Chapter 97: How to Judge Funds and Distinguish Good From Bad

Source: https://www.facebook.com/100063294665283/posts/763078345811981/

[James’ Origin and Today] Chapter 97 - [Fund Expense Ratio: How to Judge and Distinguish Good from Bad] (01/09/2024)

To compare fund expense ratios, it makes more sense to compare between funds of the same profile and type.

For example, comparing QQQ to Fidelity Vanguard Charles Schwab's index funds is inaccurate.

This is because there are no index funds focusing on QQQ (Nasdaq 100), that is, their fund names are not Nasdaq 100 Index Fund. Therefore, if you mention an index, you must clearly indicate what index it is in order to be considered a true index passive fund.

For example, the fund name should indicate that it is an SP500 index fund, so that it can truly be called an index fund like SPY.

If the name of the fund is market index fund or the name is general and vague, it is usually a case of trying to sell dogs over others.

Taking the same index funds, for example, SPY and VOO are both SP500 index funds. Both funds are passive funds and both track the SP500 index, which is suitable for comparison. The expense ratios of these two funds are slightly different, the difference is about 0.06%! The stock price trends of these two funds completely overlap, and there is not much difference, which means that the stock price capital appreciation performance of the two funds is the same, but the dividend yield of VOO is 1.58%, while the dividend yield of SPY is 1.55%, a difference of 0.03%. Therefore, the difference in long-term investment performance between SPY and VOO is 0.03%, not 0.06% as indicated by the expense ratio. In other words, investors of VOO's low expense ratio of 0.06% have not fully enjoyed it. Only half of the 0.03% is benefited by the fund company because of the lower expense ratio.

Therefore, investors need to pay attention to:

1. It would be more meaningful to compare expense ratios only between identical funds.

2. When looking at different funds, we don’t look at expense ratios, but at performance. The total performance is the capital appreciation from the stock price increase plus the dividend yield, which is the complete performance. If there is a fund with a 0.5% higher expense ratio but a 5% higher annual performance, of course it is still a fund with high investment returns. Just like you wouldn't hire an inefficient employee who demands a low salary.

3. If it is the same index fund, in addition to looking at the expense ratio, we also need to look at the overall performance (capital appreciation plus dividend yield). Sometimes the expense ratio is low, but the dividend yield is also low, which means that the dividends that should be paid to you are used for expenses, and investors don't know it!

Of course, comparing SPY and VOO, VOO's performance is 0.03% better than SPY.

I hope this explanation will give everyone some ideas about fund comparison and selection.