Average Expense Ratios for Mutual Funds
How to Know if Your Fund Has a Good Expense Ratio
The expense ratio is one of the most important qualities smart investors analyze with mutual funds and exchange-traded funds (ETFs). Generally, lower expense ratios translate into higher potential returns, especially for long-term investors. Therefore, buying funds with below-average expense ratios is a wise strategy.
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 funds when you can have inexpensive funds AND high quality!
Here is a breakdown and comparison of average expense ratios for basic fund types:
Large-Cap Stock Funds: 1.00%
Mid-Cap Stock Funds: 1.10%
Small-Cap Stock Funds: 1.20%
Foreign Stock Funds: 1.25%
S&P 500 Index Funds: 0.15%
Bond Funds: 0.75%
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 the research costs for portfolio management are higher for certain types of mutual funds or ETFs.
For certain niche areas, such as small-cap stocks and foreign stocks, information is not as readily available compared to large domestic companies. Therefore, the added research required by the mutual fund analysts and managers will naturally drive the operation costs of the mutual fund higher.
Note: These averages are what an investment adviser might call "close approximations" and were taken directly from Morningstar. You can also find similar numbers on most mutual fund research sites. So, when researching mutual funds or ETFs, be sure to compare expense ratios to other funds and to the respective category averages.
Index Funds Have Low Expense Ratios
Index funds and ETFs generally have lower expenses, compared to actively-managed funds. Most index funds will have expense ratios of around 0.20% or lower. Some ETFs have expense ratios even lower than index mutual funds.
Since they are passively managed, meaning the fund manager is only tracking the stocks or bond withing the fund's benchmark index, an index fund's operational costs can be kept extremely low. For example, an S&P 500 index fund simply holds the same stocks that are in the S&P 500 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.
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. For more information and details, see our article, Mutual Funds: 10 Things to Analyze and 3 Things to Ignore.
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.