Annual Fee that is charged on all funds or exchange traded funds (mutual/index). The amount is typically a percentage of all assets in the fund. The fee covers the cost of things such as administration, compliance, distribution, management, marketing, shareholder services, and record-keeping. The average fee for a managed account can be .5%-1%. Index funds are usually lower with an average of .2% and can be as low as .04%.
Example:
Return: 6%
Annual Investment: $500/Month
Expense Ratio (Managed Fund): .54%
Expense Ratio (Index Fund): .04%
After 30 years of investing:
Managed Fund Amount: $434,000
Index Fund Amount: $474,000
Difference: $40,000
Summary: Assuming the same return on investment an index fund will provide you with an additional $40,000!
Follow-up: Index funds have historically outperformed a majority of managed funds!
