When Lipper Inc. conducted its survey of mutual fund expenses as compared to previous years, the firm found that fees for passively managed funds actually fell significantly from 2007 levels. The report, which also found that actively managed fund's expense ratio increased slightly from the previous levels (from an average of -.93% to 0,94%), it was lower cost of index funds (including ETFs - exchange traded funds) that caught everyone's attention.
According to Sue Asci at InvestmentNews.com: "The expense ratio of the average actively managed mutual fund dropped to 0.712% in 2008 from 0.748% in 2007" leading to the savings of "$3 billion less than they would have paid compared with 2007 expense levels." These fees have fallen for four straight years.
It should also be noted that the inclusion and explosion of ETFs in the report were the main drivers of this lower cost. It is a sad statement and one every investor should be wary of: not all indexes are created equally. In a previous post on the costs that index funds charge, I noted that what you pay depends largely on how much you are willing to commit to the purchase. Many fund families charge much higher fees for those with little to invest.
On the other hand, the case I have been making for years on where to put index funds presents another problem. I have suggested on numerous occasions that index funds are best kept outside of retirement accounts that defer taxes. The thinking is that these tax efficient funds and current capital gains rate are worth taking advantage of rather than putting off the payment of those taxes to the future.
That said, actively managed funds, the higher cost and less tax efficient (due to increased trading costs, research and managerial fees) should kept inside tax deferred accounts. This raises the risk question, something that is on everyone's mind these days.
We should be far more risky in these accounts that we seem to be (in light of the stock market drop-off we have recently experienced). The only way to reap reward over the long-term is with risk and although that risk comes with a cost, I really believe that reward is to take the chance.
The report also predicts that increased competition in the index fund arena will keep costs lower than in previous years and that actively managed funds are likely to increase (repositioning of funds increases trading costs, 12b-1 fees, used to advertise the fund and lure investors back into these investments will likely increase, and the fees managers charge compared to successes of those funds are likely to seem greater than they would had the fund been on a long-term roll).
And while we are looking for the lowest cost when we come to investing, the rewards that accompany that lower cost may be just as low as the fees you pay. I'm banking on the old adage: "you get what you pay for"