In an era of flat stock markets, you can't afford to pay one cent more than you have to in fees. Finally, that's a message that investors have gotten loud and clear -- and they're doing something about it.
American Funds has long been one of the most popular mutual-fund companies in the nation. With huge funds like Growth Fund of America, the company is especially popular among investors who use financial advisors. Yet last year, investors took a whopping $33 billion out of the $122 billion fund -- contributing to a total net withdrawal from the fund family of $81.5 billion.
Why investors are giving up on active management
To understand the trend behind the move away from the Growth Fund of America, you have to take a look at where people are putting their money instead. Vanguard, long known for its low-cost no-load funds, pulled in the most money of any mutual fund family, up $29.5 billion.
Perhaps more impressive, however, is the shift toward exchange-traded funds. According to IndexUniverse, ETF inflows last year were more than double what came into mutual funds. All told, more than $119 billion in net inflows went into ETFs in 2011. And again, Vanguard turned out to be the winner in that universe as well, beating out larger firms State Street (NYS: STT) and BlackRock (NYS: BLK) for the top spot among ETF families.
The common thread that links those two facts is that people simply aren't willing to pay big fees. When active managers can't deliver the goods when it comes to performance, investors are learning to make the big decisions on their own -- and they're picking investments that will cost them as little as possible to do so.
The ultimate move
Of course, depending on how much money you have to invest, the biggest cost-saver may be simply to use a discount brokerage to buy individual stocks. There's plenty of evidence that investors are doing exactly that, as TD AMERITRADE (NAS: AMTD) and Charles Schwab (NYS: SCHW) reported earnings gains last week that beat year-ago levels, while E*TRADE Financial (NAS: ETFC) is seen reversing a year-ago loss when it reports later this week.
But if you don't have enough money to build a diversified portfolio of individual stocks in a cost-effective way, you still don't have to settle for pricey investments. Consider these two choices:
- Growth Fund of America charges you a load of up to 5.75% straight off the top, meaning that less than $0.95 of every dollar you invest actually goes toward your investments. That money goes to pay your financial advisor, which may explain why the funds are so popular among the advisor set. Moreover, thereafter, you'll pay expenses of 0.68% for active management -- actually fairly low by most standards. In exchange for that, you would have earned returns of about 18% annually over the past three years.
- Conversely, you could go with a no-load mutual fund like Vanguard 500 Index. It carries no load and charges only 0.17% per year in expenses. And performance? At 20% per year over the past three years, it beats Growth Fund of America hands down.
Can you blame investors for giving up on active management when it produces results like these?
Get on the bandwagon
The fact is, you shouldn't be spending more than you have to for your investments. Even if you don't like keeping a close eye on your portfolio all the time, with ETFs and index mutual funds, you don't have to -- yet you can still have the exposure to stocks and other types of investments that you want. And at a price you can afford, it's never made more sense than now.
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At the time this article was published Fool contributor Dan Caplinger goes his own way with his investments. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of BlackRock, TD Ameritrade, and Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is fee-free for your protection.
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