Personal Finance

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

Published

2 weeks ago

November 8, 2024

Business Finance News

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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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Here’s a look at other stories offering insight on ETFs for investors.

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.

Jim Cramer explains why mutual funds are not the best way to invest

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.

Personal Finance

The must-have gift of the season may be a ‘dupe’

Published

56 minutes ago

November 22, 2024

Business Finance News

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‘Tis the season for giving… dupes?

Buying a dupe — short for duplicates — rose to the top of this year’s holiday wish-lists. A dupe gift is a gift that is a cheaper alternative to a more expensive, branded item. They were largely kept under the radar until recently because a “fake” was dubbed inferior to the real thing, but a lot has changed.

In some cases these brand imitators are now even preferred to their pricier counterparts.

This year, 79% of consumers said they would buy a dupe as a gift for their loved ones for the holidays, according to a survey of more than 1,000 shoppers by CouponCabin.

More than half — 51% — of those that the coupon site polled said dupes are better than the original.

Even when consumers can get the real thing, nearly 33% of adults intentionally purchased a dupe of a premium product at some point, a separate report by Morning Consult also found. The business intelligence company polled more than 2,000 adults in early October.

When is a dupe an appropriate gift?

Before you buy a dupe, think about who you’re shopping for, experts say.

For instance, some family members or friends might especially appreciate a dupe for what it is, said Ellyn Briggs, a brands analyst at Morning Consult.

“It’s kind of a badge of honor for young people to get a dupe,” she said.

On the other hand, you risk disappointing someone if they have been asking for a specific product for a while, said Melanie Lowe, CouponCabin’s savings expert.

If that is the case, consider the cost of the name-brand item and assess if it is within budget. The key is to know when to splurge or save, Lowe said.

“If you’re talking about a product that you’ll use daily… invest in the original,” Lowe said. “That purchase is usually worth it.”

Alternatively, “if it seems appropriate in the situation — if it is a more light-hearted gift — you can definitely go the dupe route,” she said.

‘It’s a dupe for a reason’

While some shoppers take pride in buying dupes, roughly 86% of shoppers have been disappointed by their purchase of a dupe, CouponCabin found.

“It’s a dupe for a reason,” said Lauren Beitelspacher, professor of marketing at Babson College. “We don’t know where it’s made, who is making it or the quality.”

Visa's View on the Holiday Shopping Season

“It’s not that all dupes are bad. But sometimes we are paying a premium because there is a quality difference — and we, as consumers, have to be more conscious of that,” Beitelspacher said.

If you want to shop for dupes, read and watch product reviews online to help determine the dupe’s quality — this is where social media can come in handy.

A majority, or 62%, of U.S. adults who use TikTok say they use the app for reviews or recommendations, according to a new study by the Pew Research Center. Others tap Instagram and Facebook for product research.

Shopping secondhand this season

Consumers should make the same value considerations when buying secondhand, which has also become more popular, even for gifting.

Three in four shoppers said that giving secondhand gifts has become more accepted over the past year — notching a 7% increase from the year before, according to the 2024 OfferUp recommerce report. OfferUp, an online marketplace for buying and selling new and used items, polled 1,500 adults in July.

The majority, or 83%, of shoppers are also open to receiving secondhand gifts this holiday season, the report found.

Shoppers have increasingly turned to resale for a number of reasons, including value, sustainability and as a means to secure hard-to-find luxury items. Because secondhand shopping is considered eco-friendly, it’s also become more socially acceptable. OfferUp’s report credited Generation Z for driving a shift in mindset.

“The stigma around secondhand gifting is rapidly diminishing,” said Todd Dunlap, OfferUp’s CEO.

However, the same buyer-beware mentality applies, cautioned Babson’s Beitelspacher, especially if you are ordering secondhand goods online. “You might not get what you want,” she said.

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Personal Finance

Here’s why you should max out your health savings account

Published

20 hours ago

November 21, 2024

Business Finance News

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Many employees have a health savings account, which offers tax incentives to save for medical expenses. However, most are still missing out on long-term HSA benefits, experts say.

Two-thirds of companies offer investment options for HSA contributions, up 60% from one year ago, according to a survey released in November by the Plan Sponsor Council of America, which polled more than 500 employers in the summer of 2024.

But only 18% of participants invest their HSA balance, down slightly from the previous year, the survey found.

That could be a “huge mistake” because HSAs are “the only triple-tax-free account in America,” said certified financial planner Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta.

Health savings accounts are popular among advisors, who encourage clients to invest the funds long term rather than spending the funds on yearly medical expenses. But you need an eligible high-deductible health plan to make contributions.

Some 66% of employees picked an HSA-qualifying health plan when given the choice, according to the Plan Sponsor Council of America survey.

However, the best health insurance plan depends on your family’s expected medical expenses for the upcoming year, experts say. Typically, high-deductible plans have lower premiums but more upfront expenses.

HSAs can look like a ‘health 401(K)’

HSAs have three tax benefits. There’s an upfront deduction on contributions, tax-free growth and tax-free withdrawals for qualified medical expenses.

If you invest it wisely, it can look like a health 401(k).

Ted Jenkin

Founder and CEO of oXYGen Financial

“It’s one way to deal with the inflationary cost of health care,” said Jenkin, who is also a member of CNBC’s Financial Advisor Council. “If you invest it wisely, it can look like a health 401(k).”

A 65-year-old retiring today can expect to spend an average of $165,000 in health and medical expenses through retirement, up nearly 5% from 2023, according to a Fidelity report released in August.

That estimate doesn’t include the cost of long-term care, which can be significantly higher, depending on needs.

Why employees don’t use HSAs for long-term savings

There are a couple of reasons why most employees aren’t investing their HSA balances, according to Hattie Greenan, director of research and communications for the Plan Sponsor Council of America.

“I think there’s a lot of confusion about HSAs and [flexible spending accounts],” including how they work and how they’re different,” she said.

While both accounts offer tax benefits, your FSA balance typically must be spent yearly, whereas HSA funds can accumulate for multiple years. Plus, your HSA is portable, meaning you can take the balance when changing jobs.

However, many employees can’t afford to cover medical costs yearly while their HSA balance grows, Greenan said. “Ultimately, most participants still are using that HSA for current health care expenses.”

Personal Finance

73% of workers worry Social Security won’t be able to pay benefits

Published

21 hours ago

November 21, 2024

Business Finance News

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Most Americans are concerned about what may happen to Social Security when its retirement trust fund crosses a projected 2033 depletion date, according to a new Bankrate survey.

Nearly three-quarters, 73%, of non-retired adults and 71% retired adults say they worry they won’t receive their benefits if the trust fund runs out. The October survey included 2,492 individuals.

Those worries loom large for older Americans who are not yet retired, according to the results. That includes 81% of working baby boomers and 82% of Gen Xers who are worried they may not receive their benefits at retirement age if the trust fund is depleted.

“Once someone’s actually staring at the prospect of the end of their full-time employment, the seriousness of the need to fund that part of their life comes into full view,” said Mark Hamrick, senior economic analyst at Bankrate.

Still, a majority of millennials and Gen Zers surveyed, at 69% and 62%, respectively, are similarly concerned.

Social Security relies on trust funds to supplement its monthly benefit payments that currently reach more than 72.5 million beneficiaries, including Supplemental Security Income beneficiaries.

While payroll taxes provide a steady stream of revenue into the program, the trust funds help to supplement benefit checks. Social Security’s actuaries project the fund the program relies on to pay retirement benefits will be depleted in 2033. At that time, an estimated 79% of those benefits will still be payable.

What financial advisors are telling clients now

Financial advisors say they frequently field questions from clients on Social Security’s future. And they often tell their clients it’s still best to wait to claim benefits, if possible.

Retirees can claim Social Security retirement benefits as early as age 62, though they take a permanent lifetime reduction. By waiting until full retirement age — generally from 66 to 67, depending on date of birth — individuals receive 100% of the benefits they’ve earned.

By delaying from full retirement age to as late as age 70, retirees stand to get an 8% annual boost to their benefits.

When talking with clients, George Gagliardi, a certified financial planner and founder of Coromandel Wealth Strategies in Lexington, Massachusetts, said he tells them Washington lawmakers are unlikely to leave Social Security’s solvency unaddressed by the trust fund depletion deadline.

But even if that does happen, it still makes sense to delay claiming Social Security benefits until 70, if possible, unless there is a critical situation where it makes sense to claim early, he said.

“My bottom line on the whole thing is, you don’t know how long you’re going to live,” Gagliardi said. “But basically, you want to bet on longevity.”

Experts say retirees need to be mindful of longevity risk — the potential that you will outlive your savings.

Social Security is “inflation indexed longevity insurance,” said CFP David Haas, owner of Cereus Financial Advisors in Franklin Lakes, New Jersey. Every year, benefits are automatically adjusted for inflation, a feature that would be difficult to match when purchasing an insurance product like an annuity.

“You really can’t get that from anywhere else,” Haas said.

Maximizing your Social Security benefits

While more than a quarter — 28% — of non-retired adults overall expect to be “very” reliant on Social Security in retirement, older individuals expect to be more dependent on the program, according to Bankrate. The survey found 69% of non-retired baby boomers and 56% of non-retired Gen Xers expect to rely on the program.

To avoid relying on Social Security for the bulk of your income in retirement, you need to save earlier and for longer, Haas said.

“You need to compound your savings over a longer period, and then you’ll be flexible,” Haas said.

To be sure, shoring up a long-term nest egg is not a top-ranked concern for many Americans now as many face cost-of-living challenges. A separate election Bankrate survey found the top three economic concerns now are inflation, health care costs and housing affordability.