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.
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)
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.
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.