One of the biggest reasons why mutual funds have a higher cost than ETFs is because of the need for indexes to constantly rebalance, which results in commission costs that coincide with bid-ask spreads. ETFs do not have this issue due to a process called creation and redemption-in-kind that avoids these costs. Another cost issue with mutual funds has to do with something called “cash drag.” Mutual funds are required to have a certain amount of cash to cover potential net redemptions. ETFs are not required to do this, due to the same creation and redemption-in-kind feature.
Lower fees are driving investors to passively managed funds. Our article on fund management fees explains the different fees investors pay to have their funds managed.
|Mutual Fund||Index / Benchmark||ETF|
|Ticker||AUM (billions)||Expense Ratio||Ticker||AUM (billions)||Expense Ratio|
|FSTVX||$34.60||0.07%||Dow Jones U.S. Total Stock Market Index||VTI||$62.60||0.05%|
|FSSVX||$1.87||0.23%||CRSP US Small Cap Index||VB||$13.42||0.09%|
|VGSLX||$60.10||0.12%||MSCI US REIT Index||VNQ||$30.84||0.12%|
|VBMFX||$176.00||0.16%||Barclays Capital U.S. Aggregate Bond Index||AGG||$0.42||0.05%|
The Bottom Line
To learn more about index funds, check out our Index Funds page.
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