What is an Expense Ratio? Well, it's how you pay for an investment...

Here at Red Oak Financial, we invest our clients primarily in broadly diversified strategies made up of low cost investment vehicles (i.e. low expense ratios) and implement low turnover methodologies to mitigate ancillary trading costs. We focus on the long term financial goals of our clients, while making near term adjustments around relevant and current economic data to drive performance. As mentioned, one of the best ways to drive performance for the long run is keeping the expense ratio of a fund as low as possible, all else equal. So what is an expense ratio?

An expense ratio is the total fund costs divided by the total fund assets. Basically, it is the measure of how expensive it is to invest in the fund. If a fund (like an ETF or mutual fund) has an expense ratio of 1%, for example, for every $1,000 invested in the security there will be a $10 cost to the investor. The expense ratio is used to pay for things like administrative and other operating costs involved in operating the fund. Some funds also carry a 12b-1 fee, which is included in the operating expenses of the fund. This is an on-going fee for advertising and promotion related expenses, and cannot exceed 1%. What is not included in the expense ratio are things like load fees and redemption fees, as well as trading activity related costs.

Some other notable points on expense ratios relate to index funds vs actively managed funds. Index funds generally will have much lower expense ratios because these funds are more or less attempting to mirror performance of a certain benchmark or index. Actively managed funds, as the name suggests, are actively managed by a team of analysts and managers to seek out performance that is higher than a certain benchmark. Since there is a team actively behind these funds on a day to day basis, you pay a higher expense.

In investing, there are many variables to consider before choosing a suitable option that works for you. Future returns are not guaranteed to be similar to past returns and there is no assurance that an actively managed fund will outperform an index fund. What we do know as the investor is what the investment product costs. We maintain the ideology that keeping the known costs of an investment as low as reasonably possibly, without sacrificing performance, is the best strategy to put in place. As fiduciaries, we keep expense ratios top of mind when selecting our investment vehicles to expose our clients to, and you should too. If you are making selections in a 401(k) plan and you aren't sure of what to invest in, consider index funds or target date funds with lower expense ratios. Please consult a financial professional for advice on this topic when selecting funds. #expenseratio #fianance #baltimore #401k

-Your Friends at Red Oak Financial Group