The 10 Cheapest Index Funds to Supercharge your Portfolio

index fund fees

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 comparable to Vanguard, 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 $10,000 or more to invest, you can buy Vanguard S&P 500 Admiral Shares (VFIAX), which has an expense ratio of .04%.

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 still almost four times cheaper.

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
Schwab S&P 500 Index Fund SWPPX .03% None
Fidelity 500 Index Fund – Investor Class FUSEX .09% $2,500
Vanguard 500 Index Fund Investor Class VFINX .14% $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 index funds, Charles Schwab is the cheapest.

Not only is it cheaper than Vanguard’s Admiral shares (.04%) requiring a $10,000 minimum, but Schwab has no minimum investment.

Even Fidelity beats out Vanguard in the chart above.

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.

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.

Investment Advisors

index fund fees

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 the Charles Schwab equivalent, but with Charles Schwab, you will pay .03% 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%.

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?

1.68%

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
Fidelity 500 Index Premium FUSVX .035% $10,000
Vanguard 500 Index Admiral VFIAX .04% $10,000

 

Here are the cheaper versions of the Fidelity and Vanguard S&P 500 Index funds with a $10,000 minimum investment.  Note: Charles Schwab is still cheaper with no minimum.

 

Total Stock Market Index Funds

Name of Fund Symbol Expense Ratio Minimum Investment
Schwab Total Stock Market Index SWTSX .03% None
Fidelity Total Market Index Investor FSTMX .09% $2,500
Vanguard Total Stock Market Index Fund Investor Shares VTSMX .15% $3,000

 

Once again, Schwab comes out on top, and has no minimum investment.

Impressive.

 

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% $10,000
Fidelity Total Stock Market Index Premium Class FSTVX .04% $10,000

 

International Index Funds

Name of Fund Symbol Expense Ratio Minimum Investment
Vanguard Total International Stock Index VGTSX .19% $10,000
Schwab International Index Fund SWIXS .19% $10,000
USAA International Fund USIFX 1.11% $3,000

 

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.  Same with mortgages and car insurance.

Conclusion

So shouldn’t Jim Collins and the FIRE community at large recommend Schwab or Fidelity funds over Vanguard?  When it comes to Total Stock Market Index or S&P 500 Index, they both have expense ratios quite a bit lower than Vanguard for investments under $10,000 dollars.

Schwab has no minimum, which is awesome!

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 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 publically 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.

Do you agree?

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 How to Invest Your Money and Retire Early

Read how I made my money in real estate.  It’s all here.

The Complete Guide to Real Estate Investing

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22 Comments

  1. Luis

    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/

  2. Everett

    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.

  3. 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!

  4. 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).

  5. dimensionlessindex

    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!

    • Kyle

      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.

  6. Casey

    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!

  7. Derek Okahashi

    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).

  8. Joelle

    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.

  9. Steve

    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.

  10. Jen

    Great article Rich! Learned lots about index funds and fees. Wish I had read this 10 years ago. Thank you!

  11. 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.

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