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: Pretty good, but not perfect. 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.
More information about Fidelity’s index funds can be found here.
Schwab Index Funds
- Schwab Total Stock Market Index Fund (expense ratio: 0.09%)
- Schwab International Index Fund (expense ratio: 0.19%)
- Dreyfus Bond Market Index Fund (expense ratio: 0.40%)
Minimum Investment: This is Schwab’s strongest point. Their index funds have a minimum investment of just $100.
Selection: Limited. For example, Schwab itself doesn’t appear to have a single bond index fund. That said, an investor at Schwab would still have access to bond funds run by other companies (such as the Dreyfus Bond Market Index Fund mentioned above).
Important note: For investors with accounts at Schwab, Schwab does offer commission-free trades on their own ETFs. Among those ETFs are three very low-cost bond offerings, which would make an excellent complement to an index-fund portfolio.
More information about Schwab’s index funds can be found here.
Vanguard Index Funds
- Vanguard Total Stock Market Index (expense ratio: 0.06%)
- Vanguard Total International Stock Index (expense ratio: 0.18%)
- 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.
More information about Vanguard’s index funds can be found here.
Conclusion
In short, which company to use depends entirely upon your situation:
- If you have $10,000 available for each asset class, either Fidelity (with their Spartan funds) or Vanguard (with their Admiral Shares) is an excellent choice.
- If you have a small amount to invest (less than $3,000), I’d say start with Schwab, and potentially plan on transferring to Vanguard once you have enough to meet their minimums.
- If you intend to build a somewhat more complicated portfolio — such as one that overweights value or small-cap stocks – or if you have more than $3,000 but not enough to meet Fidelity’s minimums, go with Vanguard.
Hi. I'm Mike Piper, the author of this blog. I'm a CPA and the author of several personal finance books. The point of this blog is to show that investing doesn't have to be complicated. 
Americans are lucky they have access to a wide variety of investment fund companies and discount brokers. Up here in Canada we have very little choice for low cost index funds. Wish Vangard would establish business in Canada!
Mike,
Are there lower minimums for IRAs accounts? I’ve seen different minimums for some funds depending on account type.
-Rick
Rick, regarding minimums in IRAs: Fidelity still requires $10k, it appears. I know Vanguard still requires $3k. And I doubt Schwab goes any lower than $100.
Hi Mike,
I have sorted some more things out with regard to investing and I am sold on the Index fund approach. I appreciate your articles and I have spent A LOT of time on your web site. I also plan to purchase your new book.
Its Mike again.
Mike my wife and I have about $5K each in T-Rowe New Era mutual fund that held in individual Roth IRAs for each of us. We are making $150 contributions to each per month.
We are not fund traders or stock traders. We also have an account with Schwab that I opened when I thought I might want buy and trade some stock. I bought one stock because of family ties. I should probably move that account to TradeKing…
We have another $100K to invest. I thought to be split up between diversifying the IRAs and having taxable index fund accounts.
Lets say for the taxable index fund accounts we buy,
1. Vanguard Total Stock Market Index Fund
2. Vanguard All World Ex-US Index Fund
3. Vanguard Total Bond Market Index Fund
Do I buy $33K each or do I open the accounts for less and x amount to each per month?
Also, I would like to add some funds to the IRAs to diversify Vivian’s and mine. It doesnt seem to make sense to buy the same index funds as I chose for the taxable account does it? I guess come to think of it does it make sense for us both to hold the same New Era mutual find?
Thanks and have a GREAT day!
Kind regards, Capt. Mike
Capt. Mike, the following are my thoughts on your questions. Please note that they are not intended to replace advice from a professional adviser who would be more informed as to the particulars of your situation.
As to what’s in the IRAs: I’m not very familiar with it, but it appears that the New Era fund is a natural resources fund. I’d be reluctant to put what appears to be ~ 9% of your portfolio in natural resources.
For large one-time purchases (as opposed to smaller monthly purchases), I really like ETFs due to their slightly lower expense ratios than traditional open-end index funds. Also, they’re slightly more tax-efficient, which can be important in taxable accounts.
As to whether to invest all at once or spread it out over a few months, I think this post at BadMoneyAdvice (as well as the video it links to) answers the question better than I ever have.
Lastly, I don’t see any reason against holding the same funds in a taxable account as in an IRA (unless the funds in the IRA are particularly tax-inefficient and therefore not well suited to a taxable account). For instance, I wouldn’t see any problem with holding those three funds (or their respective ETF versions) in both your IRA and in your taxable account (provided you select an asset allocation suitable to your goals and tolerance for volatility).
I’m interested to see what other readers have to say.
Ok that was helpful.
1. I will first divide the funds into 2 groups. One group funds for the IRAs and the other group funds for the taxable ETFs or Index Funds.
I am not sure how to handle the group of funds for the IRAs. We are limited in how much we can contribute to the IRA on an annual basis. So I maybe I should set cash aside and let it set on the sidelines to max out IRA contribuitons for each for a couple of years or since we are self-employed we need to investigate setting up an Individual or Solo 401k so we can contribute more on an annual basis.
2. Then decide on asset allocations percentages for each group.
3. Open or buy the Index and/or ETF funds using the the dollar figures that get us to the asset allocation percentages.
Does that make sense?
Kind regards, Capt. Mike
I really like the Fidelity Spartan funds. They do have the Spartan Extended Market Index Fund at 0.10% also.
My big beef with Vanguard is they don’t have an intermediate-term government bond index fund (they have an intermediate-term bond index fund and intermediate-term government bond fund, but no government bond index)
Hi,
I can not find this fund as an index fund, Vanguard FTSE All-World ex-US Index.
I can find it it as an etf.
Kind regards, Capt. Mike
VFWIX is the ticker for Vanguard FTSE All-World ex-US Index Fund.
Regarding your earlier comment, my suggestion when it comes to asset allocation is to look at your portfolio as a whole, not as a separate Roth portfolio and taxable portfolio.
So, add up the total investable money you have (both in IRAs and in taxable). Then determine your appropriate asset allocation. Then go about buying funds/ETFs that will reach that allocation. (Ideally, doing it in the most tax-efficient way. So, for example, if there were any funds you wanted to own that were particularly tax inefficient, hold them in the Roth rather than the taxable account.)
Hi,
I happened to stumble across this great blog and I have to say I like the way you write your articles. But may I ask for your opinion/advice? I’ve been thinking really hard about investing in index funds, I plan on starting with Schwab since I only have about $3k in the bank. I just got out of college, and I have about $10k in my student loan. I don’t own any credit cards. They say (e.g. in Motley Fool) that I have to settle my debt first before investing. My family says the economy’s down so I’ll only lose my money if I invest. But when should I start?? I feel like a sponge o___o you know, just absorbing all the info I can get without applying them. I feel helpless as a sponge!! o___o
Hi Tsuna.
Happy to hear you’re finding the blog helpful. To me, the question of whether to pay off student loans prior to investing comes down entirely to the interest rate of the loans. A little more information can be found here:
http://www.obliviousinvestor.com/pay-down-debt-or-invest/
Also, I’d generally suggest keeping some cash on hand rather than using all of it to invest/pay down debt. More on that topic can be found here:
http://www.obliviousinvestor.com/investing-step-emergency-fund/
Hope that helps.
Thanks for the mention of my book. Your site gives some great advice. Anyone have any thoughts on this piece I wrote:
http://moneywatch.bnet.com/investing/blog/irrational-investor/insurance-investing-and-the-10000000-challenge-the-outcome/654/?tag=col1;blog-river
Thanks.
Allan Roth
Great advice Mike but here’s a question for you. Do you typically choose one index and stick with it or build a diversified portfolio of various indexes? Seems to me the very nature of investing in an index fund means you are pretty well diversified but would love your take on it.
Hi Paul. That’s a great question.
To me, at a minimum, an investor needs a U.S. stock index fund, an international stock index fund, and a bond index fund in order to be diversified. A portfolio properly allocated between three such funds should get the job done for just about every investor.
That said, I believe there are additional diversification benefits to be gained from picking up a couple additional funds, such as a REIT fund or a small-cap fund. (More on that topic here.)
My own portfolio looks very much like the “5 fund” portfolio mentioned in this post. (Though it has a lower bond allocation and a higher allocation to each of the other funds.)
Mike
Love your piece of advice. do you know why the schwab site doesn’t have any information on the SWTIX fund? I mean I dont see any detailed information like cost, performance etc etc.. is the fund closed now?
Hi JJ.
I don’t know anything about SWTIX, and Morningstar doesn’t have anything about it either. A Google search shows that it was called Schwab Total Stock Market, but I know the ticker for Schwab Total Stock Market Index Fund is SWTSX.
Sorry I’m not more helpful here…
No, actually you are helpful, Mike. ..SWTSX is the right one. they still show the old one with no data.
I am little confused as to what might be difference between SWTSX and VTSMX as they both belong to Large blend (only difference being the expenses and the minimum investment for both).
the expense ratio for SWTSX is .09 (after waivers ), that means there is no guarantee that it would stay there..sounds like a bait and switch?
I can afford the $3000 minimum at Vanguard, but the expense ratio is .18% and has 3395 stocks??
they both seem good but with the low cost history of Vanguard’s Iam leaning towards it. Is that a wise decision?Being a novice here, anyone here can throw some light?
The account that Iam planning to invest in is a taxable account (not a Roth or any IRA account) for the long term. (5- 10 yrs)
Short answer: It probably doesn’t matter much either way.
The makeup of the MSCI US Broad Market Index (tracked by VTSMX) and the Dow Jones Wilshire 5000 Composite Index (tracked by SWTSX) are so similar as to be functionally the same.
If you look up each fund on Morningstar and click on the “tax” tab, it appears that VTSMX has historically been somewhat more tax-efficient.
On the other hand, the expense ratio of the Schwab fund is lower, and its index generally should have lower turnover and therefore lower trading costs.
Given how similar the two funds are, I wouldn’t base my decision upon their differences, but rather upon which company I’d rather have an account with.