1

I am currently investing in a Traditional IRA account using T Rowe Price. The two funds I am investing are as follows:

Global Technology Fund (PRGTX) 
Gross expense ratio - 0.86% 
Average Annual Total Returns¹   Monthly (as of 12/31/2021)  Quarterly (as of 12/31/2021)
1 Year
10.05%  10.05%
3 Year
37.37%  37.37%
5 Year
28.10%  28.10%
10 Year
24.86%  24.86%


Equity Index 500 Fund (PREIX)
Gross expense ratio - 0.18% 
Average Annual Total Returns¹   Monthly (as of 12/31/2021)  Quarterly (as of 12/31/2021)
1 Year
28.50%  28.50%
3 Year
25.85%  25.85%
5 Year
18.24%  18.24%
10 Year
16.29%  16.29%
Since Inception (3/30/1990)
10.65%  10.65%

As you can see the expense ratio on the Global Technology Fund is pretty high but its overall return is also high. Currently, I am investing $3000 in both funds. Is it wise to invest in fund with such high expense ratio?

2
  • Its overall return was high. No one can know whether this return will be sustained through your investment time period.
    – Flats
    Commented Jan 10, 2022 at 14:39
  • Is it wise to invest in fund with such high expense ratio? Expense ratio is not the only issue. Question is, too, if Global Technology is worth the expensive investment. Commented Jan 10, 2022 at 21:37

1 Answer 1

3

It's fine to invest in funds that have a high expense ratio if they have demonstrated higher returns, and except for the past year, this one has.

But the return of the fund is not the main reason that it's helpful to invest in it. It helps diversify your portfolio, since it's a global fund focused on one sector versus a US-based broad equity inced (S&P 500). There is a significant correlation since the S&P 500 also includes many tech companies, but if you are OK with overweighting the tech sector a bit there's nothing wrong with investing in this fund for strategic reasons.

Where higher fees hurt is when the fund underperforms, the high fees will exaggerate losses, which are compounded against you just like returns compound in your favor, so if there were a similar fund with lower fees I would compare the returns of those funds and see which one better overcomes their fees, but 0.86% is not an extraordinarily high expense ratio for a global fund.

Some will say that "no one can beat the market long-term". Which is a theory that hold true in the aggregate, meaning that the average performance of all active funds will not be significantly higher (or higher at all) than the market, since by the law of averages some funds will beat the market and some will not. It does NOT mean that a single fund cannot beat the market (which is how it's often (incorrectly) interpreted, and you should just choose the funds that have the lowest expense rations at all costs. There are certainly fund that have higher than normal expense ratios that do provide more return than needed to make up for the expenses.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .