Evaluating Funds by Expense

September 04, 2018
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Over the past few years, there has been a major push toward the lowest possible expenses for index funds by the major investment companies. While there are advantages to having low or zero expense, expenses are not the only thing to consider. Two of the main considerations for index funds include:


  1. Tax-efficiency - How tax efficient are the index funds? One of the advantages of passive investments is that there is usually less capital gain distributions, putting you in the driver’s seat for when to realize gains and losses. But not all index funds are created equal.

Taxes especially matter if you are thinking of selling a low cost fund and replacing it with one that is cheaper. Do you have a gain on the fund that you will have to pay taxes on when you sell and replace it? 

  1. Index-tracking ability - How well does the fund actually track the index it is setting out to track? Strangely enough, there are periods of time where funds with higher fees actually performed better than funds tracking the same index with lower fees because they simply tracked the index better(Picchi, 2016). This is not always the case but something to be aware of.


Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.

An Index fund is a type of mutual funds that follows certain preset rules so that the fund can track a specified basket of underlying investments. You cannot invest in an index directly.

1 - How to Chose an S&P 500 Index Fund, Picchi, 2016

You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.