While 87% of investors say they are aware of what expense ratios are and 83% say they know what a basis point is, less than one-third say they understand each “completely,” according to a survey conducted by State Street Global Advisors.
“Comprehension of investment product fees – and fees in general – is low even among those working with an adviser. This underscores how much work our industry has to do when it comes to price transparency and investor education,” Brie Williams, State Street’s head of practice management, said in a release. “Confusion exists about how investors pay for both investment products and the guidance they receive from an adviser, with 47% of investors believing the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisers or investment platform.”
Among those who think they understand expense ratios and basis points, the average expense ratio they consider to be no longer “low cost” is 0.61%. Meanwhile, the asset-weighted average expense ratio of U.S open-end mutual funds is 0.51% and the average asset-weighted ETF cost is just 0.20%.
“From an ETF provider’s perspective, low cost is generally considered funds with an expense ratio of 0.10% or less, which is six times lower than the threshold of investors in the survey,” Williams said.
When asked to rank factors in terms of importance when evaluating investments like mutual funds and ETFs, the majority of investors prioritize “risk compared to return” (53%), “quality of stocks in the fund” (51%), “performance compared to peers” (46%) and “performance compared to the benchmark(s)” (42%) over “management cost of the fund” (35%).
Factors ranked less important were “track record of the fund manager” (28%), “market sectors covered in the fund” (22%) and “tax efficiency” (22%).
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