Where will we find the cheapest index funds?
UPDATE 2: I’m updating this article to reflect new information coming from Fidelity Investments making significant reductions to the costs of their index funds on August 1, 2018 and changes to Vanguard’s fee structure on December 1, 2018.
Index Funds
Let’s have some index fund fun today.
Many in the Financial Independence Retire Early (FIRE) community recommend VTSAX (Vanguard’s Total Stock Market Index) as the investment of choice.
Why is that?
It probably has something to do with the blog www.jlcollinsnh.com or the book The Simple Path to Wealth.
If you are in the Choose FI world, then you’ve heard of the Godfather of FI, Jim Collins.
You may know he is a huge fan of Vanguard as the mutual fund company of choice.
Why?
Does it have the cheapest index fund fees?
Does it have the lowest investment minimums?
It turns out…
It does not.
Then why does he recommend it?
I’ll get to that…
One thing I did the first time I read The Simple Path to Wealth (I ended up reading it about 15 times as his editor on the book) was check all my current investments to find out if I was paying too much in fees.
I’ve always followed the simple advice of Warren Buffett.
Invest in index funds.
I don’t believe investors can or should try to beat the market.
Since I’m the military, I invested in USAA S&P 500 Index Fund Member Shares (USSPX).
I figured, it’s a military bank, it’s gotta have low fees compared to other banks, right?
Wrong.
The management fee for my fund was .25%. Not insanely high, but Vanguard’s comparable fund is .14%, almost half as cheap.
Not only that, but if you have $3,000 or more to invest, you can buy Vanguard S&P 500 Admiral Shares (VFIAX), which has an expense ratio of .04%.
UPDATE: Vanguard’s minimum for Admiral Shares on 38 of their index funds were lowered from $10,000 to $3,000 on December 1, 2018.
Their index funds are six times cheaper than USAA.
Full disclosure: USAA has a class of S&P 500 Index Fund Shares that can be bought for .15%, but the minimum investment is $100k. Don’t know that many military members with that kind of dough laying around.
Also, Vanguard is four times cheaper and, we’ll find out, Fidelity is much cheaper than that!
If you are not sure what the expense ratio of your mutual or index funds are, check.
You can google the prospectus or Morningstar report or something similar, and it will have that info.
Also, make sure that you don’t have a front-end or back-end load, or any other fees.
We’ll talk more about those later.
Effect of Fees
But how important are fees in the grand scheme of things?
Does 1% really make a difference? Fractions of a percent?
I used a calculator at www.nerdwallet.com to see how much difference there would be in my ending balance after 40 years of investing with Vanguard’s expense ratio vs. USAA’s.
I assumed I started with $25,000
Contributed $10,000 a year for 40 years making 8%
The Vanguard Portfolio with an expense ratio of .14% ends up with $2,997,871.
It loses $125,807, or 4% of the portfolio to fees over the 40 years.
The USAA Portfolio with an expense ratio of .25% ends up with $2,902,809.
It loses $220,869, or 7.1% of the portfolio to fees over the 40 years.
That sucks!
It’s the opposite of compound interest. It’s compound fees working against you!
And those are just fractions of a percent!
There is a wide variety of index fund expense ratios available to you. You can pay as much or as little as you would like!
In our S&P 500 Index fund chart below, you’ll see a range of expense ratios between .03%-1.57%. That’s huge.
Imagine what a massive difference a 1.57% fee will have on the portfolio I talked about above compared to .03%.
No, don’t imagine. I’ll tell you.
It makes a 34% difference in that 40 years. It’s a difference of more than a million dollars!
That’s the power of compound fees. It essentially the same investment, but from a different company.
Let’s look at a chart of the different choices you have of index funds and their expense ratios.
S&P 500 Index Funds with Low Minimum Investments
| Name of Fund | Symbol | Expense Ratio | Minimum Investment |
| Fidelity 500 Index Fund | FXAIX | .015% | None |
| Schwab S&P 500 Index Fund | SWPPX | .03% | None |
| Vanguard 500 Index Admiral | VFIAX | .04% | $3,000 |
| USAA S&P 500 Index Fund Member Shares | USSPX | .25% | $3,000 |
| Wells Fargo Index Fund (S&P 500) | WFILX | .45% | $1,000 |
| Rydex S&P 500 Class A | RYSOX | 1.57% | $2,500 |
For the S&P 500, Charles Schwab has the cheapest index fund until the August 1, 2018 reductions by Fidelity. Fidelity is now the cheapest, and also matches Schwab for having no minimum investment.
Read my post: Are Charles Schwab Index Funds the Cheapest?
They are both slightly cheaper than Vanguard’s Admiral shares (.04%) that require a $3,000 minimum.
USAA is an interesting case. It’s a bank available to military members and their families. I’ve been using them since 1999, but they also have higher fees than I would expect. I had my IRA with them, but switched to Vanguard because their fee of .25% was just too high.
I might have to think about Fidelity now…
Front-End Load
Now let’s talk about Wells Fargo and Rydex. Note their expense ratios of .45% and 1.57%. The highest of the bunch here.
They are very expensive. But that’s not the only problem.
It’s much worse than that.
They have additional fees on top of the expense ratio.
They both have what is called a front-end load.
Front-end load: A commission or sales charge applied at the initial purchase of the investment. It is deducted from the investment amount and lowers the size of the investment. It is paid to investment intermediaries, such as financial planners and investment advisors as a sales commission.
These are not part of a mutual funds operating expenses.
Additionally, it is a fact that load funds do not outperform no-load funds, they just cost a hell of a lot more!
You saw what a devastating effect a 1.5% fee had compared to a .03% fee over 40 years. Just imagine how bad it would be paying a 1.57% fee and then a 4.75% load on top of that!
Wait, don’t imagine, I’ll tell you!
A fee like this is completely outrageous. The Rydex portfolio compared to the Schwab one will lose 81% of its total value over 40 years because of fees. It will lose $2.5 million in value.
I didn’t even mention that if you sell this fund in less than one year, you get charged a back-end load of 1%. That would be total fees of 7.32% for one year. That’s insanity.
You must really like your investment advisor. I bet he drives a Porsche.
I bet you don’t.
By the way, if you are military or government and use the TSP, there have been huge changes recently. Fully understand your benefits to maximize your retirement income!
Click here to get my free comprehensive TSP Guide.
Investment Advisors
Maybe this picture isn’t fair!
Now I need to talk about investment advisors, and their role in these fees.
This is a sensitive subject for me, because on one hand, I really want to bash the investment advisor industry, but on the other, I know and like many investment advisors who I believe have their clients best interests at heart.
I believe that investing is remarkably simple, and some investment advisors unnecessarily complicate it.
I believe that once somebody reads a book like The Simple Path to Wealth, and pokes around investment blogs a little, they can intelligently choose their own asset allocation and rebalance when necessary.
Some investments advisors, but not all, will tend to recommend financial products to their clients that pay them commissions. A good example would be the Rydex S&P 500 Class A fund.
The investment is indistinguishable from it’s Fidelity or Charles Schwab equivalent, but with Fidelity, you will pay .015% in total fees everytime you buy. If you buy the Rydex version from an investment advisor, you will pay a 1.57% expense ratio and then a 4.75% front-end load on top of that for a total of 6.32%.
Ouch!
I said earlier that you are making 8% a year in our hypothetical investment. If 6.32% is going to the mutual fund company and your investment advisor, how much do you get after fees get paid?
1.68%
Ouch!
About half of what you need to keep up with inflation.
This is why I said earlier that 81% of the total value of the portfolio after 40 years of investing gets eaten up by fees. That’s a loss of $2.5 million.
Damn!
In my opinion, if an investment advisor was selling you an index fund with a front-end load that is otherwise available from many companies with no load, that is criminal.
Apologies to my investment advisor friends (if I have any now).
Read my article on How Lucky are the Richest Guys on Wall Street?
S&P 500 Index Funds with Higher Minimum Investment
| Name of Fund | Symbol | Expense Ratio | Minimum Investment |
| Vanguard 500 Index Admiral | VFIAX | .04% | $3,000 as of December 1, 2018 |
UPDATE: As of August 1, 2018, Fidelity no longer has different levels of S&P 500 Index funds. Across all Fidelity index funds, they now offer the single lowest-cost share class to all investors regardless of investment size. Therefore, the Premium class above no longer exists and is now known as Fidelity 500 Index Fund (FXAIX), the expense ratio is .015%, the lowest of all companies I’m aware of.
Total Stock Market Index Funds
| Name of Fund | Symbol | Expense Ratio | Minimum Investment |
| Fidelity Zero Total Market Index Fund | FZROX | .00% | None |
| Schwab Total Stock Market Index | SWTSX | .03% | None |
| Vanguard Total Stock Market Index Admiral Shares | VTSAX | .04% | $3,000 |
UPDATE: Up until August 1, 2018, Schwab had the cheapest index fund, but it’s now Fidelity. For the first time ever in the history of index funds, Fidelity is offering four index funds with no expense ratio and no investment minimum.
Schwab’s rate is also very low.
Total Stock Market Index Funds with Higher Minimum Investment
| Name of Fund | Symbol | Expense Ratio | Minimum Investment |
| Vanguard Total Stock Market Index Admiral Shares | VTSAX | .04% | $3,000 as of December 1, 2018 |
UPDATE: Again, with Fidelity’s changes on August 1, 2018, they got rid of tiered levels depending on investment levels. For Fidelity, this category now has a zero expense ratio and no minimum.
International Index Funds
| Name of Fund | Symbol | Expense Ratio | Minimum Investment |
| Fidelity Zero International Index Fund | FZILX | .00% | None |
| Vanguard Total International Stock Index | VGTSX | .19% | $10,000 |
| USAA International Fund | USIFX | 1.08% | $3,000 |
UPDATE: Fidelity did it again! In a category where the competitors have fairly high expense ratios, Fidelity went to zero! Also, no minimum. Amazing!
USAA, wow!
That is way too high. I urge USAA to look at their fees and become competitive with the other companies. I would love to keep all my investments with them, but their fees are way too high. Unfortunately, this is sometimes also true with mortgages and car insurance.
Win my business back. I know you have great customer service, but, money talks!
Conclusion
So shouldn’t Jim Collins and the FIRE community at large recommend Fidelity or Schwab over Vanguard? Right now, Vanguard can’t compete with what Fidelity has done by slashing their fees, going to zero on two big categories, and eliminating minimum investments!
So what’s the deal with the strong Vanguard push?
Simple.
It’s like Black Friday.
Fidelity and Charles Schwab are both companies that make money of off fees and commissions.
So how do they get you in the door?
On Black Friday, you can get a $1000 laptop for $200. That’s how they get you in the door.
And the hope is once you’re there, you’ll look around and buy more stuff.
At full price.
That’s probably Schwab and Fidelity’s hope too.
Once you are their customer, you’ll look around and hopefully see something you like. Maybe you’ll want someone to manage your money. Maybe you’ll want some sophisticated recommendations. You’ll call to ask a question or maybe come into a branch, and they’ll have a captive audience to pitch their products to.
They lure you in with a cheap product, and hopefully make up for it somewhere else.
It’s not much different than travel hacking. The credit card companies are hoping you don’t just signup and get the travel points. They want you to charge a bunch of stuff you don’t need and they get some fees and interest out of you! Hopefully you forget to cancel and they get that annual fee as well.
Vanguard, on the other hand, is in a different category than Fidelity and Schwab.
It is a company that is structured differently. It’s not publicly traded (neither is Fidelity), but instead the company is owned by the US domiciled funds and exchange traded funds (ETFs). Those funds are owned by their investors. This structure aligns company and investor interests.
The company focuses on low fees and keeping costs down. It’s Jack Bogle’s vision. It’s embedded in their culture.
The company actually created index funds and the idea of index fund investing as a strategy that is superior to picking stocks.
So the company’s values line up with what I think a large part of the FIRE community’s values are.
So in my mind, that is why Jim Collins recommends this company over all others.
That being said, if you have less than $10,000 and want to invest, as long as you can resist the temptation to sign up for additional services, I don’t see a problem with putting your money at Fidelity or Schwab.
In fact, Fidelity is starting to win me over! I’m considering going back to them!
Full disclosure: I’m technically an employee at Fidelity Investments. I worked there as a stock broker before I joined the military. I’m currently on a military leave of absence.
I don’t receive a paycheck from them, and this website isn’t monetized in anyway (yet).
So who has the cheapest index funds? I guess it’s Fidelity at the moment, but they are all pretty damn close!
Was I too harsh on investment advisors?
Are you an investment advisor?
Comment below. I want to hear it!
Rich on Money
Speaking of investing, see my article on 9 Proven Ways to Boost Your Index Fund Returns
Read how I made my money in real estate. It’s all here.
Hi Rich,
Great post and thanks for your efforts in providing this information.
Question – which would you choose between TSP and Vanguard?
Semper FI
Luis,
You don’t need to choose between Vanguard and TSP. You can have both. TSP is the military version of a 401K, and you can only hold certain funds inside of it that are already defined. They have very low expense ratios. You can also have an IRA in addition to your TSP, and you can choose to have Vanguard funds in this account if you want. Vanguard is a good choice. I would recommend reading my blog page on how to invest your money. This will make it more clear.
https://richonmoney.com/how-to-invest-your-money/
Rich,
Good article. I wish I had realized that USAA is a fantastic insurance company, a decent bank, and a lousy investment company years ago. I too invested with them for a long time before switching everything to Vanguard.
I also had no idea that Schwab had lower expense ratios and no minimum fee. You are the first blogger I’ve read that mentioned them.
Hey Rich…
Very nicely done, and not just because of the links to my blog & book. Although those are much appreciated!
As you point out, there are less expensive index funds than Vanguard’s and an index fund is an index fund.
For those companies, these are “loss leaders” designed to get you in the door.
But the difference is slim and Vanguard is structured in a way that aligns their best interest with their investors. They are always looking for ways to reduce costs to their investors. This is unique in the investment world.
The others will always be looking for ways and opportunities to raise their fees and line their pockets. They can do this at any time without warning. No problem if you hold them in a tax advantaged account and can switch without tax consequences. Potentially a huge tax bill if you have to switch in a taxable account.
Keep up the great work!
Jim!
To the one who was my first commenter on this blog. It meant a lot to me and it still does. It was an honor to work on your book. Keep up your good work!
Hi JlCollins and Rich, Something that is often overlooked is the Vanguard vs Fidelity zero or low cast index. Vanguard has lots more stocks than Fidelity Zero (almost a thousand more so expenses of thost thousands cost more)! Also the dividend distribution schedule for Fidelity Zero FZROX is once a year, FSKAX is twice a year, and VTSAX is quarterly or 4 times a year. Would this make a difference over time? Also what about Error Tracking? If Fidelity doesn’t track as well as Vanguard then isn’t that a form of expense fees. What is your thoughts on this? Thank you
Wow! This stuff is over my head. I would also argue that the differences at these low expense ratios are too small to be concerned with.
Nice post, Rich!
Where did you find the photo of my investment advisor? Ha ha, just kidding!
We invested in Vanguard’s VTSAX and VFIAX and just put in as much money as we could, as quickly as we could, to get to the Admiral fund level with the lower fees.
It doesn’t seem worth the hassle factor to start out in Schwab funds and then move over to Vanguard once you have $10K, if you can do it relatively quick. We did that by making our IRA contributions for two years, in the same year (after January 1st, but before April 15th).
We did the exact same thing. Thanks.
Excellent post!
As a bona fide Boglehead, I’d rather pay the one extra basis point to be with an investor-owned company.
Despite the criticism of Admiral shares out there, it should be noted that Vanguard offers equivalent ETFs without an investment minimum (i.e. VTSAX = VTI)
Fair point! Thanks a lot!
If both the VTSAX and VTI have a fee of .04, but VTSAX requires a minimum of $10,000, are there any advantages investing in the mutual fund over the ETF?
Not a big difference. The ETF is traded like a stock. The price changes all day long, so you can buy and sell throughout the day. a mutual fund only has one price at the close of every day. This is not very important for most investors. You shouldn’t be focused on hour to hour fluctuations, those are meaningless.
One small advantage is with Vanguard mutual funds you can set up systematic purchases of the funds over time. Very “set and forget”…. with the ETF’s you have to initiate a separate buy each time. To go a little further because the Vanguard mutual fund – ETF equivalents hold the same equities, once the ETF has a value of 3k or 10k you can ask Vanguard to convert the ETF to the mutual fund or Admiral Fund without skipping a beat or tax event.
I stick with Vanguard even though they are not the absolute cheapest (at the moment) because I’m investing for the long term. If I were to fall into a coma for 20 years, I can trust them to not screw me over by raising fees and implementing other unnecessary costs that erode my returns. I’m not sure I can say the same for any of the other investment firms.
That’s a good point. They are the ones that are committed to keeping fees low in general, but don’t necessarily have the lowest fee for every product. Their culture is right!
I just listened to your Bigger Pockets episode and am very impressed with your conservative yet aggressive approach to investing. I used to be active duty and am now a reservist. I am going to send you and email and I hope I can get a response regarding a first investment property I am analyzing.
Regarding Vanguard vs Schwab, I sort of regret choosing Schwab after reading your article. I know I made a good move recently by switching from the ridiculousness of Edward Jones and an advisor whom did not have my best interests in mind, to Schwab where the fees are low and I know I can resist any pitch that comes my way (none have so far).
I think Schwab is ok. Just don’t sign up for any of their expensive extra offerings!
Hey Rich- just discovered your blog through listening to your interview on Afford Anything (http://podcast.affordanything.com/136-bought-20-houses-debt-free-serving-overseas-military-rich-carey/). One question that comes to mind for me when reading about index funds is, are they still the best place to invest if I’m just beginning investing at age 55? I do plan to buy and hold rental properties for cash flow eventually, but probably can’t start doing this in the near future.
Thanks, I appreciate all the information you share with your readers!
Most people will have a mixture of index funds and bonds based on age and risk tolerance. example is, maybe at 55 years old, you have 50% of your money in index funds and 50% in bonds to have less volatility.
In my opinion, you don’t want to invest in index funds unless you plan on leaving that money untouched for a long time, like more than 15 years. 10 years from now, index funds could be down. You also wouldn’t use it to temporarily store money you plan to invest with later. You are better off in something like a savings account or money market if you’ll need it to pay for a down payment in the near future.
If you want to get smart on this stuff and get a lot of help from likeminded people, go to the choosefi facebook group and ask your specific financial questions there.
Hopefully that helps.
Hey Rich – I know you’ve read TMM – what’s your take on Dave’s mutual fund advice? I specifically mean his ideas of using/paying professionals who can identify funds that out-perform the market and his ideas of diversification through four types of funds?
Thanks!
I love Dave Ramsey…. When it comes to getting out of debt. He’s horrible when it comes to investments. His advisors have high fees and he’s obviously about making a portion of those fees himself. I’m a DIY investor who believes you should never pay any fees or loads for mutual funds and you should never pay investment advisors.
Great article Rich! Learned lots about index funds and fees. Wish I had read this 10 years ago. Thank you!
I was also surprised you left out the ETFs like VTI and VT. No minimum purchase and super low fees of 0.04% for VTI and 0.1% for VT.
I’d probably want to do a separate one for ETFs. Thanks!
Hi Rich!
Just found your site. Thank you for your service.
Thought I should point out that this article needs some updating (again – going to be fun keeping up with the index fund fee competition going on right now). Vanguard lowered the minimum to 3k for Admiral shares.
Also, I’ve read that another reason to stick to Vanguard is the lack of transaction fees (on their funds anyway). With the others, even with the 0 fee you still pay per transaction. *I haven’t researched to verify that since I’m already setup with Vanguard – plus lazy. Just read it on another blog.
Looks like that Vanguard change happened Dec 1, 2018. That’s some stiff competition between Schwab, Fidelity, and the Big V. That’s good for us. Updating now, thanks!
Thanks for your posts! I’m looking to meet with a certified financial planner (specifically the ELPs that Dave Ramsey recommends on his site). My goal is to save as much money in stocks so I can liquidate and invest into real estate single-family properties. I’ve never met with any sort of financial planner. Do you recommend I meet with them, or go direct and get Fidelity 500 fund and invest on my own? What questions should I make sure to cover with the ELP? Thanks for your help!
I recommend avoiding Dave Ramsey’s financial planners like the plague!!!
He’s great at getting people out debt, but when it comes to financial planning, himself and his planners are making too much in fees and I’m worried they don’t have your best interests at heart. Read my website thoroughly, read a simple path to wealth, or the stock series by jlcollinsnh.com, and you’ll be able to invest for yourself.
I read an article that Fidelity is able to offer 0% index funds because they only provide and dividend once per year and invest the cash like robinhood does while its waiting to distribute. The effective expense ratio is .15%.
Also in a another post you recommend Paul Merriman. Some of the index funds he recommends for schwab are .25% -.39% expense ratios. If he can get his claim of 2% greater returns its no problem but its also as high as your USAA fund I’m noticing.
Good point. Don’t pay the high fees regardless. You can always find something similar with low fees.
Rich,
Thanks for all the work you do to provide military members and others with this incredibly valuable information. I’m an active duty Air Force O-2 and I’m looking for some investment advice. I plan to serve 20 plus years and I’m currently investing 7% of my base pay (I’m in the BRS so I’m getting the 5% match) into the TSP Lifecycle 2060 fund. However, I’ve decided this fund is too conservative and I’m considering changing my asset allocation but I can’t decide between 50% C and 50% S (your strategy) or 90% C and 10% F (the Warren Buffet strategy). I’m also not sure how close to retirement I should start making my retirement fund more conservative to avoid a sudden loss in the account’s value.
In addition to my TSP, I have a Roth IRA through Vanguard made up of 4 very aggressive growth mutual funds (small, mid, large cap and international growth funds). All the funds are over 20 years old and have returns since inception of about 11%. However, their average expense ratio is 0.38%. Would you recommend I stick with these funds or switch to a passive index fund like the S&P 500 VFIAX? Also, would it not be redundant to be invested in the C fund in the TSP and another Vanguard S&P 500 index fund?
Sorry, I know that’s a lot! Any advice would be appreciated!
Keep in mind, I’m not a licensed financial advisor.
I think everything you are doing is fine. An international growth fund could have the expense ratio your talking about, but small mid and large cap shouldn’t. Talk to a vanguard advisor about it. have you considered VTSAX to cover the whole stock market?
Rich,
Understood, thank you for your response. I was probably over generalizing the vanguard funds I’m in. The actual funds are the explorer fund (VEXPX), mid cap growth (VMGRX), international growth (VWIGX) and the windsor (VWNDX). I definitely will discuss my options with a vanguard advisor.
I hadn’t considered VTSAX specifically. I’m planning on going 50% S and 50% C in my TSP so hopefully that will fairly closely mimic exposure to most segments of the US stock market. But I will look into VTSAX. Thanks for the information!
It sounds like you are on the right track. Good luck!