Know the Costs of Index Funds

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Know the Costs of Index Funds

A common assumption about indexing is that all index funds are cheap. Because they don’t demand the resources of active management, they certainly ought to be. But some index funds charge surprisingly high annual expenses. Consider this: one S&P 500 index fund takes a huge 1.40% bite out of your investment every year. That is awfully steep when you consider that the average large-blend index fund’s expense ratio is roughly half that. And even that looks pretty stiff compared with some that charge even smaller fees.

Of course, you might willingly pay more for some index funds because you want the screens they apply in deciding which companies to include in their indexes. But all things being equal, cheaper is better.