We have been waiting the major investment management companies to announce this for a few years now. The fees these companies charge investors to their manage mutual funds and exchange-traded funds have been declining for some time. Investment management companies like Vanguard, BlackRock, and Dimensional Fund Advisors have been able reduce their fees for several reasons. Enhanced technology has enabled them to reduce their operating expenses. Lending securities owned by their funds to other investors has grown as a source of revenue for these companies (read more about “securities lending” here). Fund companies have also lowered the cost to investors (the expense ratio) in an effort to gain market share. As an investment manager reduces the fees for a particular fund, investors often migrate to that fund and its assets grow. While the fees charged to investors in percentage terms are lower, the revenue taken generated by the fund company will increase based on the larger size of the fund.

Springwater has always used funds with very low expense ratios. We know that the fees and expenses incurred by our clients are one of the elements of investing we can control. Other elements, like the performance of the markets, we of course cannot. The average expense ratio for our portfolios are less than 0.25%. This average has been falling, as expense ratios continue to decline and we continually look for less expensive funds. Morningstar recently reported that “Investors paid lower fund expenses in 2017 than ever before. Our [Morningstar’s] study of U.S. open-end mutual funds and exchange-traded funds found the asset-weighted average expense ratio across funds was 0.52% in 2017, from 0.56% in 2016, reflecting an 8% decline. This is the largest year-over-year decline we have recorded since we began tracking the trend in asset-weighted average fees in 2000.”

One of the funds we may use is the Vanguard Total Stock Market ETF (ticker symbol VTI). This fund has an expense ratio of 0.04%. Vanguard indicates on its website that similar funds have an expense ratio of 0.95%. One of the short-term bond funds we may use is the BlackRock iShares Core 1-5 Year USD Bond ETF (ticker symbol ISTB). It has an internal expense ratio of 0.08%, compared to the industry average for similar funds of 0.74% (source: Vanguard).

Not to be outdone, Fidelity last week announced that its new Fidelity Zero Total Market Index Fund (ticker symbol FZROX) and Fidelity Zero International Index Fund ticker symbol FZILX) will have expense ratios of 0.0%. The funds, as their names suggest, are designed to provide broad exposure to US and international stock markets. This marks a milestone in the fund industry and it is good news for investors.

We fully expect other large fund managers, such as Schwab, Vanguard and BlackRock, to follow Fidelity and release their own “zero cost” funds. When they do, we will consider them for possible inclusion in Springwater’s model portfolios.

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