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Low-Cost ETFs for Building Long-Term Wealth

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Before we delve into the intricacies of low expense ratio funds or ETFs, let's start with the basics: what is an expense ratio? An expense ratio is a measure of what it costs an investment company to operate a mutual fund. It covers the management fee, administrative costs, and other operational expenses.

This ratio is calculated annually and represented as a percentage of the fund's total assets. Therefore, the lower the expense ratio, the less you are paying to have your money managed, and the more of your investment returns remain in your pocket.

Compounding Effect of Lower Expense Ratios

One of the key reasons to consider low expense ratio funds is the powerful compounding effect. Compound interest works in two ways: it can be your best friend when you're earning it, but your worst enemy when you're paying it. The same principle applies to the expense ratios of funds.

Over time, a high expense ratio can significantly eat into your investment returns. By choosing a low expense ratio fund, you allow more of your money to remain invested and compound over time, potentially leading to significantly greater long-term growth.

Difference a Low Expense Ratio Can Make

Consider this example: If you invest $10,000 in a fund with a 1% expense ratio and the fund earns 8% per year, after 20 years you would end up with roughly $40,000. However, if you invest the same amount in a fund with a 0.1% expense ratio and the same annual return, you would end up with around $43,000. That's a $3,000 difference from just a 0.9% reduction in the expense ratio. The longer your investment horizon, the larger this difference will be.

Misconception of High-Cost Equals High-Return

A common misconception among investors is that higher-cost funds provide better returns, due to superior management or exclusive investment strategies. However, numerous studies and actual data have shown that lower-cost funds often outperform their more expensive counterparts over the long run.

Price War Among Issues Make Funds Cheaper These Days

With competition intensifying in the ETF space, the fee-cut war has gained momentum over the years. In a bid to gain market share, ETF issuers have been engaged in a fee war and slashing expense ratios for some of their products aggressively. Notably, Equity ETFs averaged 0.16% in 2021, down from 0.34% in 2009. Expense ratios of bond index ETFs averaged 0.12% in 2021, down from 0.26% in 2013, per (read: Looking to Cut Costs? Tap Zero-Fee ETFs).

Each Penny Matters Amid High Inflation

Against such a backdrop, we have highlighted seven ETFs with ultra-low expense ratios that can be considered at the current operating backdrop. The data are as of

ETFs in Focus

SoFi Select 500 ETF (SFY - Free Report) – 0.00%

BNY Mellon US Large Cap Core Equity ETF (BKLC - Free Report) – 0.00%

JPMorgan BetaBuilders U.S. Equity ETF (BBUS - Free Report) – 0.02%

Vanguard Total Stock Market ETF (VTI - Free Report) – 0.03%

iShares Core S&P 500 ETF (IVV - Free Report) – 0.03%

Schwab Short-Term U.S. Treasury ETF (SCHO - Free Report) – 0.03%

SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM - Free Report) – 0.03%

(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)

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