Low-Fee ETFs vs Mutual Funds: The Ultimate Wealth-Building Showdown
Episode 37: The Dynamic Duo — Round 2!
“Compounded over time, small differences in annual fee and returns can drastically change overall performance.”
Sifu
Episode 37: The Dynamic Duo — Round 2!
Primer:
Ronin: Sifu! I read today’s and I see that you have another head-to-head with our friends Mike and Harvey again. Those guys never learn, do they? Fight club — part 2. Let’s get it on!!
Sifu: Hee-hee. I do love Harvey and Mike comparisons. In this case, I think Mike is the one that “never learns”.
Ronin: Yeah boss, when will that ijdut get a clue and just follow Harvey. He’s the genius out of this dynamic duo, isn’t he? Mike sounds like the kind of guy who pays for premium toilet paper, and then complains about inflation.
Sifu: Indeed, #1. You’re not wrong. :
1. Managed fund fees can be 10 to 20 times higher than ETF’s lower fees.
2. Statistics show that over time, the majority of managed funds underperform ETF’s that mimic the overall market.
3. Compounded over time, small differences in annual fee and returns can drastically change overall performance.
Sifu: In our test case, the returns and fees used are very typical.
Year 10: The Slow Burn of Fees
Sifu: After 10 years, Mike, with his 7% returns minus 1.5% fees, has grown his portfolio to $170,825.
Ronin: And what did Harvey do? Kick serious ass and took names!
Sifu: Close. Harvey, with his 8% returns and just 0.1% fees, grew his portfolio to $214,358.
Ronin: Oy! That’s over 43 grand more! Mike could’ve taken that extra money and bought… I dunno, a lifetime supply of that quadruple-ply toilet paper?
Year 20: The Fee Monster Feasts
Sifu: By year 20, Mike’s portfolio is worth $291,709. Meanwhile, Harvey’s is sitting at $459,002.
Ronin: Whoa! That’s $167,000 more! With that difference, Mike could’ve gotten some actual financial advice… or maybe hired someone to slap the fees out of his mutual fund manager’s hands.
Sifu: Fees are like a silent kung fu master. You don’t see them, but they slowly knock you out over time.
Year 30: Mike’s Financial Karate Chop to the Gut
Sifu: After 30 years, Mike’s portfolio reaches $498,395. Harvey, on the other hand, nearly doubles that, finishing at $981,070.
Ronin: Ai-ya! A double?! Looks like lunch will be on Harvey for the rest of their lives!
Sifu: Seriously! Harvey walks away with $482,675 more. That’s the power of compounding.
Ronin: Mike walks away with… financial trauma. Maybe a total knockdown. That extra money paid for his fund manager’s Ferrari and his kid’s private school.
The Power of Fees and Returns
Sifu: Last time, we went over the key takeaways, but today’s test case makes the point, emphatically. Fees and overall performance matter, especially over time.
Ronin: Roger that, bossman!
Sifu: The right choices today can lead to an empire tomorrow. Small, consistent decisions lead to massive results.
Ronin: Hey Sifu, we’re kind of like a dynamic duo, right? Can I be Harvey?
Sifu: Ronin, listen up. Clearly, I’m Harvey and you’ll be Mike until you mend all your dumbass ways. You want to step into Harvey’s big ass shoes, you’d better man up. Big pants is not the same as big shoes!
Ronin: Doh! Can’t blame a guy for trying. Hee-hee.
Go to Sifu’s Notebook for the Case Study on Low-Fee ETFs vs Mutual Funds
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Originally published at on September 24, 2024.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
