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Low expense funds vs high expense funds with exceptional returns
Over the years I have used expense ratio as one one factor in choosing a fund . In recent years I have come to realize that many funds have a superior returns even though they have higher expense ratios. Case in point is the advertising talking points of Vanguard funds. I now look at the expense ratio last before I choose a fund.
I don't know that I would put expenses at the bottom of a screen, but they are an important consideration. Yeah there are a lot of funds that can put up great numbers and earn their expenses. But there is no guarantee that will continue, and in a down year, the higher expenses can put even more pressure on total returns. All that being said, however, there some funds that I believe do earn their way despite higher expenses. For example, WAEMX is not at all a cheap fund in terms of expenses. It plays in thinkly-traded emerging market small cap stocks, often venturing into frontier markets that are even more difficult to execute trades. So its 1.96% expense ratio is indeed high. But compared to EEM or VWO(emerg mkt index), it's blown past over the fund's short history. Will it continue? I don't know, of course. But given the talents of the lead managers, we have a lot of confidence.
Expenses are really important when dealing with fixed-income funds. Since total return expectations are likely much less than with equity funds, higher expenses, unless the fund has really out-shot its competition, can be a real drag.
Expenses are definitely an important factor for me. When buying a fund, you are buying it for its future performance, not past performance. It can be very difficult to predict the future performance of a fund... but expenses are one thing you can be definitely sure about.
Generally I will have a specific strategy/style in mind, say "REIT fund" or "opportunistic concentrated fund with value tilt." Once I have a few funds where I think the skill/strategies are comparable (or at least not clearly better than another), I will almost always pick the one that has the lowest expenses, even if its performance has not been the best. Again, that's because I am not buying a fund for past performance, but future performance.
Note that this does not mean I only buy funds with low expenses. Some investment strategies/styles simply cost more. WAEMX is a good example. I hold WAEMX and have no complaints about its performance, but again, I don't know how it will do in the future. So I am also looking at GPIOX and other possible alternatives that have lower expenses.
Lastly I am not sure what point you were trying to make about Vanguard. I will just say that Vanguard funds generally perform very well, and more importantly, they perform well *consistently*. Just going off Morningstar, VTSMX has been in the top 50% every year for at least the last 10 years (and many years it is in the top 1/3), and the low fees are definitely a major factor for that performance.
Comments
Expenses are really important when dealing with fixed-income funds. Since total return expectations are likely much less than with equity funds, higher expenses, unless the fund has really out-shot its competition, can be a real drag.
Generally I will have a specific strategy/style in mind, say "REIT fund" or "opportunistic concentrated fund with value tilt." Once I have a few funds where I think the skill/strategies are comparable (or at least not clearly better than another), I will almost always pick the one that has the lowest expenses, even if its performance has not been the best. Again, that's because I am not buying a fund for past performance, but future performance.
Note that this does not mean I only buy funds with low expenses. Some investment strategies/styles simply cost more. WAEMX is a good example. I hold WAEMX and have no complaints about its performance, but again, I don't know how it will do in the future. So I am also looking at GPIOX and other possible alternatives that have lower expenses.
Lastly I am not sure what point you were trying to make about Vanguard. I will just say that Vanguard funds generally perform very well, and more importantly, they perform well *consistently*. Just going off Morningstar, VTSMX has been in the top 50% every year for at least the last 10 years (and many years it is in the top 1/3), and the low fees are definitely a major factor for that performance.