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Costs

ETFs are known for their low costs. The Vanguard 500 Index Trust previously discussed is known as a superefficient index fund in terms of costs, with an annual expense ratio of 0.18 percent. For index mutual funds, it doesn't get any lower than this. The S&P 500 iShare ETF tops Vanguard's low cost with a really startling figure—0.09 percent on an annual basis. It is difficult to imagine how costs could go any lower.

The cost issue might or might not be as important as it first appears. For all practical purposes, the operating cost difference between the Vanguard index fund and the ETF illustrated is not very large. The reason the costs for both are low, of course, is that both are unmanaged portfolios, and therefore costs are not generated for security analysis. As we start to examine actively managed mutual funds, of course, the expenses become much higher, and make a much more significant difference.


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