Invesco's QQQ charged 0.18% a year when it launched in March 1999. It now holds near $500 billion, more than 200 times its size back then. The fee is still 0.18%. Jason Zweig, the Journal's Intelligent Investor, says QQQ has plenty of company.
The cheapest big index funds cost almost nothing. iShares, Schwab, State Street and Vanguard all sell large-company ETFs at 0.03% or less. Yet index ETFs that charge at least 0.20% to hold large U.S. stocks held $417 billion at the end of September, Morningstar says. Zweig blames inertia. Investors pay tens of millions of dollars a year in fees they don't need to pay. Sara Shores, a former BlackRock fund executive, calls it a “squishy middle” of ETFs charging more than they can justify.
Money managers usually offer breakpoints. The fee drops as the pool of money grows. Many ETFs don't have them, or set them so high they barely bite. The iShares Russell 1000 Growth ETF launched in May 2000 at 0.20%. By the end of that year it held $106 million. Today it holds over $120 billion and charges 0.18%. That's roughly 1,200 times bigger for a fee cut of two hundredths of a point. QQQ's own cheaper twin, Invesco NASDAQ 100, launched in 2020 at 0.15%. BlackRock's iShares put out a Nasdaq 100 ETF this July at 0.12%, or 0.10% after a waiver that ends next summer. State Street's version charges 0.10%. Same index, a little over half the fee.
The tax that keeps you there
Zweig asks why people stay. Elisabeth Kashner of FactSet gives the blunt answer. If you own the fund in a taxable account, selling it means a big tax bill, and “your best option to get rid of it is to drop dead.” Federal capital-gains tax takes up to 20% of long-term profits. After a long bull market, that's a real bill. Fund companies know it, so the old fees stay high. Money is still moving, though. Over the past year investors pulled $1.8 billion from the iShares Russell 1000 Growth fund and put more than $950 million into Vanguard's version at 0.06%.
Our read
Time Value of Money, M3. A fee is a return you give away every year, and it compounds the same way a return does. Take QQQ at 0.18% against a twin at 0.10%. The gap is 0.08% a year. On $100,000 that's about $80 a year. Over 27 years, QQQ's life so far, that's more than $2,000 before any growth on the money you kept. Small, yes. Also certain, and almost nothing else in investing is. Our own books use the lower-fee class, QQQM, in 4 books, held at weight. Zweig's close says it best. If you're in these funds, “you are the market, and you're bearing too much.”
Here's the check for your own plan. Open your 401(k), 403(b) or IRA app this week and find the expense ratio on each fund you hold. That's the yearly fee, shown as a percent of your money. Inside those accounts, a switch to a cheaper fund on the same index costs you nothing in tax, if your plan offers one. Do it there first. In a taxable account, weigh the capital-gains bill, up to 20% federal, against years of fee savings. Point new money at the cheaper fund either way. If you'd like a second pair of eyes on that fee list, bring it to your next review.