As we started writing this blog, we also started reading other blogs about personal finance and FIRE. The blogs are all very different, but it seems as if they all agree to one thing… that investing in passive index funds is the shit! And we are not to blame them, as it very easily gives you a diversified portfolio at a much lower cost than buying actively managed mutual funds. But are the passively managed funds so cheap at all?
As readers of our blog know, we prefer to “invest like an index fund” rather than invest in an index fund (Single stocks or index funds?). The main reason for this is costs. Cost structures for buying single stocks is extremely easy to understand, as it is the commission fee you pay when you buy and sell the stock.
When you invest in funds (both passively and actively managed) you pay the commission fee that you also pay for single stocks, but on top of this, you also pay a purchase fee (when buying in), a redemption fee (for selling out) and a yearly fee for having a position in the fund. Let’s look at an example, where you buy a low cost passive index fund (Globale Aktier Min. Risiko KL, Sparindex):
When buying the fund you will pay a commission fee (that depends on your trading platform) and a purchase fee at 0,29%. For every year you hold a position in the fund, you pay 0,50%. And the day you want to sell out, you pay a commission fee and a redemption fee at 0,27%. This is a lot of fees if you ask us and especially if you compare to buying single stocks.
Most funds inform you what their yearly costs in percentage are (in danish: ÅOP), but be aware that this number is given without the commission fee you pay and is calculated with a certain number of years as holding period. For the example with Sparindex, they write that the costs (ÅOP) of the fund is 0,59% per year and if you dig into this number, you will find out it is calculated based on a holding period of seven years.
As you can read it can be quite costly to invest in an index fund, even though it is passive and seems cheap. We surely understand people who choose to invest in index funds as you get a very diversified portfolio with smaller amounts of money and avoid the hassle with deciding when and what to buy, but we think it is important that you know what you actually pay in fees.
This was our take on fees for now. We will stick to investing in single stocks, but maybe some of you wants to challenge our view?
Note: This post does not cover closed end funds like ETFs etc.