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In a surprising twist on the classic “Vanguard vs. Fidelity” debate, seasoned financial advisor Steve Abramowitz shares his unexpected findings on which brokerage actually offers the lower-cost index funds. With a meticulous comparison of popular portfolio allocations and a deep dive into fund fees, Abramowitz reveals that the answer may not be what you expect.
I was an independent advisor for Charles Schwab but have always entrusted my money to Fidelity. I’ve been spoiled by the elite service, very knowledgeable telephone reps and emphasis on mutual funds. I see Schwab more as a bunch of swashbuckling stock enthusiasts offering mutual funds merely to have a presence.
I’ve snubbed Vanguard despite its reputation as the hands-down low-cost provider because of its notorious service shortcomings—insufficient online tools, limited telephone hours, poorly trained agents and no local branches. I want a comprehensive online platform, 24/7 availability, and the option of personally depositing a large check I hesitate to send through the mail. Of course, readers might say that the buy-and-hold investor who makes periodic automatic contributions does not require that much handholding.
But is the royal treatment at Fidelity worth missing out on Vanguard’s vaunted cost advantage? I determined to find out. I conceived of a portfolio that has proven popular and effective for the long-term, consisting two-thirds of primarily large cap stocks and one-third bonds. The stock allocation would be split evenly between domestic and international funds.
A numbers kind of guy, I set out to compare the expense ratios for the two groups’ three target funds—the S&P 500 or large cap-surrogate index fund, total international index fund and broad bond index fund. I was startled by the results and think you will be, too.
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Why so surprised? Well, because using comparable funds according to Morningstar, Fidelity emerges as substantially cheaper (.01) than Vanguard (.07). How can the cost of Fidelity’s portfolio be so microscopically low and Vanguard’s so relatively high? One culprit is the relatively large fee (.12) paid by owners of Vanguard’s international fund, when Fidelity imposes no fee at all on its zero-fee international fund’s shareholders.
I also substituted Fidelity’s zero-fee large cap fund for its conventional S&P fund. Then, curiously, Vanguard charges twice as much for its bond index fund (.05) as Fidelity does for its counterpart (.025). In fact, the cost of each of Fidelity’s three funds is lower than it is for the similar fund at Vanguard.
Did I cheat by replacing Fidelity’s conventional S&P and international stock funds with their otherwise very similar zero-cost alternatives? I don’t think so. Just how comparable are they? Taken from Morningstar, the top ten stocks in the S&P fund and its proxy are the same, as is their downside risk. The funds’ performance in the 2022 correction and 2023 recovery is also identical. The same scenario prevails for the total international index funds..
Some readers in the early accumulation phase might prefer to be invested more aggressively and ditch the bond allocation. Once again, Vanguard falls a little short. Its average cost for a 50/50 split between the U.S. and international large cap index funds is .08 contrasted with .04 for Fidelity. The offender again is Vanguard’s higher international fund fee.
Although for the innovative investor Fidelity wins the cost competition, Vanguard offers far more in-house index funds (over 100) than its competitor (24). Further, Vanguard’s fees on most index funds other than the large caps analyzed here are markedly lower than those offered by rival fund families. For any readers who occasionally slink into active funds, Vanguard’s fees are also dramatically less costly.
I started out wondering whether the first-class services offered by Fidelity were worth the added cost. I’m left asking why settle for a thrift shop when we can get a better deal at the designer boutique?
9 thoughts on “Vanguard vs. Fidelity: When First Class Is Cheaper than Economy”
Appreciate the effort in creating this blog post. Great job. Solar
Regarding tax efficiency, until recently Vanguard enjoyed a clever and legal patent between mutual fund and ETF shares that enabled it to avoid any realized capital gains on a number of funds. Remains to be seen whether other fund companies will choose or be able to employ a similar scheme now that the patent is expired. But a noted cost advantage for Vanguard in non-retirement accounts over the last few decades.
Something you did not account for with Fidelity’s zero fee funds is the drag on not reinvesting your dividends every quarter like Vanguard does. Fidelity only reinvests your dividends from these funds once per year so they are not earning you anything that whole time. This can be a drag of roughly 0.15%. So zero funds are actually more expensive than the equivalent Vanguard funds. Vanguard is still cheaper.
About a year and a half ago I received a letter from Vanguard stating they were instituting a new fee structure and fees would be waived for accounts having 5 (FIVE) million dollars! After calling Vanguard and waiting about 45 minutes to talk to a representative, I asked what the fees would total for my, my wife, and my child’s accounts. I was told $955 per year. WOW! Since Vanguard doesn’t have HSA accounts and Fidelity does, I checked in with Fidelity and was told that I could move our accounts and not be assessed those fees. Our accounts were moved almost painlessly, We don’t have account fees and the service with Fidelity is far superior! I was with Vanguard for over 30 years and a staunch supporter, but no more. Their service became incredibly poor.
I had been in Vanguard for years with a Brokerage account and Roth IRA. I would have stayed with them too until this year Vanguard decided to not let its buyers by any of the bitcoin etf that the sec approved.
I found it ludicrous that Vanguard would block its customers from buying an investment that was legalized under the sec just because it went against their philosophy.
I switched to Fidelity and transferred everything with ease. The customer service at Fidelity is light years ahead of Vanguard. The mobile app and website are also far more elegant than Vanguard with a better user interface. Vanguard mobile app especially paled on comparison.
I’m not really addressing Vanguard vs Fidelity. I’d like to address your model portfolio. You split the equity portion of your portfolio evenly between domestic and international stocks/companies in your choice of funds. I think many if not most US investors would have a significantly higher proportion of domestic stocks. This would lessen the impact of the higher fee of the Vanguard international fund.
One thing not factored in is the tax drag of each fund. It is my understanding that Vanguard funds are more tax efficient compared to Fidelity and, in the end, it’s basically a wash when it comes down to any savings.
My employer uses Fidelity for the 401k, so I don’t have a choice. But, I recently inherited a little money (50k) and wanted to put it in an index fund. I called Vanguard b/c I had an account with them about 10 years ago and they were always touted as the low cost fund leader. I was able to verify my old and new addresses, online username and password, along with all relevant security information like SSN. But, the offshore representative would not open an account for me without me signing and notarizing several forms. They just kept saying “it is due to security”, but could not explain what additional security was needed. It shouldn’t be so difficult, so I just went with Fidelity. I found better service and now I’m happy to see that the cost is lower too.
I have funds at both Vanguard and Fidelity.
I don’t appreciate a difference in service, but as the author notes, a buy and hold investor may not notice much, and that’s me.
On the contrary, when calling Vanguard over the last 25 years I have never once had a rep that didn’t speak English as their first language and seem to be highly educated on financial issues. My waiting time years ago was zero, now there’s often some wait.
With Fidelity, who I’ve only used in the last year for an HSA, and a i401k (Vanguard stopped supporting the i401k once again, the second time in 15 years!), I believe my calls are going to a call center. Not always, but some reps seem to be outside the USA. I’ve had to be transferred around a lot. Less impressed with their reps.