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Remember to Comparison Shop Index Funds

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For as long as I’ve been reading and writing about personal finance, index funds have been popular because they offer a low cost way for investors to get diversified into the market. I’ve long been a customer of Vanguard and index funds have always been popular with its founder, John Bogle.

Lately, index funds and index ETFs have exploded in popularity because people are starting to buy into low cost investing as the best way forward. Active funds remain popular but index funds usually win out, after expenses are considered.

So when you start looking at index funds, does it really matter if you invest with one broker or another? Surprisingly there is a little variation with mutual fund companies and it really pays to do your homework.

Expense Ratios

The expense ratio is how much a fund charges you each year to be invest in their funds. You usually don’t pay a transaction fee when you buy into or sell out of a mutual fund owned by your broker. For example, I can usually trade into and out of any Vanguard fund in my Vanguard account without paying a commission. This is true just about everywhere (i.e. Fidelity funds at Fidelity). They may restrict how often you can trade, since they don’t want you to be “actively” trading the shares, but they won’t charge you.

That said, not all funds charge the same amount and part of that owes to how much each index is managing. Charles Schwab’s S&P 500 Index Fund (SWPPX) has a 0.09% expense ratio. Vanguard’s 500 Index Fund Investor Shares (VFINX) has a 0.18% expense ratio. If you are going to invest over $10,000, then you qualify for Admiral Shares (VFIAX) which boast an expense ratio of 0.07%.

Finally, you have Fidelity’s Spartan 500 Index Investor class (FUSEX) with a 0.10% expense ratio. If you have $100,000 then you qualify for their Advantage Class with an expense ratio of 0.07%. As you can see, there is a bit of variation in the expense ratios.

(I expected that the fund with more assets would have a lower expense ratio but this isn’t the case. According to Google Finance, Schwab is the smallest with net assets of $10.68B. Vanguard is the largest with $31.90B. Fidelity is in the middle with $26.41B)

Minimum Investment

Different brokers have different minimum investment requirements. Charles Schwab’s fund lets you invest with just $100, the lowest of the three. Vanguard has a minimum investment of $3,000 and Fidelity’s fund requires a minimum of $10,000. If you can afford $10,000, Vanguard’s Admiral shares (and its 0.07% expense ratio) are available to you. As you can see, depending on how much you have to invest, you have different options as to which is the most affordable option.

Returns

Here’s where it can get a little tricky. Since each of the funds intend to match the S&P 500, they should have similar return figures. The problem is that when the S&P does make a change, each fund isn’t going to make its subsequent change at the same time. They also won’t make it in the exact same way so you’ll see a little bit of variation in the numbers based on a bit of luck.

As you can see, while the index funds all intend to mirror the return of the benchmark they are tracking, they can vary based on a variety of factors. There’s even variation in something that’s easy to compare, the expense ratio. So, if you’re planning on buying into an index fund, remember to do your homework first.

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7 Responses to “Remember to Comparison Shop Index Funds”

  1. DIY Investor says:

    I recommend using exchange traded funds. Expense ratios are lower and if you shop around you can get commission free funds. For example at Schwab SCHX is a large cap index exchange traded fund with an exchange ratio of .08% and is commission free.
    In 2010 it returned +15.92%.

  2. zapeta says:

    Great post. It always pays to shop around for lower fees. When I changed jobs, I left my retirement money with my previous employer because I could access Spartan Investor Class shares and they had a lower expense ratio than I could get otherwise.

  3. eric says:

    Just because it says index doesn’t mean it’s cheap. That’s something I tell people around me. Always look at the expense ratio.

  4. govenar says:

    I prefer ETFs (at a brokerage with free commission), so I don’t have to worry about minimums on amounts and holding periods, etc.

  5. cubiclegeoff says:

    It does help to look at the expense ratio, for everything, no matter what. This is especially important with a 401k that may not use that many index funds and will often have higher fees.

    • jsbrendog says:

      this. my company 401k has very few choices so I just went for the ones with the lowest expense ratio. so far so good.

  6. scdavid says:

    Great point Jim. Expense ratio is something often missed when reviewing funds.


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