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Here’s why ETFs often have lower fees than mutual funds

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The trend is clear: Investors continue to seek out lower fees for investment funds.

The mass migration to cheaper funds has been a key driver of falling costs, according to Zachary Evens, a manager research analyst for Morningstar.  

Average annual fund fees have more than halved in the past two decades, to 0.36% in 2023 from 0.87% in 2004, Evens wrote.

And when it comes to fees, exchange-traded funds often beat their mutual-fund counterparts, experts said.  

The average ETF carries a 0.51% annual management fee, about half the 1.01% fee of the average mutual fund, according to Morningstar data.

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Some experts say comparing average ETF fees to those of mutual funds isn’t quite fair, because most ETFs have historically been index funds, not actively managed funds. Index funds are generally cheaper than active ones, which employ stock-picking tactics to try and beat the market; that means average ETF fees are naturally lower, experts said.

However, there’s a similar fee dynamic when comparing on a more apples-to-apples basis.

To that point, index ETFs have a 0.44% average annual fee, half the 0.88% fee for index mutual funds, according to Morningstar. Similarly, active ETFs carry a 0.63% average fee, versus 1.02% for actively managed mutual funds, Morningstar data show.

Investors pay this fee — a percentage of their fund holdings — each year. Asset managers pull it directly from client accounts.

“There are so many things you can’t control in investing,” said Michael McClary, chief investment officer at Valmark Financial Group. “The one thing you can control is fees.”

“I think it’s one of the key things people should care about,” he said.

‘Cheap mutual funds also exist’

ETFs and mutual funds are similar. They’re both baskets of stocks and bonds overseen by professional money managers, and offer ways to diversify your investments and access a wide range of markets.

ETFs are newer. The first U.S. ETF — the SPDR S&P 500 ETF Trust (SPY), an index fund tracking the S&P 500 stock index — debuted in 1993.

Mutual funds hold more than $20 trillion, about double the assets in ETFs. But ETFs have steadily increased their market share as investor preferences have changed.

While ETFs tend to be cheaper, on average, that’s not to say mutual funds are always more expensive.

“Cheap mutual funds also exist,” said Bryan Armour, director of passive strategies research for North America and editor of the ETFInvestor newsletter at Morningstar.

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For example, some index mutual funds, like those that track “major” indexes such as the S&P 500, have competitive fees relative to similar ETFs, Armour said.

“It’s really just the core indexes where mutual funds compete more directly with ETFs on fees,” Armour said. “Other than that, I’d say ETFs are, generally speaking, cheaper.”

And, fees for newly issued mutual funds are declining while those of new ETFs are increasing, data shows.

The “fee gap” between newly launched mutual funds and ETFs shrank by 71% in the last decade, from 0.67% to 0.19%, according to Evens of Morningstar.

That’s largely due to “the emergence of active and alternative ETF strategies, which tend to be pricier than broad index strategies,” he said.

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Trump’s win may put Public Service Loan Forgiveness program at risk

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Current borrowers should remain entitled to relief

While the program remains in effect, borrowers are entitled to the relief, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

“Don’t panic,” Mayotte said. “PSLF is written into federal law, by a Republican president, and it would take an act of Congress to eliminate it.”

As of now, Republicans have a majority in the Senate. The House is still up for grabs, with several races too close to call.

Yet even if both chambers are under GOP control, it’s not clear “all the Republicans want it gone,” Mayotte said.

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But what if they do vote to do away with the program?

“It wouldn’t be retroactive,” Mayotte said.

That means current borrowers would still be able to work toward loan forgiveness under the program.

“So, worst-case scenario, it would be for loans made on or after the date of such a law enactment,” Mayotte said.

Higher education expert Mark Kantrowitz agreed that’s how such a change would probably play out.

“Most likely the change would apply only to new borrowers,” Kantrowitz said. “Existing borrowers would be grandfathered in.”

The Trump campaign did not immediately respond to a request for comment from CNBC.

What borrowers can do

With the PSLF help tool, borrowers can search for a list of qualifying employers and make sure they’re on track for the relief. They should also access the employer certification form at StudentAid.gov.

That form will confirm that you’re working in an eligible job and generate an updated tally of how many qualifying payments you’ve made, Kantrowitz said.

Try to fill out this form at least once a year, he added. And keep records of your confirmed qualifying payments. To get your remaining debt excused, you need 120.

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28% of credit card users are still paying off last year’s holiday bill

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Visa's View on the Holiday Shopping Season

Americans tend to overspend during the holiday season.

In fact, some borrowers are still paying off debt from last year’s purchases.

To that point, 28% of shoppers who used credit cards have not paid off the presents they bought for their loved ones last year, according to a holiday spending report by NerdWallet. The site polled more than 1,700 adults in September.  

However, this is a slight improvement from 2023, when 31% of credit card users had still not paid off their balances from the year before.

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Growth in credit card balances has also slowed, according to a separate quarterly credit industry insights report from TransUnion released on Tuesday.

Although overall credit card balances were 6.9% higher at the end of the third quarter compared to a year earlier, that’s a significant improvement from the 15% year-over-year jump from Q3 2022 to Q3 2023, TransUnion found.

The average balance per consumer now stands at $6,329, rising only 4.8% year over year — compared to an 11.2% increase the year before and 12.4% the year before that.

“People are getting comfortable with this post-pandemic life,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “As inflation has returned to more normal levels in recent months, it has also meant consumers may be less likely to rely on these credit products to make ends meet.”

Recent wage gains have also played a role, according to Paul Siegfried, TransUnion’s senior vice president and credit card business leader. Lower inflation and higher pay “may be driving consumers toward a financial equilibrium,” he said.

Still, spending between Nov. 1 and Dec. 31 is expected to increase to a record total of $979.5 billion to $989 billion, according to the National Retail Federation.

Shoppers may spend $1,778 on average, up 8% compared with last year, Deloitte’s holiday retail survey found. Most will lean on plastic: About three-quarters, 74%, of consumers plan to use credit cards to make their purchases, according to NerdWallet.

“Between buying gifts and booking peak-season travel, the holidays are an expensive time of year,” said Sara Rathner, NerdWallet’s credit cards expert. However, this time around, “shoppers are setting strict budgets and taking advantage of seasonal sales.”

How to avoid overspending

“There’s no magic wand, we just have to do the hard stuff,” Candy Valentino, author of “The 9% Edge,” recently told CNBC. Mostly that means setting a budget and tracking expenses.

Valentino recommends reallocating funds from other areas — by canceling unwanted subscriptions or negotiating down utility costs — to help make room for holiday spending.

“A few hundred dollars here and there really adds up,” she said. That “stash of cash is one way to set yourself up so you are not taking on new debt.”

How to save on what you spend

Valentino also advises consumers to start their holiday shopping now to take advantage of early deals and discounts or try pooling funds among family or friends to share the cost of holiday gifts.

Then, curb temptation by staying away from the mall and unsubscribing from emails, opting out of text alerts, turning off push notifications in retail apps and unfollowing brands on social, she said.

“It will lessen your need and desire to spend,” Valentino said.

If you’re starting out the holiday season debt-free, you’re in a “strong position” to take advantage of credit card rewards, Rathner said.

Credit cards that offer rewards like cash back or sign-on bonuses will offer a better return on your holiday spending, she said.

However, if you are planning on purchasing big-ticket items to work towards such bonuses, make sure you’re able to pay off the balance in full to avoid falling into holiday debt, Rathner said.

What to do if you have debt from last year

People walk by sale signs in the Financial District on the first day back for the New York Stock Exchange (NYSE) since the Christmas holiday on December 26, 2023 in New York City.

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What investors need to consider when choosing a dividend-paying fund

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For investors who want income, dividends may provide an answer.

Dividends are corporate profits that companies pay to shareholders in the form of either cash or stock.

In comparison to other income-paying investments — such as certificates of deposit, bonds or Treasurys — dividends may provide the opportunity for more appreciation, said Leanna Devinney, vice president and branch leader at Fidelity Investments in Hingham, Massachusetts.

“Dividends can be very attractive because they offer the opportunity for growth and income,” Devinney said.

Dividend investment options may come in the form of single company stocks or dividend-paying funds, like exchange-traded funds or mutual funds.

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With individual stocks, it’s easy to see the dividend a company may offer in exchange for owning its share, Devinney said. Notably, not all companies pay dividends.

However, dividend-paying funds like ETFs or mutual funds may provide a broader exposure to dividend securities, often at lower costs, she said.

For investors who are considering putting a portion of their portfolios in dividend-paying strategies to fulfill their income-seeking goals, there are some things to consider.

What kind of dividend-paying fund fits my goals?

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To be clear, both of these strategies have trade-offs.

“The risks and rewards are a little bit different between the two,” Sotiroff said. “They can both be done well; they can both be done poorly.”

If you’re a younger investor and you’re trying to grow your money, a dividend appreciation fund will likely be better suited to you, he said. On the other hand, if you’re near retirement and you’re looking to create income from your investments, a high-yield dividend ETF or mutual fund is probably going to be a better choice.

To be sure, some fund strategies combine both goals of current income and future growth.

How expensive is the dividend strategy?

Another important consideration when deciding among dividend-paying strategies is cost.

One dividend fund that is highly rated by Morningstar, the Vanguard High Dividend Yield ETF, is well diversified, which means investors won’t have a lot of exposure to one company, he said. What’s more, it’s also “really cheap,” with a low expense ratio of six basis points, or 0.06%. The expense ratio is a measure of how much investors pay annually to own a fund.

That Vanguard fund has historically provided a yield of about 1% to 1.5% more than what the broader U.S. market offers, which is “pretty reasonable,” according to Sotiroff.

While investors may not want to add that Vanguard fund to their portfolio, they can use it as a benchmark, he said.

“If you’re taking on higher yield than that Vanguard ETF, that’s a warning sign that you probably have exposure to incrementally more volatility and more risk, Sotiroff said.

Another fund highly rated by Morningstar is the Schwab U.S. Dividend Equity ETF, which has an expense ratio of 0.06% and has also provided 1% to 1.5% more than the market, according to Sotiroff.

Both the Vanguard and Schwab funds track an index, and therefore are passively managed.

Investors may alternatively opt for active funds, where managers are identifying companies’ likelihood to increase or cut their dividends.

“Those funds typically will come with a higher expense ratio,” Devinney said, “but you’re getting professional oversight to those risks.”

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