A Three Fund Portfolio Keeps Getting Cheaper!

Vanguard, the brokerage company that gave the world its first passive index fund in 1976, has been a low cost leader for over forty years. The firm has been known to have the lowest cost passive index funds, but recent moves by Fidelity and Schwab actually undercut Vanguard’s fees on a few popular funds.

The other day, Vanguard announced it had lowered its fees on those key funds that make up the three fund portfolio, while also lowering its fees on a mere 164 other funds this year.

The move makes Vanguard’s funds equal to or cheaper than Fidelity’s, but not quite as low as Schwab’s on the Total Stock Market, Total International, and Total Bond Funds.

A Three Fund Portfolio Keeps Getting Cheaper!

The Annual Expenses of a Three Fund Portfolio


Let’s take a look at the updated expense ratios and the resulting costs to your portfolio. Note that you will not be charged these fees directly, but the cost of operating the funds will be deducted from your returns periodically. The current cost of the mutual funds in the three fund portfolio are (updated 2/2019):



  • Total Stock Market (SWTSX) 0.030
  • Total International Market (SWISX) 0.060
  • Total Bond Market (SWAGX) 0.040
  • Cost per $1 Million per year (1/3 in each fund): $433


Fidelity (Premium Class):

  • Total Market Index (FSKAX) 0.015
  • Total International Index (FTIHX) 0.060
  • US Bond Index (FKNAX) 0.025
  • Cost per $1 Million per year (1/3 in each fund): $333


Fidelity (ZERO Expense Ratio Funds):

  • ZERO Total Market Index Fund (FZROX) 0.000
  • ZERO International Index Fund (FZILX) 0.000
  • US Bond Index (FXNAX) 0.025
  • Cost per $1 Million per year (1/3 in each fund): $83


Vanguard (Admiral Funds):

  • Total Stock Market Fund (VTSAX)  0.04 0
  • Total International Fund (VTIAX) 0.110
  • Total Bond Fund (VBTLX) 0.050
  • Cost per $1 Million per year (1/3 in each fund): $667


Should I Switch to Fidelity or Schwab?


While I am happy to see Vanguard leapfrog Fidelity, both still lag Charles Schwab when it comes to ultra low cost investing. They have seen the money pouring into Vanguard and have made a move to capture some of those dollars. It’s an intelligent tactic.

Critics of Schwab (and Fidelity) have suggested that the recent price wars are an effort to dangle loss leaders out front in order to gain investors who might use their more expensive advisory services or invest in their actively managed funds.

That may very well be true, but business is business and these companies are vying for my business and yours. If that leads to healthy competition and lower fees across the board, I’m all for it.

Personally, I have no plans to make any changes based on the latest round of fee reductions. I’ve been with Vanguard for a number of years and appreciate that their entire family of funds has low (and decreasing) expense ratios. I’m not inclined to switch my loyalty to save a few hundred dollars a year.

The difference between an expense ratio of 0.04 and 0.03 is not enough to move the needle for people like you and me. It’s $100 per $1 Million per year. If you have enough money for that difference to measure in the thousands of dollars, you’re probably not terribly concerned about a couple thousand dollars. Your yacht burns that much in gasoline in a matter of hours.

Now, the difference between 0.3 (the expense ratio of T. Rowe Price’s Total Stock Market Fund) and 0.03 is a different story ($2,700 per $1 Million per year) and I do not regret having deserted them for Vanguard. Making the transition away from T. Rowe was a bit of a T-Pain, but it was totally worth it.

Another consideration is the tax implications of a change. Half of my nest egg is in a taxable account and I would incur capital gains taxes if I were to swap any of those Vanguard funds out for a lower cost fund. No, thank you. There are ways to avoid capital gains taxes, and I plan to utilize at least some of them in the future. In a retirement account, a swap could be made without tax consequences. If I were ever to make such a change, it would be in an IRA.


What If I Were Starting From Scratch?


If I was a new attending and had no established relationship with any brokerage firm, I might be tempted to get started with the current low cost leader. Another advantage I failed to mention is that the Schwab funds have a $1 minimum, whereas the lowest cost Fidelity and Vanguard funds have minimums of $10,000.

Those larger minimums may be easy to meet for an attending physician, but a resident just starting to invest may be putting in fifty bucks at a time — beer money. Additionally, both Schwab and Fidelity have brick and mortar branch locations where a new investor can walk in for assistance. Vanguard doesn’t have such a thing.

So I’m happy to stick with Vanguard, but I was starting from nothing today, I would certainly consider investing in an ultra-low-cost three fund portfolio via Schwab. As an added bonus, Schwab also has a donor advised fund (Schwab Charitable) with lower starting minimum compared to Vanguard’s ($5,000 versus $25,000) and lower grant minumums ($50 versus $500). Fidelity’s minimums match Schwab’s.


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Where is the Market Headed, Anyway?




Another recent revelation from Vanguard is their annual 10-year forecast. Their thoughts are detailed in this white paper and summarized in this infographic.

In summary, their outlook is the most guarded in a decade, but they expect stabilization, not stagnation. While Vanguard founder John Bogle recently made headlines suggesting we can expect 4% nominal returns from stocks in the coming decade, his employees paint a rosier picture.

Vanguard’s best guess is that we’ll see stocks return a “guarded but not bearish” 5% to 8% real return per year (annualized), with fixed income returning 1.5% to 2.5%. A 60/40 split would return 3% to 5% real if their predictions hold true. I can certainly live with that.




A couple months ago, Schwab weighed in with a ten-year forecast of its own. Like Vanguard, they are asking investors to temper expectations, with the key factors being low inflation, low interest rates, and less growth in P/E ratios.

Still, they’re not calling for doomsday, either. In fact, over the next decade, they expect US and International stocks to return about 7% nominal returns per year (annualized) with investment grade bond returning 3% and cash investments 2%.

Again, given the starting point we have today, if we see returns like this over the next decade, I will not be the least bit disappointed.




I did not find a forecast from Fidelity, nor do I need one. All the educated guesses in the world aren’t going to change the future. There’s not much an individual can do to affect or know the future, either. There is one thing you can do, though.

Keep your fees low.


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For further reading on the three fund portfolio, check these out:



  • Nice summary of the price wars between the Big 3. One caveat I would note is that Schwab’s international index fund (SWISX, ER = 0.06%) only includes foreign developed markets, while the Vanguard (VTIAX, ER = 0.11%) and Fidelity (FTIPX, ER = 0.11%) index funds you listed include foreign developed and emerging markets. Schwab’s emerging markets index fund (SFENX) has an expense ratio of 0.39% (and then you’d have a fourth fund).

    As you mentioned, the expense ratios are moving targets, with all three firms lowering expense ratios over the past year. Schwab may be the leader in terms of lowest ERs today, but they may not be the leader next month or next year.

    One last point: if you are trading in a taxable account with Fidelity of Schwab, please use the ETF versions, not the mutual funds. ETFs are significantly more tax-efficient than the mutual fund. I encourage people to look at Schwab’s Total Stock Market (SWTSX)’s after-
    tax performance by going to http://performance.morningstar.com/fund/tax-analysis.action?t=SWTSX&region=usa&culture=en_US and then click “Compare” and type in SCHB. There is a significant difference in after-tax returns.

    This last point does not apply to Vanguard investors, where they have structured the ETF and index fund in a way that the index fund is just as tax-efficient as the equivalent ETF. Although you can use the ETF if you are just starting out and can’t afford the minimum investment for the Admiral shares.


    • Edit: For Schwab investors wanting exposure to emerging markets, use the ETF SCHE (ER = 0.13%). It has a much lower expense ratio than the Schwab emerging markets index fund (SFENX, ER = 0.39%).

    • Thank you for filling in the blanks, WSP! That’s an important distinction regarding the international funds tracking different indexes.

      Also, how interesting on the taxation difference between Schwab’s ETF versus mutual fund. With Vanguard, it’s an issue I haven’t had to dal with. Using your link, I compared VTSAX with SWTSX, and when you look at the 1 year and longer after-tax returns, Vanguard wins by 0.3 to 0.4 percent. That’s $3,000 per year per $1 Million!


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  • Nothing is better for the investor gen a price war. The ER has done nothing but drop for these funds over the last decade. I agree with your interpretation of whether to remove with a caveat. Some brokerages allow in kind transfers where you do not have to sell. They also provide signup bonuses from time to time for moving cash. I still don’t do it as a hundred dollar signup bonus probably is not worth the large number of hours I’d spend on the phone making the change. But… for some it may be worth it.

    • Good insight, FTF. I’m willing to open a new credit card every few months to rack up some miles and points, but I’m not sure about moving hundreds of thousands of dollars from one brokerage to another.


  • Another great reminder why we love low fees. I hold VIIIX inside my 401k. An institutional investor SP 500 like fund with expense ratio of 0.02%. Meb Faber tweeted out recently that a number of investment shops will charge you 1.5-2% for a SP 500 like fund. Not just scandalous, bloody criminal!! It’s great to see respected investment guys like him calling out these highway robbers.

    Another useful pointer for any travel hacker readers who could be interested. – We moved $100k in funds recently from Vanguard over to Fidelity. Got 50,000 American air miles for a few clicks of the mouse. No sell/buy, just a simple transfer. There are some rather easy wins out there when you look.

    • Dr.Joe

      How did you get the points? Fidelity credit card? Is there a maximum number of points? Not a bad deal. Worth a minimum of $500 but could be worth $2000 or more if used to upgrade to business class.

      • I believe the offer is now closed. It was up to a max of $100K per user. $50K would have gotten you 25,000 miles.

        I could have chosen Delta miles instead of AA miles.

        Points were loaded directly to my AA account within ~10 business days of the funds landing in the Fidelity account.

        We will use these miles along with 150,000 other miles to fly the family of four round-trip, FREE, from Boston to Vancouver next February for our ski-trip to Whistler. Gotta love travel hacking!

  • I can’t wait until these fund companies start paying us 🙂 Hopefully they’ll continue pushing fees down until it becomes almost like a checking account where they upsell you with other products to offset the cost of your account. That’s probably wishful thinking though!!!

  • TheGipper

    Good stuff.

    If starting out fresh today, I’d take a close look at the tax efficiency of these funds as the deciding factor over fund ER. Last time I checked VG had the slight edge with no capital gains distribution and lower percent of unqualified dividends. But my VG funds have been drifting up with unqualified dividends and I wonder if Fidelity and Scwhab have caught up.

    In a tie, Vanguard wins due to corporate structure.

    • In a taxable account, you’re absolutely right. One might assume that different Total Stock Market funds would have similar tax efficiency, but one would be wrong.

      In fact, Vanguard wins by 30 to 40 basis points compared to both Schwab and Fidelity. That’s a huge margin when we’re looking at differences in fees of 1 or 2 basis points. This topic might deserve its own post.



  • I recently did some research on the funds in the 401(k). My company offers Vanguard Admiral shares. I was able to save quite a bit in fees moving out of the 2050 target date fund and into Vanguard Admiral shares: 25% VFIAX, 25% VSMAX, 45% VTIAX, 5% VBTLX !!

    • Excellent. I started out in Target Date funds because it was easiest (and I didn’t know squat about fees – I was in T. Rowe Price funds at the time). When you have a better understanding of your investments, you realize you don’t need the hands-off glidepath the Target Date funds provide, and the glidepath of increasing bond allocation may not actually make sense for you, anyway.


    • David

      Where can I find out more about how to move out of the target date fund? I recently just graduated med school and put in 1K into my Roth IRA (lol) all into a 2050 TDF.

      I could not afford the admiral/investor shares and didn’t want to mess with asset allocation to recreate a pseudo TDF being that I am so new to this.

      I foresee myself not buying TDFs for my Roth IRA in the future. With the 1 K that I have in the TDF, is there a protocol for how to convert that into admiral/investor shares? Thank you

  • Great break down today. I opened my first brokerage account when I was in my mid 20’s and poor, which meant I went with Schwab at the time because of the low cost of entry (I didn’t have $10k sitting around). For years I’ve been meaning to switch to Vanguard, but have never got around to it. This post has helped me rethink my plan to switch. Maybe my procrastination has finally paid off?

    • Perhaps — although, if you’re invested in their mutual funds, check the tax efficiency. As you’ll note in the comments above, Vanguard’s TSM fund saves you 30 to 40 basis points (0.3% to 0.4%) per year as compared the “equivalent” funds at Schwab and Fidelity.


  • Timely overview. I just opened a Scwab account last night and will be funding it with my upcoming pay checks. I am still in the accumulation phase of my investment portfolio so I won’t be tax lost harvesting in the near future.

    Once I get the yacht, I won’t try to pinch pennies as much! 😉

    • Good for you, SMMD! Be sure to invest in the ETF versions if this is a taxable account. For reasons that are not clear to me yet, Schwab’s ETF is more tax efficient than the mutual fund (see first comment).


  • I love Vanguard funds. “Funny” (disappointing really) that Morgan Stanley recently announced they would stop selling these low-cost funds. Apparently their brokers just aren’t making enough money on them. What ever happened to fiduciary standards??

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  • Dad Dollars Debts

    Set it and forget it…Since I already have a Vanguard fund, it would have to be a real good offer for me to switch today. As for if I were starting with an investment today, I am not sure. There is something to be said about customer service, and Vanguard always seemed to have the customer in mind.

    • Funny that you say that, Triple D.

      Customer service is probably the most common complaint I hear about Vanguard. I have had no issues, but unlike the other two mentioned here, they do not have branch offices. It helps keep their costs low, but can make things challenging for people who want to sit across a desk from someone to figure things out.


  • Matt

    So I’ve been at Vanguard for years for my IRA accounts and been happy there. Happy enough that now that student loans got paid off last month, I opened my first taxable account there. It has about $25,000 in it and I make $450K+ so taxes are high, so I’m assuming it’s probably a good idea to keep that money there and avoid any tax consequences? Or the fact that the account is only a few weeks old means it hasn’t gained much and maybe the tax consequences are negligible? That being said, should I continue to channel our extra savings into the Vanguard account or should I just open up a separate Schwab account from here on out? I expect to add about $60K/year and then use the accounts for my charitable giving each year ($30k-$40k/year). Any thoughts?

    • If you’ve been happy there for years, I see no reason to make a switch now. It wouldn’t take much in gains for the taxes on them to outweigh the benefit of saving a few basis points.

      You might consider opening a Schwab account, but realize that will give you additional tax paperwork each year, a second place to login to check your balances, etc… And who knows — maybe Vanguard will lower fees again next year to match Schwab.


  • VagabondMD

    If I were staring today, I might pick Schwab, as the lower fees, storefronts, and better customer service give it the edge.

    As it stands now, I have Fidelity and Vanguard accounts, the latter filled with DFA funds and ishares ETFs. Ishares core ETFs trade free at Fidelity and offer among the lowest expense ratios (2 basis points for IVV and ITOT, compares with 4 basis points for Vanguard’s VOO and VTI). Both my workplace retirement account and my wife’s workplace retirement account also sit at Fidelity, so we have a lot of irons in the FIRE there (pun intended).

    That said, most of my new taxable account money is going to Vanguard these days. The bottom line is that all of the choices are good and have improved over the years. I remember in the bad old days of mutual fund investing paying ERs occasionally over 200 basis points (!) and paying loads to invest with “star” managers.

    • Never mind the “bad old days”. The nonsense of exorbitantly high fees is going on TODAY.

      Examples of SP500 type funds and fees being offered TODAY to investors:

      State Farm SP 500 Index 1.38%
      Rydex SP 500 Index 2.31%
      Blackrock SP 500 Index 1.08%

      Scandalous. Brutal. Really sad that people get duped by these “choices”

      Meb Faber has a great summary of this sorry state of affairs over at:


      • Scandalous is right. Outlandish. Other adjective synonymous with terrible.

        We often recommend that easy DIY investing involves purchasing passive index funds, but it’s important to add Low-Cost at the beginning. It’s easy to forget crummy versions exist, and hard to understand why.


  • My inner Vanguard fan girl is thrilled at the fact that Vanguard is responding to these up and comers. I would be inclined to stay with Vanguard even if their expense ratios were slightly higher simply for the ownership model.

    In other news, a friend recently asked for help with her portfolio. There was a fund in there called MGIAX with a 1.01% ER. And it wasn’t the only one either. And yes, of course she has an ‘advisor’ who charges his own fee on top.

    • Good for you for helping a friend, Mrs. BITA, and I like your take on the ownership model. That is indeed worth something.

      I compared MGIAX with a similar Vanguard fund (VVIAX). The Vanguard fund blows it away in performance, which is unsurprising given the expense ratio of 0.06.


  • An extra $200 a year is fine. Would there be transaction costs and taxes needing to be paid if you switched? I don’t think it would be worth it.

    That’s still pretty crazy that a fund has an expense ratio of 0.03%. That must have hedge funds and actively managed mutual funds shaking in their boots 🙂

    • In a taxable fund, you would likely owe some capital gains taxes if you sold. If your taxable income puts you in the 15% federal tax bracket and you live in a state with no income tax, you might be able to make a switch tax free.

      For retirement funds (IRA), there would be some hassle, but no cost.


  • Vanguard is best for most things, but not everything. As you mention here, the $10,000 minimums for Admiral shares might be challenging for beginning investors to reach. As another example, Vanguard’s individual 401k does not accept rollovers.

    • That’s a good point, LFMD. Although, if you have fewer than $10,000 in the fund, each basis point is less than a dollar per year. At $10,000, 0.01% = $1.

      I went with eTrade for my individual 401(k). Vanguard’s doesn’t offer admiral funds regardless of account size.


      • EnjoyIt

        I am still with vanguard for my i401k but very frustrated about not having the ability to buy ETFs or going admiral. I know it is costing me a few hundred bucks a year, but I kinda like having everything in one place. I told myself if when my 401k hits $1 million I will jump ship.

        I just checked and it is currently costing me a little over $500/year. Maybe it is worth it to jump to Ameritrade and stick with BND and VTI. They already have my HSA account.

        • When I opened my individual 401(k), I dismissed Vanguard for those reasons and some other limitations. From what I read, ETrade sounded like the most flexible and it does offer some low cost funds with no transaction fees. Fidelity also sounded like a good option. I didn’t look into Ameritrade, but that may be another viable option.


  • Nice update.
    We can’t be too careful about expenses. It is mind blowing how much a small percent can suck out of a portfolio.
    I feel comfortable recommending Vanguard to people – largely based on their management structure and lack of inherent conflict of interest (shareholders vs. clients).

    • Thank you, WD. You can save a few pennies (or a few hundred dollars if you’re a millionaire) with a competitor, but Vanguard has always been and will continue to be an excellent choice.


  • HarjotSingh

    A very important but not often mentioned point is that Vanguard’s investors become its owners/shareholders too. Hence, there is no conflict of interest between owners and customers – they are the same. The setup is non-profit.
    I am spread between many – mainly Fidelity and Vangaurd especially as Vanguard didn’t offer the 401k setup that I needed back in the day.

  • Amy

    Thanks PoF!

    I’m one of the newer investors w/ a Vanguard taxable account (just started putting in a few months ago so only have about 5K in there now). For simplicity’s sake I’ve got it in the Life Strategy Moderate Growth Fund, which I know may not be best for taxes on capital gains in the bond portion of the fund. Since the account is only a few months’ old with a low amount in it, do you think I should transition to Schwab instead? My 401k and back door are both w/ Schwab, so it would be nice to be able to view all investments on the same log in.

    Also curious how you would have your back door Roth invested if you were w/ Schwab?

  • We’re with Fidelity since that’s where my first 403(b) was offered, and we’re very happy with their service. Having a local office is nice because they make rollovers painless.
    If we were starting over today, I’m not sure which of the three we’d choose, but for now there aren’t enough benefits to balance out the hassle of changing and the capital gains we’d incur.

    • With costs so low across the board (among these three, anyway), you can’t go wrong with any of them. Reasons other than costs, i.e. a local branch, can be the deciding factor.


  • Just like you, I would hate to trigger a tax event just to save a few dollars. I’ve been with Vanguard for a couple of years and so far so good. If I were starting from scratch I’d suggest doing your due diligence and I could certainly see justification for going with Schwabb. I will say I like competition which in this case benefits the investor but what took Fidelity and Schwabb so long? To me they were just being greedy and now realize they need to compete to stay in the game. I hate that. Now Vanguard has always been transparent on their mission to keep fees low so to me it’s in the core of who they are. The others are just trying to adapt so they can capture future investors. Anyways, great post!

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    Thanks for the update. I think these are the Schwab ETF tickers? I’ve read this twice but only see tickers on the Vanguard & T-Rowe.


  • Gonzo on FIRE

    Great post!

    My wife and I hold our 403b/401a with Fidelity in the Larimore classic 3-fund portfolio. After reading your post, I love the competition btwn fund companies driving ERs down.

    Recently, we made our first backdoor Roth contribution with Vanguard! I feel like a true Boglehead now. Before with being strictly with Fidelity, I never felt legit. 😉

    If I were starting out with sub$10k, I would go with Vanguard 100%. Its the gold standard. Always there for the customer.

  • Gonzo on FIRE

    I have a “what would you do” question.

    Would you open a Vanguard taxable account to save for wedding expenses? I have three girls with the oldest at 6y.

    I am considering opening one up and buying VTSAX and contributing for the next 20ish years.

    Thanks for your input.

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