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

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.


<!–
BA
–>

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


© MyMoneyBlog.com, 2017.


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

Leave a Reply

Your email address will not be published. Required fields are marked *