Investors Moving Money to Low Cost Funds

Most index fund and bond investors choose the most inexpensive funds.

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Lower fund costs allow investors to keep more of a fund’s return. The volatile financial market has led to increasing concern about how much investment expenses erode gains and enhance losses, especially when saving for a long-term goal such as retirement. Costs are also sometimes controllable by shopping around for funds that charge the lowest expenses.

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When information about investment expenses is available, most people rationally choose low cost investments. The predominant portion of investor dollars were invested in funds with the lowest costs between January 2000 and December 2009, according to a new Vanguard analysis of Morningstar data. Nearly $395 billion was invested in equities in the lowest quarter of expenses compared to $81 billion that was transferred out of equities with the top half of expenses. About 86 percent of all equity investments over the past decade were in the quarter of funds with the lowest expenses, Vanguard found.

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Index funds were generally the top choice for investors seeking low costs. A large majority (93 percent) of the money invested in index funds was in funds with the lowest costs. And over three quarters of bond investors (78 percent) chose bond funds in the lowest quartile of expenses.

Investors using actively managed equity funds and exchange-traded funds and notes, however, seemed to make choices based on other factors in addition to costs. Only slightly more than half of exchange-traded fund equity investors (59 percent) and activity managed equity investors (55 percent) chose the most inexpensive funds.

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Financial advisers and retirement plan sponsors also play a large role in how client and participant money is invested. An uptick in use of financial advisers paid a flat fee for their services rather than a commission has likely contributed to their recommending more low cost investments, Vanguard says.

Tell us, do you shop around for the lowest cost investments?