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.
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.
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.
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.