May 30, 2017

Index Funds: What's the Catch?

Hat tip to Meb Faber for compiling this list of S&P500 Index Funds:

So, what’s the catch?

  • Each fund holds the same stocks in the S&P500
  • Yet each charges a different fee for basically doing the same thing. If there was ever a commodity investment product, it would be an S&P500 Fund! Remember that this fee is taken out of fund returns EVERY year so it has a compounding effect over time.
  • Why do they charge a different fee?
    • Because investors allow them to by not comparing alternatives and taking what a financial advisor recommends to them without asking “Is there a lower cost option available!”

Assignment for your students:

  • Find the LOWEST cost S&P500 Index Fund.
  • How does the fee of this fund compare to the fees in the table above?
  • Why do you think investors buy the index funds above when there are lower cost options available?
  • What is your main takeaway from this mini-activity? Importance of comparison shopping!!!!

___________

Want to teach your students about index funds? Try this popular NGPF Role Play: Let’s Make A Mutual Fund!

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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