Don’t Switch Between Cheap Index Funds To Save Money (Try Cheap Milk Instead)

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I’ve seen this Schwab commercial multiple times recently, where Schwab touts that one of its index funds costs “3X less than Fidelity” and “4X less than Vanguard”:

I already knew why it bugged me every time I saw it, but I finally ran the numbers. Never mind that this is one cherry-picked fund. Let’s play their game. The index fund in question is the Schwab S&P 500 Index fund at a 0.03% expense ratio. The comparison is the Vanguard 500 Index Fund Investor Shares (VFINX) with an expense ratio of 0.14%. On an investment of $5,000, this works out to $1.50 a year vs. $7 a year. That’s a difference of $5.50 a year, or under 50 cents a month.

But wait, there’s more. Once you reach a $10,000 balance, the Vanguard 500 Index Fund Admiral Shares (VFIAX) will automatically decrease to an expense ratio of 0.04%. Now the difference is $1 per year. That’s 8 cents a month. Schwab funds have been far more expensive than Vanguard for decades, and now that they are bragging about saving you less than 50 cents a month?

Finally, the only way that Schwab can do this is in the first place is that these index funds are a loss-leader. Here’s an excerpt from the Morningstar article Penny-Pinching Index Fund Investors May Pay a Price, which also warns fundholders before switching index fund providers as the tax hit could take decades to overcome.

Existing shareholders in these funds are clear winners in the fee war. But as this race to the bottom nears its inevitable ending (free beta), these investors’ savings will increasingly be measured in dollars and cents. In my mind, these latest exchanges will likely do more to move the needle for fund firms and brokerages like Schwab. In many settings, these low-cost building blocks are simply loss leaders, a cheap gallon of milk meant to entice consumers into the store in hopes that they’ll grab some Cheetos and a pack of gum before they get to the counter.

I think that Schwab has many positive attributes to point out overall, but this commercial was deceptive. I’m happy that low-priced, broadly-diversified index funds are more readily available, but the idea that Schwab is significantly cheaper than Fidelity or Vanguard is laughable. The real numbers show that you could save more money by regularly buying discounted milk than by switching $100,000 from Vanguard to Schwab.

If you haven’t started investing yet, you will most likely be fine with any low-cost provider – iShares, Vanguard, Fidelity, Schwab. If you’ve already started, the absolute cost difference is too small to warrant a change.

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  1. More important than the fees is the ability to track the index. Fidelity was horrible at tracking the index for a long time and would cost you 0.5%. I have not looked at index returns in years but that is the more important thing to look at. It cannot be assumed an index fund will track the index properly. Vanguard is the best at it.

  2. Ms. Raggedly Rich says

    I’m glad there’s people like you out there that are naturally suspicious of anything that seems too good to be true. Not that it’s technically untrue, but you can’t ignore the spirit of it. Thanks for the post!

  3. Schwab is cheaper. This is what matters to me. I am a loyal reader but tend to skip over your Ting and Vanguard cheerleading moments.

  4. Moe Howard says

    Deceptive advertising? Have you watched commercials on TV?

  5. A short anecdote. About 10 years ago I made my checking account Schwab with six month of living of expenses in it because it had a paltry .1% APY, but that was far better than 0%. I thought Chuck was this old guy with no way to keep with up places like Etrade, Ameritrade etc and had to pay a little to get business. Fast forward 10 yeares and I do more and more business with Schwab, have more and more accounts and I amazed at how forward thinking they are.

    The reality is that sure they are advertising, but the reality is the average person doesn’t have 100K they are moving over. You can’t make a commercial tailored to everyone. I applaud Schwab for doing what they are doing, they are actually forcing commissions down across the industry and that is good for consumers.

    • Gosh yes, we consumers really need a break in this arena. Commissions have been far too high for far too long. Thanks for this article and advice. We individuals that are trying to learn about investing and how to make the most of our money salute you!

  6. It’s not really deceptive IMO. For folks with <3k the truth is that VG fund is 4x expensive. It is only when you reach the admiral status that the difference is negligible. Additionally Schwab has also removed minimum balance requirements, so even folks with $100 can buy these index funds whereas with Vanguard you either have to use ETF or wait till you have 3000 to invest.

    I think this is a good move for Schwab as they'll likely attract new investors with less money in their early careers. Otherwise VG would've captured the full market while others would be spectators.

    I'll stick with VG since I use their admiral funds & the tax cost of switching will be higher than the negligible ER savings. Also, VG has a bigger selection of index funds, including REITs, Small-cap Value; which Schwab currently lacks. It's still good to know the are options given the deteriorating state of VG customer service lately.

  7. A couple of other points to keep in mind:

    1. Some Schwab funds aren’t transferable outside of Schwab. I found this out about 5 yrs ago when I joined a group in my company that required me to move all my money to a certain fiduciary so that they can monitor trades. All of my investments were at Schwab at the time. My Schwab funds couldn’t transfer and to cash out and move would have triggered tax consequences. Instead I had to get an exception to keep my Schwab account open.

    2. Reinvesting in Vanguard funds outside of Vanguard is expensive. There are usually no trading fees when buying Schwab index mutual funds.

    I’m actually a big fan of Schwab banking and investing. Their customer service is top notch.

  8. I haven’t seen the commercial, but I’ve been with Vanguard for years and appreciate the fact that we (the investors in the funds) own the company. Fees are low across the board.

    My portfolio has grown to a nice 7-figure number, so every basis point counts, but I recognize that the daily fluctuation of the account is usually in the double digits in terms of basis points, and adds up to a 4-figure number. I’m not about to jump ship to Chuck Schwab over 1 measly basis point.

    Where can I score some cheap milk?


    p.s. It’s Aldi. $1.58 for a gallon of skim and $0.48 for a dozen eggs. That’s where the deals are!

  9. Instead of investing directly in the index funds, I prefer the ETFs that track the same indices. Vanguard has an S&P 500 ETF (VOO), which has a 0.04% expense ratio and no minimum balance requirement. In my taxable account, I am invested mostly in VTI, an ETF tracking the entire stock market. It has an expense ratio of 0.01%.

  10. Big John says

    I’m a big Vanguard fan. Lots of my money is in Vanguard ETFs. But why the beating up on Schwab. What they claim is true. Schwab has a half dozen funds that are the absolute cheapest! I opened a Schwab account several years for my mother and I really like it. In fact, other than Interactive Brokers incredible margin rates, I like the Schwab brokerage account the best.

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