You Might Be Paying Too Much for That Index Fund
Index-tracking funds are inching closer to free. State Street last month slashed the fee on its cheapest S&P 500 exchange-traded fund, known by ticker symbol SPLG, to 0.02%—making it less than a quarter of the cost of its popular SPY fund that tracks the same stocks. It is now the cheapest index fund in its class.
A $1,000 investment in SPLG costs investors just 20 cents a year in fees. The arrival of a 0.02% fund fee—about as close to zero as many in the market expect major funds to get—is the culmination of a decadeslong fee war among asset managers. “It is hell for issuers, but heaven for investors," said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.
An individual investor can now build a fully balanced portfolio using ETFs without paying more than 0.05% in total fees, said Susan Thompson, head of SPDR Americas distribution at State Street, compared with around a 1% average fee 20 years ago. “I think we’re getting pretty close to the end. If someone goes to zero, then they’re doing it as a loss leader," Thompson said.
Fees make a huge difference over a long time horizon: A $1 million account invested for 40 years would save about $370,000 in fees at a 0.05% fee versus a 1% fee, according to a State Street analysis. The average ETF fee is 0.55%, but the asset-weighted average, which takes into account how much money is invested in what funds, is just 0.17%, according to Bloomberg. State Street’s SPLG fund is part of its suite of ETFs marketed to individual investors, which includes passive funds tracking stock and bond indexes.
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