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Fund Charges Comparison: Measuring ETF and Mutual Fund Expenses

Passive Investment Vehicles Like ETFs Often Feature Lower Costs Than Mutual Funds, Due to Less Management Involvement and the Omission of Load and 12b-1 Fees.

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Examining Fund Expenses: Breakdown of ETF and Mutual Fund Costs
Examining Fund Expenses: Breakdown of ETF and Mutual Fund Costs

Fund Charges Comparison: Measuring ETF and Mutual Fund Expenses

A laid-back guide to the world of investment fees

Hey there! Let's talk about how you can save a pretty penny when investing in the stock market—all thanks to something called exchange-traded funds, or ETFs.

First things first, let's set the stage. You've probably heard of mutual funds, right? Well, ETFs are similar, but with a noticeable difference: they come with lower fees.

In 2024, the average expense ratio for an index equity ETF shimmered at a mere 0.14%, while the average cost for an equity mutual fund stood at a swaggering 0.40%. It's safe to say that, overall, the investment fees have been on a steady downhill trend.

Why the shift in fees, you ask? Easy—it's because mutual fund companies have had to step up their game by slicing down their fees to stay competitive with the low-cost ETFs.

But what, exactly, is an expense ratio? Well, it's like the cost of inviting a handful of party crashers to the party—you know, the managers, marketing folks, and such. It's the total cost of the fund, expressed as a percentage of the total assets under management.

Mutual funds might invite a few more guests to the party with extra fees such as:

  1. Management fees, which compensate those who trade the fund's portfolio.
  2. 12b-1 fees, which pay for marketing costs and sometimes employee bonuses and cannot exceed 1% of the investor's assets.
  3. Account fees, which apply to accounts that fall below a specified value.
  4. Redemption fees, which penalize short-term trading.
  5. Exchange fees, which are charges for moving money between funds at the same company.
  6. Purchase fees, which are levied at the time shares of a fund are bought.

But there's a catch—the fee for purchasing mutual fund shares, also known as the "load fee," is a one-time charge that's typically 5% of the amount invested. Many "no-load" funds are available to help you avoid this cost, making the party that much more affordable!

Now, let's swiftly move into the realm of ETFs. Unlike mutual funds, these guys keep their administrative costs low through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another doesn't affect the fund. This means investors incur lower costs compared to mutual fund investors.

Most ETFs are passively managed funds and always "no-load," meaning there's no purchase fee. Online brokers offer commission-free ETF trades, making it easier than ever to join the party. And unlike mutual funds, ETFs don't charge annual 12b-1 fees!

Fast Fact: Did you know that in 2024, the SEC approved eleven spot bitcoin ETFs that have been trading on the NYSE Arca, Cboe BZX, and Nasdaq exchanges? And on May 23, 2024, the SEC approved applications from the same exchanges to list spot ether ETFs, which began trading in July 2024.

The Bottom Line: Exchange-traded funds (ETFs) come with lower fees compared to mutual funds. Over time, both index ETFs and mutual funds have seen a steady decline in expense ratios, but ETFs currently boast the lowest average expense ratios, sometimes near zero, while equity mutual funds have an average of about 0.40%. The fee compression trend has been particularly pronounced over the last 15–20 years, and it continues on into 2025. Keep those party costs low, my friend!

Enrichment Data:

  • Today, the average expense ratio for popular index equity ETFs ranges from about 0.00% to 0.05%. By comparison, the asset-weighted average expense ratio for equity mutual funds in 2025 remains at a significantly higher 0.40%.
  • The expense ratios for index equity ETFs and mutual funds have steadily decreased over the past decades due to increased competition, the rise of passive investing, and investor demand for lower fees.
  • The fee compression trend has been particularly pronounced especially over the last 15–20 years and continues into 2025, with many index equity ETFs boasting near-zero fees.
  1. Dabbling in the crypto sphere, the SEC approved eleven spot bitcoin ETFs in 2024, paving the way for trading on NYSE Arca, Cboe BZX, and Nasdaq exchanges.
  2. Embracing the digital age, the SEC also approved applications for spot ether ETFs in 2024, which subsequently began trading in July 2024.
  3. When considering investing in various financial channels, such as trading bitcoin through ETFs, it's beneficial to consider the consistently lower fees associated with exchange-traded funds (ETFs) compared to traditional mutual funds.

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