Investing giant Vanguard has cut expense ratios for 56 mutual funds and ETFs over the past few months, according to a press release. Affected funds include the Total World Stock ETF (VT) and the Russell 3000 ETF (VTHR), among others. You can find the full list here.
The price decreases are relatively modest; many of the expense ratios — what investors pay Vanguard to manage the fund — are being shaved by 0.02% to 0.05%. Still, it's good news for individual investors, who will pay less in fees overall.
Here's a breakdown of what this means for you.
Cutting expense ratios is the latest step brokerages are taking to attract investors with low fees. Over the past few years, expense ratios and trade commissions on ETFs have been lowered by many major brokerages, including Vanguard, Fidelity, Schwab and more. Some are even offering zero-fee index funds.
Not only will investors pay less, but funds with lower fees tend to have higher returns, making them doubly attractive, investment research firm Morningstar recently reported. Investing in low-cost index funds is the strategy advised for most individuals by experts, including Vanguard Group founder Jack Bogle and Berkshire Hathaway's Warren Buffett.
"Costs really matter in investments," Buffett says. "If returns are going to be 7% or 8% and you're paying 1% for fees, that makes an enormous difference in how much money you're going to have in retirement," Buffett told CNBC's "On The Money."
Still, experts say to be careful: Brokerages aren't lowering costs simply out of the kindness of their corporate hearts. They will try to make the money up elsewhere, such as by charging more for personalized investing advice or promoting pricier investing products.
A company might also increase other types of fees, like an advisory fee. That means that after attracting investors with low-cost funds, they might still raise how much you'd pay overall. Those types of fees can be difficult to suss out — they're not listed as obviously as expense ratio. One way to figure out how much you are actually paying is to ask the broker how much you will pay over 10 years, including all fees.
Overall, though, the trend of cutting prices is positive as long as investors do their research on the funds they select.
As Buffett has advised: "Consistently buy an S&P 500 low-cost index fund."
Now the cost is lower than ever.
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