Monday, November 29, 2004

Minor Correction on TSP Expense Ratios 
A reader writes in correctly pointing out that the 10 basis point expense ratio on the "C" fund in the Thrift Savings Program is arrived at after adding in unvested employer (that is, Federal) contributions to the fund.

He also rightly points out that the "C" fund actually owns shares of a master fund, and so may have underlying expenses not listed in the expense ratio.

Nevertheless, one can guage the true expenses of this index fund from its tracking error, which is still very small.

Moreover, the Vanguard Group manages to run institutional money in an S&P 500 index fund for 10 basis points without the benefit of unvested federal matching contributions remaining in the fund.

My original point still stands--critics pointing to the "average" mutual fund which charges 1.5% in expenses are constructing straw men, and overstating the expense problem by a factor of at least 15.

At the same time, though, they're understating the true expenses of mutual funds, because actively managed mutual funds tend to trade more -- 100% is a typical turnover ratio -- and thereby rack up anywhere from a half percentage point to several points per year in trading costs, bid/ask spreads, etc. These are also not included in the expense ratio, but are a much, MUCH smaller factor with an S&P 500 or Wilshire 5000 type index fund.

Splash, out


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