These averages are what I would call "close approximations" and were taken directly from my Morningstar mutual funds software.

You can also find similar numbers on most mutual fund research sites.

Index Funds Have Lower Expense Ratios

For the opposite reason, index funds have low expenses. Since they are passively managed, meaning the fund manager is only tracking the stocks or bond withing the fund's benchmark index, the fund's operational costs can be kept extremely low.

For example, an S&P 500 Index fund simply holds the same stocks within the index and therefore no research or analysis is required to find the stocks or bonds to buy for the fund, as is the case with actively-managed funds.

Most index funds will have expense ratios of around 0.20% or lower. Some Exchange Traded Funds, or ETFs, can have expense ratios even lower than index mutual funds.

With that said, the funds with the lowest expense ratios are not always the best. Therefore, when analyzing a mutual fund, the expense ratio is just one of several things to consider before you buy the fund.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

Continue Reading...