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Investing strategies

Get to know your investment costs

All investments have costs. But how much you pay for your investments—and to whom—is up to you.
9 minute read

Remember … costs matter

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.

Don't let high costs eat away your returns

Compare costs for 2 funds and see how they'd affect your investment

All mutual funds have:

Expense ratios. This expense is measured as a percentage of the amount you have invested—for example, 1.25%.

You won't see it on your statement; it's deducted from your returns before they get to you. So, for example, your mutual fund 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.

The money from the mutual fund expense ratio goes directly to the fund to pay management and administrative costs, which could vary widely depending on the fund and company.

Many fund companies, including Vanguard, offer shares 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.

See more about Vanguard fund share classes
 

Some mutual funds also have:

Purchase & redemption fees. 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.)

These fees go back to the fund to offset trading costs.

Loads. 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. These fees are charged to pay for expenses to market and distribute the fund.

Commissions. These costs are charged when you buy or sell securities. They go directly to the broker through which you buy your fund shares.

All ETFs (exchange-traded funds) have:

Expense ratios. This expense is measured as a percentage of the amount you have invested—for example, 0.50%.

You won't see it on your statement; it's deducted from your returns before they get to you. So, for example, the investments in your 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.

The money from the ETF expense ratio goes to the investment company to pay management and administrative costs, which could vary widely depending on the ETF and company.

Bid-ask spreads. This is another cost you won't see. It's the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

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.
 

Some ETFs also have:

Commissions. These costs are charged when you buy or sell securities, and they go directly to the broker. While all ETFs technically have a commission fee, you may avoid it by buying the ETF directly from the provider.

All stocks have:

Bid-ask spreads. This is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

For example, let's say you want to buy shares of a certain stock 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 stocks—those with many buyers and sellers at any given moment—the spread will stay very narrow. For stocks that don't trade frequently, the spread can be much wider.
 

Some stocks have:

Commissions. These are charged when you buy or sell stocks, and they go directly to the broker.

All bonds and CDs (certificates of deposit) have:

Bid-ask spreads (price spreads). This is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

For example, let's say you buy a certain bond for $990. If the current bid price for that bond is $970, you've already lost $20 on paper.

A bond's bid-ask spread will be partly due to how liquid the bond is. Less liquid corporate and municipal bonds can have wider spreads because the pool of potential buyers is smaller.
 

Some bonds and CDs have:

Commissions. For bonds and CDs, commissions can vary 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.

Commissions. 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.

Bid-ask spreads. If you trade options (rather than either exercising them or letting them expire), you'll also be subject to a bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive for the option.

In practice, the bid-ask spread isn't only an indirect cost, it's also a good measure of liquidity. Options that have a lot of potential buyers and sellers should have a narrow spread. Options that don't trade frequently can have much wider spreads.

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For more information about Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

All investing is subject to risk, including the possible loss of the money you invest.

Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.

Options are a leveraged investment and are not suitable for every investor. Options involve risk, including the possibility that you could lose more money than you invest. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. A copy of this booklet is available at theocc.com. It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (866-641-0739 or 888-OPTIONS). The booklet contains information on options issued by OCC. It is intended for educational purposes. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit optionseducation.org for more information. The OIC can provide you with balanced options education and tools to assist you with your options questions and trading.