Competition on Mutual Fund Fees!

FullSizeRenderCompetition on mutual fund fees has broken out! Fidelity Investments lowered its index fund fees below those of low-cost leader Vanguard. As a former antitrust attorney, I LOVE the fact that these companies are competing on something that actually matters to investors. And by naming names in its advertisements, Fidelity’s move is a direct attack on Vanguard.

Fees matter because high expense ratios are directly deducted from a fund’s return. The lower the expense ratio the better the index fund’s return.

I wrote previously that Fidelity, Schwab, T Rowe Price, and Vanguard each offer index funds that track the entire domestic and international stock markets and the domestic bond market. An index fund is passively managed and tracks a wide gauge or index of the market.

But which company’s index funds were better from a performance point of view?

I concluded that Fidelity’s three main index funds were the better value, if only slightly, over Vanguard’s index funds. Fidelity’s index funds’ returns were higher on an annual and time-weighted basis. The returns I compared were net of fees. The Schwab and T Rowe Price index funds lagged both Fidelity’s and Vanguard’s funds.

Although the domestic stock and bond funds were pretty similar among all four companies, their international stock offerings tracked different indices of the international stock market. The international index Vanguard tracks contains a larger allocation from emerging markets compared to the ones tracked by Fidelity, Schwab, and T Rowe Price.

During the second quarter of 2016 Vanguard’s Total International Stock Index Fund outperformed the other three company’s international funds both on the three-month return and on time-weighted approach, because emerging markets performed better than developed markets. This additional emerging market exposure pushed Vanguard’s International index Fund ahead of its peers for 2016 so far.

So now with Vanguard’s International Stock Fund’s better performance, it may be a draw between Fidelity’s and Vanguard’s index funds as to whose are the better value.

I wonder now, however, whether the performance of Fidelity’s index funds will pull ahead of the other three company’s funds because of the cut in expenses. Or will Vanguard, Schwab and T Rowe Price match the fee cut?

Only time will tell how this competition on mutual fund fees will play out.

So stay tuned!


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