![\"\"](\"http:\/\/springwaterwealth.com\/wp-content\/uploads\/2019\/10\/im-112777.jpeg\")
<\/p>\n
Finally, another cost paid by investors in mutual funds and ETFs is the \u201cexpense ratio.\u201d The expense ratio is the total percentage of fund assets used by the fund manager for administrative, management, advertising, and all other expenses. Mutual funds typically haver higher expense ratios than ETFs. We won\u2019t get into the reasons for this today. However, the expense ratios for both mutual funds and ETFs have been under downward pressure. Earlier this year, Fidelity, and then Vanguard, came out with mutual funds that have a 0% expense ratio. This is fairly remarkable. Springwater uses mutual funds and ETFs that have expense ratios much lower than the industry averages.<\/p>\n
You might be asking how these brokerage firms can continue to be profitable, as they persistently drive trading costs \u2013 and thus their income \u2013 down. Part of the answer lies in their ability to use technology to reduce their expenses. They\u2019re able to pass along to investors some of these savings in the form of lower commissions. Another reason is that these firms are incredibly efficient in earning a spread on the cash sitting in investor accounts. As an example, if an investor has cash sitting in Schwab\u2019s bank account, it is earning very near 0% interest. However, Schwab can sweep that cash daily from its customers\u2019 brokerage accounts, invest it through its banking division and earn a rate much closer to 2%. While that \u201cspread\u201d may not seem like much, for large brokerage firm managing millions of accounts (12 million for Schwab) holding billions of dollars, it can add up fast. It\u2019s interesting to note that The Wall Street Journal reported last week that investors are holding 11.4% of their total holdings in cash. That\u2019s higher than in the past and it suggests investors are nervous. It also gives brokerage firms more money with which to earn the spread.<\/p>\n
In case you\u2019re wondering, Springwater generally keeps a minimal amount of cash in Schwab Bank for our clients. There will be enough cash to meet distributions over the next 6-12 months and to pay fees and commissions. We invest excess cash in a Schwab money market fund, and expect to earn significantly more interest than Schwab Bank pays on cash deposits.<\/p>\n
Zero commissions, and reduced investing costs in general, are good for investors. You can think of those savings as resulting in a higher net return or reducing the investment cost \u201cdrag\u201d. If you have a $1 million portfolio and Springwater can reduce your overall investing costs by even 0.25%, your portfolio will effectively gain $2,500. We think that\u2019s significant and we believe you\u2019ll agree.<\/p>\n