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There on this episode of the Personal Finance Podcast How I Analyze Index Funds to choose my investments. What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney co. And today on the Personal Finance Podcast we're going to be talking about how I analyze index funds. If you guys have any questions, make sure you join the Master Money newsletter by going to MasterMoney co/newsletter. And don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever your favorite podcast player is. And if you want to help out the show, consider leaving a five star rating and review on Apple Podcasts, Spotify or your favorite podcast player. Now today I'm going to dive into how I analyze index funds and I go through a very specific process when I am looking at a new fund that I may want to invest in. And so today we're going to go through the nine different steps that I go through to try to factor in what are the big things that I want to know. And so I want to make this as easy as possible for you as well. And so we're going to go through some of these metrics that you may think that you already go through, and some of these you may not go through yet. And it's going to be a great lesson for you in order to learn how to analyze index funds. So I have a ton of stuff to go through here in this episode, so without further ado, let's get into it. All right, so to start off this episode, we are going to get as basic as we possibly can for those who are brand new to index fund investing. And so if you are brand new to index fund investing, there is something that you need to search for when you are looking for this specific investment called a ticker symbol. Now, a ticker symbol is just going to be a bunch of various letters that identifies that specific fund. And so when we are looking at index funds and ETFs, you may be looking for an S P 500 index fund, for example, and Vanguard has a bunch of them. Well, Vanguard's ticker symbol is VF iax. Now, I'm going to use VF IAX as an example throughout this entire episode. So you'll see me talking about VFX throughout this episode. So if you're listening at home and you want to pull up and kind of look at what I'm looking at, you can go to Vanguard's website and pull up VF I A X. Just a simple way to have an example here. But the ticker symbol, all it is, it's just the fund name essentially broken down. And so you need to understand what that ticker symbol is as you start to look through some of these investments. So say, for example, you look up a list of S&P 500 index funds. Well, you'll see all these different fund names. And then in addition, you'll see these ticker symbols listed up and down on that fund. Next, we want to look at inception date. Now, these are just some of the other fun basics that I want to know. But inception date means when was this fun started? When did this begin? Because the longer the history, the better for me. I like older funds. I like funds that have a long term history because I can see how they performed throughout different economic cycles. We have had a ton of different things happen over the course of the last 50 years. And if I can find funds who have been through, for example, the tech bubble in the late 90s and early 2000s, well, that's a great indicator of what would happen based on something really surging way too high and how that fund performs. But even more importantly, is What I really want to know is, are there funds that were available back during the 2007, 2008 recession? Why? Because I want to see the worst case scenario, what would happen to this fund in the worst case scenario. And so I look that far back to see if these funds have that history. Now, if there's a newer fund, there's nothing wrong with that. You can still invest in newer funds. But I like older funds because I can look back historically and see what happened. 2007 and 2008 is a really important time for me because that is when the Great Recession happened. The stock market collapsed and most of these investments dropped 50%. And I want to see exactly how that happened and when it happened on some of these charts. Now, does charting some of this stuff truly, truly matter? Not always. It doesn't always matter when you're looking at this. But I want to see that inception date so I can understand what happened in the past. In addition, I also want to see how a fund performed over the course of 2009 through 2015. I want to see how it recovered from 2008 and 2009 and what happened during that big economic surge all the way up until 2020. Because when you look at 2020, what happened in 2020? COVID 19, where we had some pullbacks in 2020, did it weather that storm? Was it resistant against some of these pullbacks? Or was it something that had a much larger impact? If it had a much larger impact, it may be too heavily weighted in certain assets. We'll talk more about that as time goes on here. So that's the. I'm just looking at those two fund basics. Hey, what is the ticker symbol? We're talking about that just for people who are brand new to index fund investing. And then secondly, the inception date. Okay, so now we're going to dive into some deeper dive stuff here. Now, if you are brand new to index fund investing, we have a course called Index Fund Pro. And Index Fund Pro is the investing for beginners course that is going to teach you step by step all of this stuff. But we're also going to dive deeper into this. So if you're interested in Index Fund Pro, you can go to MasterMoney Co courses and check out Index Fund Pro. Let's go to the second second step, which is fees and efficiency. All right, next we are going to be looking at fees and efficiency. And what we want to really be looking at first is the expense ratio. Now the expense ratio is going to be the percentage of assets deducted Annually for fund management. What does that mean? What is that jargon even talking about? What this means is how much you're paying out of your pocket to the fund manager in order to manage this fund. These are the fees that are coming out of your pocket. And we want to keep this as low as possible, especially when we are investing in funds. If you are getting nothing out of this fund outside of just being invested in this fund, you do not want to be paying a high expense ratio. You want to keep those fees as low as possible. In fact, the lower the better. Now, there are a lot of fantastic index funds out there now that have 0% expense ratios. So if you're out there and you have a financial advisor who is putting you in a really high fee mutual fund or a really high fee expense ratio, you want to make sure that you have a conversation about that. Because there are a lot of low fee expense ratios out there. For example, Fidelity has zero fee expense ratio index funds. They're absolutely amazing. I invest in some of them and they are something that I think a lot of people can look into where you pay 0% fee. Now, what is a good expense ratio? That's going to be the big question a lot of people ask. And really a very good expense ratio is anything below 0.10% or 10 basis points is what a lot of people will call that. So anything below 10 basis points or 0.1% is a very, very good expense ratio. Acceptable is anything between 0.10 and 0.30. Because in that range, most likely some of those funds are at least low enough. And you'll see how impactful this is in a second. I'm gonna do the math for you, but you're gonna see that that's low enough to see a not as big of a difference as some of these other expense ratios will be. Now, as we get above 0.40 and 0.50% expense ratio, those fees are going to really impact your portfolio. Unless you're getting help from someone. If someone is helping you with your money, you should not be paying that high of an expense ratio for a fund. So if you're investing in index funds and all you're doing is buying an index and you have that high expense ratio, then that is going to be something you really want to avoid. That's what advisors should be charging. That shouldn't be something where you are paying that much in an expense ratio and having to worry about paying all these costs upfront. Now, here's one thing I want you to know when it comes to expense ratios, you want to get them as low as possible. But sometimes in things like your 401k, you only have so many options. It is so much better to get your money at least invested than it is to not invest at all because of the expense ratio. So if you are looking in your 401k and all of the options are just terrible, and the lowest expense ratio you can find is some sort of S&P 500 index fund that has a 0.50% expense ratio, then you know, more power to you. At least you have something to invest in, especially if you're getting a 401k match. But when it comes to your own investments, where you can go out and choose your investments, you need to keep them at least below 0.30% when it comes to the funds themselves, if you can. That's the goal is if you can. Now, sometimes you have no options. Maybe your advisors have no options. It just depends on the specific scenario. But you want to try to keep it as low as possible, especially if you're the one choosing. If you're going out to Vanguard or Fidelity or Charles Schwab, then you should not have a problem finding expense ratios lower than that. Now, let me show you the impact of these expense ratios and why this is so incredibly important. So we ran the numbers to see what would happen if you invested $10,000 every single year and you got a 7% rate of return. Now, this is over the course of 30 years. And I think a 7% rate of return is something that is a conservative rate of return over the course of the next few decades. But if you looked at this and you got a 7% rate of return and you had a 0.05% expense ratio, which is very normal for Vanguard index funds. It is very normal for ETFs to get a 0.05 expense ratio. If that happened, the total amount you would have paid over the course of 30 years is $8,455, and your portfolio value would be $936,000. Now, let's say you spent a 0.15% expense ratio. Well, your portfolio is going to have paid $25,113 and the future value would be $919,000. But as we start to jump this up, let's say, for example, you paid a 0.35 expense ratio. Well, that is 0.35 expense ratio is $887,000 is what your portfolio would be worth. And you would have paid $57,445 out of pocket. That's a huge, huge difference. But what I want you to note here is as I start to talk about the total fees paid, you're also missing out on the opportunity cost of that money. That money could be compounding to a much greater number if paying those fees. So you gotta remember that that's a huge, huge impact when it comes to your money. If I'm paying $57,000 out of pocket going forward, I want to make sure I'm paying somebody to help me invest my money. Instead of paying it to some sort of mutual fund manager or something like that. You can find a fee only advisor or something along those lines that's going to actually help you with your money if you're going to pay that much in fees anyways. Next, we have a 0.65% expense ratio. I'm just going to jump it up here. Each time, your total portfolio value would be $800,000. So now we're looking at a hundred thousand dollar difference. And you would have paid out to that index fund $103,000. Now let's look at the major impact of a 1% fee. A 1% fee would take your entire portfolio down to 783,000 and you would have paid $160,000 over the course of 30 years in fees. And then a 1.15% is $770,000. And you would have paid $174,000 in fees. Fees really, really matter. And what this analysis I just did does not factor in is also the opportunity cost, because the opportunity cost is going to shift to millions of dollars. Because if you do the math on what you invested there, say for example, you were thinking through $10,000 per year over the course of 30 years. Well, you invested $300,000 into those fund. Well, if you're paying $174,000 in fees, imagine how much more that fund would grow if you actually had those dollars to reinvest over that time frame. So that's how impactful fees can be. It is a million billion decision to make sure you lower your assets fees, meaning your index funds or your mutual funds, they need to have very low fees because there are some fantastic funds out there with great returns that have low fees. Next is what I look at is turnover ratio. So when we're looking at fees and cost efficiency, fees are first, then I look at the turnover ratio. Now the turnover ratio is something that measures how frequently the fund buys and sells stocks stock a lower turnover ratio under 10 is way, way better for tax efficiency. So what I really look at here is I First, if a fund has a turnover ratio higher than 50%, if that turnover ratio is above 50%, A, it's most likely a mutual fund. B, if it's an index fund, I am not looking at it. Why? Because that means they are buying and selling way too many securities. What is the purpose of an index fund? The purpose of an index fund is to mirror the the index. You must be able to mirror the index. If you cannot mirror the index and you're just buying and selling securities left and right, that means you're doing way too much out here. You're doing too much. And so you need to make sure that if you have an index fund, you are keeping that turnover ratio lower. Why? Because you pay less taxes the lower the turnover ratio. And so we need to make sure that that turnover ratio is low. So for broad market index funds, typically the turnover ratio is going to be very, very low. You want it to be like right around 5, 10%, somewhere in that range. That's going to give you a great indicator as to how much they are buying and selling investments. Now mutual funds, for example, they're going to have really high turnover ratios because they have a professional money manager. They have a whole team of Harvard and Yale graduates who are sitting in some sort of high rise out there, which is why you are paying them 1% expense ratio. You are paying for the high rise, you are paying for the Harvard graduate salary, you are paying for the fund manager's salary. And so that's why mutual funds have such high expense ratios, which is why I want you to avoid a lot of these mutual funds because the expense ratios are so high. So we want to make sure that when we look at some of these turnover ratios, we want to make sure that they are below 50% as the first benchmark. But secondly, you really want it below 20% if you're going to invest in something like that. And so really the sector funds are going to be right around that 20% range. And then actively managed funds are often 50% plus us for example, VFIAX, who are you? We are using in this example has a turnover ratio of 2%, which means it's very tax efficient. It's a very, very tax efficient investments. Now, ETFs tend to be even more tax efficient than mutual funds due to their structure. And so funds with those lower turnover ratios and capital gains distributions tend to be more tax friendly. ETFs also do that which is great. So index funds, ETFs, I'm using them interchangeably here. They are of different different, but I'm using them interchangeably here just because the purpose of both of them is to mirror an index. So if you like VOO or VTI more than the index fund, then that is great too. Next we're going to get into performance and risk metrics. More rewards, more savings with American Express Business Gold. Earn up to $395 back in annual statement credits on eligible purchases at select shipping, food delivery and retail subscription merchants. Enjoy the benefits of membership with the Amex Business Gold Card. Terms apply. Learn more@americanexpress.com Business Gold AmEx Business Gold Card billed for Business by American Express.