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I've got a large amount of money (for me) in a US large cap index fund, with a 0.25% expense ratio. I've recently gotten back into investing after a long hiatus, and am now putting most of my money into VOO for its ridiculously low expense ratio. But my question is - what should I do with the money currently in the older index fund?

I don't think it's in a bad spot, and the fees are super low, relatively speaking, so by my estimates I'm not really saving that much by moving that money into VOO, and indeed I'll pay capital gains on it. But at 40 years old, I have another 20+ years of compounding to go before I'll start withdrawing from my investments.

I feel like in this situation, I feel like the right idea is to just keep old money where it is since the expense ratio is reasonably low and invest new money into something cheaper, e.g. VOO. But are there any other considerations I should think about here, considering my age, time horizon, etc.?

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    I don't think that it makes sense to take a large capital gains hit in order to lower the expense ratio "X" basis points. Feb 5 at 20:26
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You're right that the main effect here is tax - there's not a huge benefit if you're just saving a small percentage in fees.

It might make sense if you have some other capital losses to offset, or are in an unusually low tax bracket for some reason. By paying the tax now you raise the cost basis in the new investment, reducing your tax burden later.

It might also be beneficial to sell this now and move as much as you can to a retirement account, which keeps the tax deferral but also gets the lower expense ratio.

If 2021 will be a "typical" year for you then it's purely a choice of paying tax now versus later.

Also note that the lowest expense ratio isn't always the best. Look at the historical performance of the two funds and see if the higher expense has resulted in higher returns in the past.

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Rather than look at the expense ratio, I'd look at net returns. If fund A charges .25% and after taking that out gives an average 5% return, and fund B charges 10% but after taking that out gives a 6% return, fund B is the better investment despite the outrageous fee. A fund that charges less in fees will, all else being equal, give a greater return. But the big qualifier there is "all else being equal". It probably won't be.

(And yes, investment companies always say "past performance is no guarantee of future results". I presume there's some law that requires them to say that. Well of course past performance is not a GUARANTEE, but if for the last 20 years fund A has performed better than fund B, the safe bet is that it will continue to do so, in the absence of any information to the contrary.)

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  • investment companies always say "past performance is no guarantee of future results". There is, because brokers -- being salesmen -- would say just about anything to close the deal, and so would promise just about anything.
    – RonJohn
    Feb 5 at 23:36
  • On a bad year, e.g. one that's 5x lower growth, the fund that charges .25% will still net you +.75%. The fund that charges 10% will net you -7%. Long-term, you'd be gambling that the 10%-fee fund is so good at picking stocks that they will consistently outperform the S&P500 by more than 10%. Realistically, to do so, they'd have to play junk securities, so on a bad year, you'll be looking at a neat -100%. There's no such thing as a free lunch. High returns come from high risk investments.
    – ZOMVID-21
    Feb 6 at 11:47
  • @ZOMVID-20 Of course my 10% fee example was deliberately extreme. My intent was, not that someone charges 10% and then in one really good year gives good performance, but that they do this year after year, in good times and bad. How would that be possible? I have no idea. It was intended to be a ridiculous extreme hypothetical. If I knew a way to get 15% or 20% returns on the stock market year after year through good times and bad, I'd be typing this while flying my helicopter to my yacht to meet up with my crew of 10 beautiful girls in bikinis.
    – Jay
    Feb 6 at 16:09
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If the ETF is at the same company, then maybe you convert the MF into it's "twin" ETF. Vanguard, I know, allows you to directly convert VFINX into VOO.

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