Expense ratios (fund expenses per share divided by net asset value per share) are often overlooked because expenses are netted out against income, and reported returns already include the impact of expenses. So, if the return is competitive, who cares about expenses?
Well, two points are important. First, expense ratios are relatively unchangeable—they are easy to forecast, whereas returns are not. Second, the higher the expense of a fund, the greater the drag that a portfolio manager must overcome in the long run in order to be consistently better than other funds in the category. Also, high expense ratios are relatively easier to overcome in fund categories that produce higher returns on average, such as stock funds, than in fixed-income fund categories where expenses have a greater effect on returns. Two municipal bond funds share the same investment objectives and almost identical performance figures, but one is hard to beat on expenses. No contest.
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