Get to know your investment costs

Compounding is great when it's your returns that grow exponentially—but not so much when it's your costs. Make sure you understand how expenses will impact your returns. You can use our Fund Comparison Tool to compare costs for 2 funds to see how they’d affect your investment.

These costs apply to a few different investment options.

Expense ratios go directly to the fund to cover management and administrative costs, which can vary depending on the fund and company. They’re measured as a percentage of the amount you have invested—for example, 1.25%. They apply to mutual funds and exchange-traded funds (ETFs)

You won't see an expense ratio on your statement; it's deducted from your returns before they get to you. For example, your mutual fund or ETF might return 5%—but if your expense ratio is 1%, you'll only see a 4% return, meaning you'll lose one-fifth of your return right off the bat.

Many fund companies, including Vanguard, offer fund share classes that allow you to pay a lower expense ratio if you make a large investment. Check to make sure you're paying the lowest costs you qualify for.

Bid-ask spreads are the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive. They apply to ETFs, stocks, bonds, certificates of deposit (CDs), and options.

They’re another cost you won’t see.

For example, let's say you want to buy shares of a certain ETF and you bid $20 per share. As soon as your bid is the highest in the marketplace, a seller accepts your bid and the sale is completed.

But now that your offer has been accepted, the new "highest bid" waiting to be filled is $19.95. On paper, you've already lost $0.05 per share.

In practice, the bid-ask spread isn't only an indirect cost, it's also a good measure of liquidity. For very liquid ETFs—those with many buyers and sellers at any given moment—the spread will stay very narrow. For ETFs that don't trade frequently, the spread can be much wider.

Commissions are fees that are charged when you buy or sell securities. They go directly to the broker you use to buy your investments. Commissions can be applied to mutual funds, ETFs, stocks, bonds, CDs, and options.

Commission structures differ based on the investment type. Commissions can vary for bonds and CDs, depending on whether you're buying on the primary market or secondary market, and they may be levied based on the face value or per transaction.

For options, commissions are usually based on both a flat fee and a per-contract charge. An additional charge applies if you exercise the contract before expiration.

While all ETFs technically have a commission fee, you may avoid it by buying the ETF directly from the provider.

In addition to expense ratios and commissions, some mutual funds have the following fees:

Purchase and redemption fees go back to the fund to offset trading costs. Mutual funds may charge a percentage of the transaction amount every time you buy or sell. (Redemption fees usually only apply for a certain time period—for example, if you sell shares you've owned for less than 2 months.)

Loads are similar to purchase and redemption fees in that they're charged when you buy (front-end load) and sell (back-end load) certain securities. However, loads are paid directly to the investment company, not the fund.

12b-1 fees are charged to pay for expenses to market and distribute the fund.