Index Investing: Low Fees but High Costs
Many investors and investment professionals are aware of the cost/performance issues within the actively managed mutual fund industry. This has provided a significant boost to index investing and exchange traded funds (ETFs). Virtually everyone knows about the low fees and index-like performance; it is a very compelling story relative to higher-cost mutual funds that underperform their related indices on average.
Looking deeper into the mechanics of index investing, however, reveals subtle but real costs that can far outweigh the advertised management fees. In some cases, these costs can be 2% or more per year and should thus be considered when deciding on or formulating investment strategies.