The other day, a reader, Matt, sent me an e-mail in response to my Zecco IRA Rollover. He asked (I'm paraphrasing):
I have a question about the Zecco IRA account. You figured a 0.036% expense ratio and I understand how you calculated it - $30 annual fee/$80k balance. If I had an account of ETF's, wouldn't I have to pay $30 per year plus any sort of expenses for the fund itself? Or does the $30 per year replace the fees for the ETF?
It was a great question and I realized that it was one that I clearly overlooked. The answer is simply "yes." The companies that make the ETFs available have to eat and pay rent too. There's no way out of ETF expenses. The bright side is that they are typically minimal - the smallest in the industry. That's the big advantage of going with indexes. Some ETFs have an expense ratio of around .07% - see Vanguard Total Market Index (ticker: VTI). Considering that I'm probably paying close 0.75% or more in some actively managed mutual funds in my 401K now, I'd be pretty happy to push that down to .10-.11% (.07 for the ETF and .036 to Zecco). A half a percent (or in this case slightly more) in 30 years is very significant on an $80,000 investment.
Before settling on Zecco for my rollover IRA, I considered two other options:
- I could go with a brokerage like Ameritrade (where I have my Roth IRA). I pay $10 commission per trade there to buy ETFs. Typically, I make one trade a year (a buy with my yearly contribution). It's technically a cheaper if I want to continue to do that - just $10 a year to buy and then selling expenses in the future. However, that commission prevents me from rebalancing or contributing a little each month.
- I could go with Vanguard or Fidelity and buy low-expense mutual funds. This option would limit my investing options significantly. For instance I couldn't find a way to invest in gold or oil with Vanguard's options.
In the end, this may be nitpicking. All the options keep expenses much lower than the national average. This little bit of nitpicking could translate to thousands of dollars in the future, so it's worth trying to get it right. I feel that Zecco currently gives me the most flexibility at the lowest cost.
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