Many investors don’t know difference between mutual funds and ETFs

Personal Finance

For the most part, actively managed funds cost more than those that are passively managed because you’re paying for investment-picking expertise.

In investment funds, the cost is called the expense ratio and is expressed as a percentage. It’s the share of your assets that the fund takes each year as compensation for managing your money.

The average expense ratio for actively managed traditional mutual funds is 1.09, according to Morningstar. For index funds, it’s 0.79 percent. For ETFs, meanwhile, the passive bulk of them come with an expense ratio of 0.57 percent. The actively managed ones, 0.76 percent.

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Your investment fees matter, because they take a bite out of money that otherwise would be in your account to continue growing. The bigger the yearly expense, the bigger the hit to your earnings over time.

Say you invested $100,000 for 20 years and its annual return was 4 percent. If you paid 0.25 percent yearly, you’d have close to $210,000, according to the Securities and Exchange Commission’s Office of Investor Education and Advocacy. By contrast, if you paid 1 percent a year, that $100,000 would grow to only about $180,000.

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