Ask An Expert: Can I Just Ignore The Net Expense Ratio?

Here’s a question we recently got from Michael F. down in Texas.

There are already so many numbers to pay attention to when picking a good investment. Do I really need to care about a fund’s net expense ratio?

First of all, this is a great question. Second, I hear you. With so many percentages and ratios to analyze, comparing funds or picking one to buy can feel extremely overwhelming — especially for new investors.

But when you’re looking at funds, it’s important to consider the net expense ratio because it will directly affect your profits.

But I’m getting ahead of myself. First, let me explain what the net expense ratio is and what you should specifically look for when evaluating one.

What Is A Net Expense Ratio?

The net expense ratio is fancy way of saying “annual fee for owning this fund.”

That’s right; almost all funds — from actively managed mutual funds to passive ETFs — charge investors an ownership fee, usually a small percentage of a fund’s price, that is used to cover the fund’s operating expenses over a given period, typically a year.

The net expense ratio includes various costs, such as management fees, administrative expenses, and other operational costs, and it’s automatically deducted when you make your purchase.

You can find a fund’s net expense ratio by visiting the fund’s website or by looking it up on a financial website. On Magnifi, you’ll find it in the “Key Stats” for every fund, with a bar indicating whether that fee is low, high, or average for its category.

Do I Want A Low Net Expense Ratio?

Generally, you want to steer clear of high net expense ratios if you can. That’s because they directly impact the profits you make on your investment.

For example, if you invest $10,000 in a fund with a 10% fee, you’re actually only buying $9,000 worth of the fund. That may not sound like much of a difference, but if your investment doubles, your position will only be worth $18,000 — not $20,000. That means your 100% gain is actually only 80%.

We also have to consider the long-term impact on your portfolio.

For example, let’s say your $10,000 portfolio grows to $1,000,000. Instead of paying 10% a year on $10,000, or $1,000 a year, now you’re paying $100,000 – TEN TIMES the entire balance of your original portfolio. Worse, it’s a recurring fee for as long as you hold the fund in your portfolio. That’s why some investors like to avoid funds with high net expense ratios.

With lower net expense ratios, more of your money goes toward your investment and less is lost to fees and expenses.

How Do I Know If A Fund Is Worth Its Net Expense Ratio?

First of all, it’s important to understand that net expense ratios can vary widely across different types of funds, and even within the same asset class. For example, actively managed funds generally have higher net expense ratios than passively managed index funds or ETFs because they include fees to pay the the fund manager.

Therefore, it’s important to compare the net expense ratios of funds that invest in similar assets to ensure you’re getting the best value for your investment.

A good expense ratio for a mutual fund is widely considered to be 0.50 to 0.75 — and slightly lower for passive and index funds.

If you’re using Magnifi, you can check the Key Stats to see how a fund’s net expense ratio stacks up next to its peers.

You can even use Magnifi to screen for low-cost, high-performing funds. Simply enter the search term “high-performing low-cost funds,” and the AI will give you a list of the top funds to choose from.

I hope this helps answer your question and gives you some new search terms to try over at Magnifi.com. Even though it’s one more number to keep track of, it’s worth it to make sure you’re getting the most from your money!

Unlock More Opportunity With Magnifi Personal

All of these funds were found using the search function over at Magnifi.com. Finding the top performers is as easy as typing in what you’re looking for and hitting “search.”

You can take your analysis a step further using Magnifi Personal, which allows you to compare these funds to each other, or to any other security you may be interested in. And once you’ve found the stock or fund you’re looking for, you can purchase shares directly with your Magnifi account.

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