When choosing between companies for constructing an index fund portfolio, my primary considerations would be:
- Cost of funds,
- Minimum investment per fund, and
- Selection of funds (Does this company have enough funds for me to build a diversified portfolio?).
What follows is a comparison of index funds from Fidelity, Schwab, and Vanguard. (I also took a look at T. Rowe Price’s index funds. Conclusion: Their selection is limited, and their funds cost more than any of the other three companies. Not particularly enticing, in my opinion.)
As a point of comparison, I’ve specifically mentioned funds from each company that could be used to construct Allan Roth’s “Second Grader Portfolio,” which consists of three basic asset classes: U.S. stocks, international stocks, and bonds. This is not to suggest that these are necessarily the only funds a person might want to use.
Fidelity Index Funds
- Spartan Total Market Index Fund (expense ratio: 0.06%)
- Spartan International Index Fund (expense ratio: 0.12%)
- Spartan U.S. Bond Index Fund (expense ratio 0.10%)
Minimum Investment: $10,000 minimum initial investment per fund for the “Advantage” share class, for which I’ve listed the expense ratios. There’s also an “Investor” share class (which has slightly higher — though still low — costs), for which the minimum investment is $2,500 per fund.
Selection: Fairly limited. For example, investors looking to tilt their portfolios toward growth stocks or value stocks won’t find the tools to do so, as there are no value-specific or growth-specific Spartan index funds.
Related note: Fidelity has a lot of “enhanced index funds.” I wouldn’t bother with them. Their costs are low for active funds, but still usually significantly higher than decent index funds.
Schwab Index Funds
Schwab’s selection of actual index funds leaves much to be desired. (For example, they don’t even have a single bond index fund.) Schwab does, however, offer commission-free trades on their own ETFs, many of which are low-cost, index-tracking ETFs.
- Schwab U.S. Broad Market ETF (expense ratio: 0.04%)
- Schwab International Equity ETF (expense ratio: 0.09%)
- Schwab U.S. Aggregate Bond ETF (expense ratio: 0.05%)
Minimum Investment: As ETFs, the minimum investment is simply the cost to purchase one share of the fund. As a result, most Schwab ETFs can be accessed with amounts as small as $50.
Selection: Somewhat limited. For example, Schwab has growth/value domestic large-cap ETFs, but no such offerings in the small-cap or international categories.
Vanguard Index Funds
- Vanguard Total Stock Market Index (expense ratio: 0.05%)
- Vanguard Total International Stock Index (expense ratio: 0.16%)
- Vanguard Total Bond Market Index (expense ratio: 0.10%)
Minimum Investment: $10,000 minimum initial investment per fund for the “Admiral” share class, for which I have listed the expense ratios. There’s also an “Investor” share class, with slightly higher (though still low) expenses, for which the minimum investment per fund is $3,000. (As yet another alternative, if you have an account at Vanguard, you can get commission-free trades on the ETF versions of Vanguard’s index funds, which carry the same expense ratios as their Admiral Shares funds.)
Selection: Very broad. Vanguard has more than 30 different index funds, covering pretty much every asset class you can think of.
In short, which company to use depends upon your situation. If you intend to build a somewhat more complicated portfolio — such as one that overweights value or small-cap stocks – go with Vanguard. But if that’s not a concern for you, any of the three companies could be a perfectly good choice (though Fidelity will be less desirable if you cannot meet the minimum investments on their index funds).