Expense Ratio - what's too high?

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jmk_123
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Expense Ratio - what's too high?

Post by jmk_123 »

Hi Bogleheads,

I've drank the koolaid when it comes to investing in funds with lower expense ratios. Now my remaining question is, how high is too high?

Do you set benchmarks? For instance, over 0.5% is too high? I've seen Target retirement funds offered by company's 401k in the ~0.7%+ range and see individual index funds around ~0.2%. Is this enough of a difference where you prefer investing in the individual funds?

Any personal experience of why one is better than the other?

Where do you guys see yourself backing out of funds in terms of ER? Where do you set the tipping point where convenience is better than ER and vice versa?

Thanks all!
steve_14
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Re: Expense Ratio - what's too high?

Post by steve_14 »

I target .1% in total fees. .7% is huge, compounded over decades. I'd certainly use individual funds in that case, or even alter my asset allocation to get a cheaper fund.
bloom2708
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Re: Expense Ratio - what's too high?

Post by bloom2708 »

My thought would be if you are over .25% you should have a "waiver" for the extra %.

A "waiver" might be that your 401k doesn't have any funds under .60%. Most 401k have at least a few options under .50%.

My higest ER at Vanguard is .20%. My wife's 401k has a portion in PIMCO Total Return at .50%.
asif408
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Re: Expense Ratio - what's too high?

Post by asif408 »

I think someone here had a list in another thread that I liked, but I haven't been able to find it since.

Here's my personal list:

<=0.10%: My favorite!
0.11-0.20%: Acceptable
0.21-0.40%: Getting Expensive
0.41-0.50%: Better be special
>0.50%: No thanks

It really depends on where you are investing, though. With my IRAs I shoot for <0.10% blended ER (right now I am at 0.09%), as my choices are greater. My 457(b) plan through work only has one fund under 0.10% that is a solid index fund, so I'm investing in that fund and a stable value fund.

If I had to, I would consider some of the funds in the 0.1-0.4% range that my 457(b) offers, as they aren't too bad. But since I currently don't have to, I don't. :D I don't see anything over 0.5% that would be worth my time in my 457(b).
Last edited by asif408 on Mon Jun 16, 2014 2:49 pm, edited 3 times in total.
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bertilak
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Re: Expense Ratio - what's too high?

Post by bertilak »

I simply figure that anything over what Vanguard charges for a similar fund is too high.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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ogd
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Re: Expense Ratio - what's too high?

Post by ogd »

I'd say it depends on what I thought the expense ratio was buying me.

If it's active management, I wouldn't pay anything for it. That's right, even at the same expense levels I'd be too concerned with the active manager doing something dumb under me and I'd stick with the passive fund which I can rely on.

If it's convenience (all in one, no rebalancing) I'd pay an extra 0.1% but no more. I can see why others would pay 0.2%-0.3%, but beyond that I'd actively try to discourage them. This is your use case, I believe. It's simply not worth it, not to mention that with Target funds in 401k there's a real chance you'll have a taxable account soon enough and you'll need to break them up for tax efficiency, and there goes the simplicity.

(Addendum: if these are the Fidelity non-index Freedom funds, I also don't like them simply because they're a hodgepodge of overlapping active funds, which I think is anything but predictable)

To get a desired value / growth / international / REIT tilt, or to avoid an undesirable one, I'd probably pay up to 0.3% extra. I'd say this is rare, other than international funds being 0.1% or so more expensive.

The only case I'd pay 0.5% extra or even more is if there was really no alternative for the bold demarcation line between stocks and bonds, e.g. if I had no cheaper bond fund in the 401k but I had cheap stocks available. I'd pay pay quite a bit to avoid that substitution. The upper limit of this would depend on the taxes I'd have to pay on bond income in taxable.
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SpringMan
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Re: Expense Ratio - what's too high?

Post by SpringMan »

I draw the line around .8%. I am happy when the total return for a fund is in the top 25% of similar funds. I guess I have not drunk enough of the koolaid, but this allows holding some very good funds like PIMIX at .45%, PRWCX at .73%, BERIX at .68%, and GLRIX at .79%. Sorry for all the ticker symbols but the fund names are not relevant to my point and those interested can look them up. All these are held in tax advantaged accounts, in taxable accounts I am 100% indexed with VSS, VLCAX, VFWAX, and FSIVX. Overall our average ER is .25% for a 38% equity/62% fixed income portfolio. Remember total return is net of expense ratios.
Best Wishes, SpringMan
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telemark
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Re: Expense Ratio - what's too high?

Post by telemark »

The magic number is 0.06143%: anything below that will make you rich beyond your wildest dreams, but if you have to pay more you might just as well take your money out and burn it :)

In reality it depends on a lot of things, including what other choices are available and how long you expect to hold those funds. A lot of us contribute to 401K plans that are less than ideal, because the tax advantages and employer match outweigh the extra costs.
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rob
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Re: Expense Ratio - what's too high?

Post by rob »

Depends on type... If it's an S&P500 idx or alike better be < .1 but if it's - say - an international small cap value or something I would accept far higher expenses..... A lot here might disagree ; on holding such a fund at any price :D or the "max" they would be willing to pay.
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Longtimelurker
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Re: Expense Ratio - what's too high?

Post by Longtimelurker »

My average ER is 0.124%. I slice n dice and with the exception of 1 fund, everything I own (including intl small, EM, etc) is under 0.2%. The only exception to this is a single ETF, EWX which is emerging markets small cap @ 0.65%. There are no liquid lower cost options for exposure to emerging small, and I personally believe the diversification benefits through low correlations to be worth the extra costs. I do however own this in an old 401k, and will dump it for a cheaper option as soon as I find one.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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stevewolfe
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Re: Expense Ratio - what's too high?

Post by stevewolfe »

SpringMan wrote:I draw the line around .8%. I am happy when the total return for a fund is in the top 25% of similar funds. I guess I have not drunk enough of the koolaid, but this allows holding some very good funds like PIMIX at .45%, PRWCX at .73%, BERIX at .68%, and GLRIX at .79%.
I agree with the above and I have held PRWCX (T. Rowe Price Capital Appreciation) for the last ~15 years (current ER of 0.71% down from 0.73% last year). Additionally, the Vanguard Stable Value fund in my 401(k) charges 0.52% ER once you include the now required to be accounted for in ER wrap insurance costs. Overall our weighted ER is 0.268%.
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RyeWhiskey
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Re: Expense Ratio - what's too high?

Post by RyeWhiskey »

bertilak wrote:I simply figure that anything over what Vanguard charges for a similar fund is too high.
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CABob
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Re: Expense Ratio - what's too high?

Post by CABob »

bertilak wrote:I simply figure that anything over what Vanguard charges for a similar fund is too high.
I don't really disagree, but, this kind of thinking can spoil you viewpoint. Most 41k plans would be unacceptable as would many funds from very good companies.
Bob
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Watty
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Re: Expense Ratio - what's too high?

Post by Watty »

asif408 wrote:I think someone here had a list in another thread that I liked, but I haven't been able to find it since.

Here's my personal list:

<=0.10%: My favorite!
0.11-0.20%: Acceptable
0.21-0.40%: Getting Expensive
0.41-0.50%: Better be special
>0.50%: No thanks
For someone with a $500K portfolio in dollars that would be;

<=$500: My favorite!
$550 - $1,000: Acceptable
$1,050 - $2,000%: Getting Expensive
$2,050 - $2,500 : Better be special
>$2,500: No thanks
freddie
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Re: Expense Ratio - what's too high?

Post by freddie »

This pretty much sums it up. I would love to have all my ERs at .05. But I am going to pay .12% to get my bond fund. I am going to pay .15% for Emerging Markets and so on. ER is not the driver of my investing strategy. I figure out what I want and then figure out how to get it as cheaply as possible.
Longtimelurker wrote:My average ER is 0.124%. I slice n dice and with the exception of 1 fund, everything I own (including intl small, EM, etc) is under 0.2%. The only exception to this is a single ETF, EWX which is emerging markets small cap @ 0.65%. There are no liquid lower cost options for exposure to emerging small, and I personally believe the diversification benefits through low correlations to be worth the extra costs. I do however own this in an old 401k, and will dump it for a cheaper option as soon as I find one.
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bertilak
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Re: Expense Ratio - what's too high?

Post by bertilak »

CABob wrote:
bertilak wrote:I simply figure that anything over what Vanguard charges for a similar fund is too high.
I don't really disagree, but, this kind of thinking can spoil you viewpoint. Most 41k plans would be unacceptable as would many funds from very good companies.
One certainly needs to take into account what is available and may need to settle for something that requires a little nose-holding! With 401(k) plans things like grabbing as much tax advantaged space as possible and snatching up all possible matching free money from the sponsoring company may be the primary considerations.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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JamesSFO
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Re: Expense Ratio - what's too high?

Post by JamesSFO »

Outside of 401K/403B where you may have little choice anything over 0.50% is too high IMHO. Once you get below 0.50% I think you can consider secondary factors that are personal to you like local branches and what not. That said my weighted personal ER is 0.06%.
feh
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Re: Expense Ratio - what's too high?

Post by feh »

I look at the weighted ER of my entire portfolio and try to keep it under .2%. That doesn't mean all funds are under that mark; I have one at .46 and another at .60
MathWizard
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Re: Expense Ratio - what's too high?

Post by MathWizard »

The only one above 0.10% that I am considering outside of my employer plan is
the Vanguard Managed Payout fund with an ER of 0.34% (VPGDX)

This is something I am considering for post 75 if I make it that far.
Post 75, I'd like everything on auto-pilot and just gets checks every month,
and enjoy myself. I looking at SS and SPIAs for base spending, this would be for the
extras.
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William4u
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Re: Expense Ratio - what's too high?

Post by William4u »

The max ER should be the cheapest that your IPS (Investment Policy Statement) requires. Your IPS should include ER limits and be dominated by index funds.

For me the upper ER limit is 0.36%. That is by far the highest ER I pay (for the 0.36% ER Vanguard International Explorer Fund VINEX). Although it pains me (it really pains me) to pay 12 times more than the cost of my least expensive fund (a 0.03% index fund in my workplace retirement plan), my IPS reasonably calls for a slice of international small cap (as it is pretty close to a model slice and dice portfolio).

Why the active VINEX fund, and not the passive Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX), which my workplace plan also offers? Well, VINEX is diversified enough and cheap enough, and VFSVX, though more diversified, is relatively expensive. VFSVX has a higher 0.40% ER and a 0.25% purchase/sell fee, while VINEX has a 0.36% ER with no purchase/sell fee. The cheaper 0.20% ER ETF version of VFSVX (VSS) is not offered in my plan, and it comes with the added cost of a bid ask spread of 0.14% anyway. Also, I don't have room for VSS in my Roth, and I don't think VSS is tax efficient and simple enough to be in my taxable account, which is entirely in the very tax efficient Vanguard Total Market Admiral fund at 0.05% ER (and I keep my taxable account as simple as possible so it is easy to do my taxes).

So a 0.36% ER it is, because my IPS (reasonably) calls for it, and it is the cheapest way I can follow my IPS.

So the max ER should be the cheapest for whatever your IPS requires, as long as you have a reasonable IPS. I would love to find a cheaper quality International Small Cap fund, though! And if my only option was a 1.00% ER international small cap fund, I would simply forgo that slice. That is part of my IPS too. I have a diversified portfolio even without that slice, and at some point the added expense can't be justified.

If your IPS does not require a slice of international, then your ER should be very, very low. Usually, the best funds in a retirement plan are also the best funds (the index funds!). Index funds are the best and cheapest!

A good discussion of various boglehead IPSs can be found here...
http://www.bogleheads.org/forum/viewtopic.php?t=61915

For most people, I recommend the simple three fund boglehead portfolio. On a risk-adjusted basis, it can't be beat!
azanon
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Re: Expense Ratio - what's too high?

Post by azanon »

It depends on what you're buying, or what you want to buy. I've seen articles on this, and they have ranges of expense ratios fees depending on the investment type.

I would drop the question outright, and just always seek the pay as little as possible for the investments that you want. Want an S&P 500 index fund? You can pay as low as 0.05% or thereabouts, so don't pay more. Want something a bit more fancy such as, say, Vanguard's highly regarded (award winning?) convertible securities fund? You're going to likely pay north of 0.5% for that (I'm too lazy to look it up but I want to say it's 0.65%ish?).

Personally, I focus on keeping my total portfolio expenses low (currently at near the 0.2% level), but I don't get so concerned about fees that I allow it to prevent me from having the asset allocation pieces that I need for my specific situation. Rephrased, I don't allow fees to wag my investment dog, but I certainly give them high importance.

Another way to think of it, if you're paying a 0.5% premium over a broad index, ask yourself are you going to get a combination of return and reduced volatility that will at least make up for that excess 0.5%, at least in theory?
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FelixTheCat
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Re: Expense Ratio - what's too high?

Post by FelixTheCat »

My average expense ratio is 0.10%.
Felix is a wonderful, wonderful cat.
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retiredjg
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Re: Expense Ratio - what's too high?

Post by retiredjg »

I scanned the responses (didn't read closely) and I'm just going to have to disagree.

It would be nice to have very low ERs for every fund, but for some people it just isn't going to happen. If a person has a 401k and the cheapest thing offered is 1.5%, they should probably use it! There are some exceptions, but most folks should use a 401k even with high expense ratios.

On the other hand, for the funds over which people have choices.... .2% or .3% may not be high for an international fund, but I probably would not pay that for a 500 index.

The point is not to make a cheap portfolio. People who do this may be missing some important deferral of taxes. The point is to get the cheapest portfolio you can with the building blocks you have available in your tax-advantaged accounts and other accounts over which you have control.
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JamesSFO
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Re: Expense Ratio - what's too high?

Post by JamesSFO »

retiredjg wrote:I scanned the responses (didn't read closely) and I'm just going to have to disagree.

It would be nice to have very low ERs for every fund, but for some people it just isn't going to happen. If a person has a 401k and the cheapest thing offered is 1.5%, they should probably use it! There are some exceptions, but most folks should use a 401k even with high expense ratios.
...
My response started "Outside of 401K/403B where you may have little choice...". I think folks assumed the question was about places where the ER was solely under your control.
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retiredjg
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Re: Expense Ratio - what's too high?

Post by retiredjg »

JamesSFO wrote: I think folks assumed the question was about places where the ER was solely under your control.
I think you are probably right. And that may have been what the original poster meant, but it is not not what was asked.

I could just see a slew of posts saying "I've only got a 500 index in my 401k and it costs a whopping .4% - should I use taxable instead?" :D
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meowcat
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Re: Expense Ratio - what's too high?

Post by meowcat »

I posted this in an earlier thread.

Downright cheap (almost free) .02% (TSP)
Bargain .07%
good deal .10%
fair .20%
getting pricy .50%
expensive .75%
rip-off 1.0%
outrageous 1.25%
astronomical 1.5%
over the top ridiculous 1.75%
Completely criminal 2.0%
What the bold print givith, the fine print taketh away. | -meowcat
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JamesSFO
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Re: Expense Ratio - what's too high?

Post by JamesSFO »

meowcat wrote:I posted this in an earlier thread.

Downright cheap (almost free) .02% (TSP)
Bargain .07%
good deal .10%
fair .20%
getting pricy .50%
expensive .75%
rip-off 1.0%
outrageous 1.25%
astronomical 1.5%
over the top ridiculous 1.75%
Completely criminal 2.0%
I like!
eazy
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Re: Expense Ratio - what's too high?

Post by eazy »

asif408 wrote:I think someone here had a list in another thread that I liked, but I haven't been able to find it since.

Here's my personal list:

<=0.10%: My favorite!
0.11-0.20%: Acceptable
0.21-0.40%: Getting Expensive
0.41-0.50%: Better be special
>0.50%: No thanks

It really depends on where you are investing, though. With my IRAs I shoot for <0.10% blended ER (right now I am at 0.09%), as my choices are greater. My 457(b) plan through work only has one fund under 0.10% that is a solid index fund, so I'm investing in that fund and a stable value fund.

If I had to, I would consider some of the funds in the 0.1-0.4% range that my 457(b) offers, as they aren't too bad. But since I currently don't have to, I don't. :D I don't see anything over 0.5% that would be worth my time in my 457(b).
My governmental 457 (b) is the one that's killing me... I max out my ROTH and put excess money toward the 457.

Here's the three funds I selected within my 457 options... (These are the three cheapest :?)

-Vantagepoint Core Bond Index I - Total expenses 0.97%
-Vantagepoint Broad Market Index I - Total expnese 0.97%
-Vantagepoint Overseas Equity Index I - Total expense 1.10%
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Re: Expense Ratio - what's too high?

Post by tetractys »

Luckily my plan has Vanguard Institutional with a %.04 E/R; but unluckily the only international stock fund is Oakmark at %1.02. I acquiesce since one's situation holds a lot of influence. And that changes with time. Not too long ago we all would have drooled over a %1 ER. -- Tet
mrehal
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Re: Expense Ratio - what's too high?

Post by mrehal »

I have my 401k through Schwab and the options aren't great, but some are very good.
I have a S&P 500 index fund (SWPPX) at 0.09%, (69% holding) Columbia Intermediate Bond Z (SRBFX) at 0.62% (8% holdings) and American Funds EuroPacific Gr R4 (REREX) at 0.84% (23% holdings). REREX has some emerging markets and a lot of European and Asian exposure, so I would imagine that's why the cost is pretty high, but it does offer a lot, all things considered.
I think the overall ER for the entire profile comes out to be 0.35%.
I do have the option to use Schwab's PCRA as well, fee free from my company. Has anyone else used this?
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retiredjg
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Re: Expense Ratio - what's too high?

Post by retiredjg »

mrehal wrote:I have a S&P 500 index fund (SWPPX) at 0.09%, (69% holding) Columbia Intermediate Bond Z (SRBFX) at 0.62% (8% holdings) and American Funds EuroPacific Gr R4 (REREX) at 0.84% (23% holdings).
You can do better than REREX which does have emerging markets but no small cap. Can you put your international stocks in an IRA? Vanguard's Total International is much cheaper.
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bertie wooster
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Re: Expense Ratio - what's too high?

Post by bertie wooster »

bertilak wrote:I simply figure that anything over what Vanguard charges for a similar fund is too high.

+1

I'm lucky. In my 401k I have access to Fidelity Spartan Funds, but I realize that others aren't so lucky. In that case I think you have to go with the best expense ratio for a certain asset class you can get with what is available.
mrehal
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Re: Expense Ratio - what's too high?

Post by mrehal »

retiredjg wrote:
mrehal wrote:I have a S&P 500 index fund (SWPPX) at 0.09%, (69% holding) Columbia Intermediate Bond Z (SRBFX) at 0.62% (8% holdings) and American Funds EuroPacific Gr R4 (REREX) at 0.84% (23% holdings).
You can do better than REREX which does have emerging markets but no small cap. Can you put your international stocks in an IRA? Vanguard's Total International is much cheaper.
Yes, I'm quite lacking in small caps from SWPPX and REREX, as in, there are none. I've been pondering opening up an IRA with Vanguard to use for international and small caps and just contributing my 401k $ to SWPPX, but I want to pay down some more debt before I do so.
Johno
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Re: Expense Ratio - what's too high?

Post by Johno »

rob wrote:Depends on type... If it's an S&P500 idx or alike better be < .1 but if it's - say - an international small cap value or something I would accept far higher expenses..... A lot here might disagree ; on holding such a fund at any price :D or the "max" they would be willing to pay.
I agree, definitely depends. It seems the discussion mainly assumes the fund would be US large cap or total market in a tax deferred account. In that case I agree, there's no reason to buy other than the lowest ER index fund (or ETF, fund v ETF being another discussion), which would generally be Vanguard (if not limited to higher price choices in a particular company's 401k). However it makes no sense, IMHO, to reject VTCLX ('tax managed' Russ 1000) out of hand for its .12% ER, in a taxable account, because non TM funds are as low as .05. Likewise I don't see it as rational to reject foreign developed investing in VEUSX, VPADX etc because you pay .12% rather than .05, or likewise VEMAX (emerging) at .15%. And say VASGX (all in one) at .17% if it's a kid's account or you *really* don't want to bother with it. There are IMO absolutely valid reasons for index funds with ER's up to at least mid teens if they add actual value (global diversification, tax management, total hands off) over rock bottom ER funds.

Even active management should not be rejected out of hand IMO, depending on the asset class. Vanguard's junk bond fund, .13% ER in Admiral version (VWEAX) is actively managed. Junk is not as efficient a market, and the fund over-weights credits in the BB range, which historically have given the best risk/return performance among corporate credits.

IMO the more serious discussion would be whether you'd ever pay .5% or 1% or more (again except if a company 401k forces you to). But it seems to me that again depends on the asset class, and if one feels it's never necessary, or even unproductive, to consider various niche asset classes or structures (some legit fixed income classes Vand doesn't have, like foreign inflation protected bonds or closed end funds purchased at discount etc), then you'd be looking at broad stock indices and it's back to paragraph 1. OTOH if you limit fixed income to US govt risk, probably better to buy the individual issues yourself (direct treasury purchase or CD's) than funds, if possible.
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