It seems the entire world is looking to 2021 with great anticipation and hope. I recently saw a New Year’s greeting card that read “Good Riddance 2020”. One piece of good news for next year is that some fund expense ratios will be lower! To be more precise, some of the funds on our firm’s recommended list, funds that we use in our clients’ accounts, will have slightly lower expense ratios in 2021.
During the Christmas buying season, everyone loves a bargain or a special discount. When we find a sale on something we want or need, we have a good feeling inside. This feeling is stronger when we have searched for the right product at the right price and are certain that this sale price is good and the item should be purchased here and now.
Sometimes there may be a little voice in our head that asks if the store raised the regular price and then lowered it to show a bigger sale discount. Or perhaps this store’s ‘sale’ price is the same as that store’s regular price. That voice of regret can be discomforting so we often turn it off. Another way to deal with it is to gain knowledge by researching products and prices. Armed with knowledge, we can say to that voice, “This is the product I want and this sale price is quite good.”
Let’s apply this situation to the expense ratios for mutual funds and exchange-traded funds (“funds”).
Before we go shopping, we make a list of what we want. To write our fund shopping list, we need to know what we own and what we should own. This may require some reading and note taking, some consideration of multi-factor problem solving, and the ability to put together a puzzle without looking at the box cover. In other words, we need to learn and then apply what we’ve learned.
With the arrival of cooler weather, my wife and I decided a throw was just the thing we need. We pictured ourselves sitting on the couch, the throw over our laps, sipping hot cocoa and watching a Christmas movie. “Let’s go shopping for a throw!” Have you seen how many different kinds of throws are available? Light, heavy, smooth silk, faux fur, solid, plaid, and everything in between. We called a timeout and went back to the kitchen table to discuss our choices. And so it is with funds. We need to know what we want to own. There are many choices so our search will be narrower if we know what we’re looking for.
Our search for a throw was much easier once we decided we wanted one with faux fur on one side. Our family room has a lot of hard surfaces so the faux fur would add some texture and softness. Next we decided on size and, lastly, color. Now we were ready to shop. Knowing that your portfolio needs more U.S. small cap can help you quickly narrow your search for the right fund.
Not every faux fur throw is made of the same material. After a trip to the mall, we found that we liked the texture of some and did not like the texture of others. Now, we had to examine each throw to see the materials used. We have to do the same things with funds. We need to examine the characteristics of the fund to see if it really is what it says it is. For example, there is a popular U.S. small cap index fund that owns only 40% small cap stocks. The other 60% is mid cap. Obviously, if we’re looking for a small cap index fund, this one does not measure up.
We were ready to find our throw. Price finally became an important consideration. When we found a faux fur throw at a very low price, we had enough knowledge to determine if it met all our criteria. If it checked all our boxes, we could decide if the price was low enough.
Finding the right throw at a low price was a wonderful feeling. We made a quick stop at the grocery store to buy hot cocoa mix and miniature marshmallows. Finding the right fund at a good price feels good when it checks all the boxes. Our firm recently learned that mutual funds we use in our clients’ accounts will be reducing their expense ratios in 2021. What a great feeling! We get the funds we want at a lower price! That makes for a happy new year!