Investors are "voting with their feet" on costs

June 28, 2016

 

Investors in low-cost funds are keeping more of what they pay for.

The message from investment research is clear: Don't assume that you’ll get more if you pay more. You can't control the markets, but you can control the amount you pay to invest. Lower costs allow you to keep a greater share of an investment's return.

Over the ten-year period ended December 31, 2015, low-cost funds outperformed high-cost funds. So it's not surprising that investors frequently say that fees are an important consideration when buying a mutual fund.

Chart 1

For more than ten years, investors have been favoring low-cost equity funds.

Investors are increasingly gravitating toward low-cost options. The equity funds with expense ratios in the lowest quartile attracted $611 billion over the last 15 years, while funds with higher expense ratios suffered net outflows.

Chart 2

Investors' preference for low-cost bond funds is clear.

Roughly 93% of net cash flows into taxable bond funds went to low-cost options.

By "voting with their feet," investors in both equities and bonds are showing they've clearly received the low-cost message.

Chart 3

Vanguard research authors:
Don Bennyhoff, CFA
David J. Walker, CFA

CFA® is a register trademark owned by CFA Institute.

 

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