A Price War Erupts Over Retirement Investing

In every business, it is said, there’s really only two markets, the high end and low end. Judging from the continuing price war in the indexing space, the low end is trending toward zero.

The biggest players in the exchange-traded fund (ETF) business are BlackRock, Vanguard and State Street. Trailing the big three are Invesco and Charles Schwab, after which the list of ETF providers turns into also-rans.

The fascinating thing about the low-cost investing business is that once you sell your clients on the virtues of being cheap it’s a race to the bottom. You now can buy several Schwab U.S. stock ETFs that cost 0.03% as an expense ratio.

According to data from the Investment Company Institute, the average stock mutual fund these days costs 0.77%. That’s a massive gap.

The cost difference directly affects returns over time. For instance, a $10,000 one-time investment that earns 8% a year over 30 years returns a final value of $100,627.

Subtract the 0.03% cost of an ETF and your return falls slightly, to $99,791. Thirty years of investing costs you $836.

Use the typical actively management stock mutual fund that your return (again, assuming the market does 8%) comes to $81,188. The difference — your cost of investing — comes to $19,439!

Would you pay nearly $20,000 for something that you could buy for less than $900? Certainly not, unless you were convinced that the much more expensive option offered some intrinsic value, some offset that makest the expense worthwhile.

How about superior returns? After all, if the market does 8% and your active fund does 9%, that more than covers the cost, right?

Except that doesn’t happen. Some funds win and some lose, yet over time it becomes extremely difficult to identify a fund manager who can beat the market consistently, according to S&P Dow Jones Indices research.

Researchers refer to this as “persistence,” the ability (or lack of ability) of a fund manager to stay in the winner’s circle.

Luck vs. winning

According to Standard & Poor’s data, the chances of selecting a fund that can demostrate such prowess is small indeed.

That’s why low cost is the sure bet for the long-term retirement investor. Selecting stocks is hard. Selecting a persistently winning stock picker is even harder and can come down to luck.

Owning low-cost index funds is not about luck. It’s a one-time decision that works in the long run of saving and investing and, increasingly, it’s a choice that costs almost nothing to make.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.