The deal for small investors is getting better. If someone wants to invest in index funds and ETFs with very low cost, Vanguard is no longer the only choice. Competition is really good for customers.
Schwab has 5 index funds that require only $100 minimum initial investment. The lineup is not as extensive as Vanguard’s, but it’s adequate for a small investor. Although Schwab doesn’t have a bond index fund, customers can buy Treasury bonds at auction or buy new-issue CDs, all for free.
Schwab customers can also buy 8 Schwab ETFs without commission. Because these ETFs are new, my first choice would be the index funds unless the asset classes can’t be covered by the index funds. Here’s an example of a simple portfolio using Schwab index funds and ETFs:
| Fund | Expense Ratio | |
| 42% | Schwab Total Stock Market Index Fund (SWTSX) | 0.09% |
| 14% | Schwab International Index Fund (SWISX) | 0.19% |
| 4% | Schwab Emerging Markets Equity ETF (SCHE) | 0.35% |
| 40% | Treasury notes bought at auction and/or new-issue CDs | 0.00% |
| 100% | Total | 0.08% |
It’s amazing to me one can invest ten grand for the cost of a few cups of coffee a year.
Fidelity has offered 8 Spartan index funds at low expenses for some time now. These index funds typically have a high minimum initial investment requirement, which makes them not feasible for small investors. In response to Schwab’s commission-free ETFs, Fidelity struck a deal with iShares to offer 25 iShares ETFs free of commission.
These iShares ETFs are among the most popular ETFs in the market. Although Vanguard ETFs have slightly lower expenses, for small investors, not having to pay a commission on small purchases is much more important than the expense ratios. Like Schwab, Fidelity also offers Treasury bonds at auction and new-issue CDs without commission. Here’s an example of a simple portfolio using commission-free iShares ETFs at Fidelity:
| Fund | Expense Ratio | |
| 42% | iShares Russell 3000 ETF (IWV) | 0.21% |
| 14% | iShares MSCI EAFE ETF (EFA) | 0.35% |
| 4% | iShares MSCI Emerging Markets ETF (EEM) | 0.72% |
| 40% | Treasury notes bought at auction and/or new-issue CDs | 0.00% |
| 100% | Total | 0.17% |
It’s more expensive than the similar portfolio at Schwab but the cost is still very low.
Are these low minimum index funds and commission-free ETFs loss leaders? Maybe, but they don’t have to be short-lived. There’s enough cross-subsidy at Fidelity and Schwab to make them last.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
KD says
TFB, could you please also included a portfolio of Vanguard ETFs built commission-free at WellsTrade? I know the minimum is 25,000 for that. But it will help compare the long term costs.
KD says
Bah! It will be 0.0828%, assuming you can buy treasury notes at Wells Trade.
Harry Sit says
KD – Buying Treasury notes at WellsTrade costs $45 for each trade. You will have to buy bond funds or ETFs at WellsTrade. Larger accounts have more options. This post is primarily focused on small portfolios. The amazing part is the cost can be so low even for small portfolios.
The comparable portfolio at WellsTrade (min. $25k) would be:
42% VTI @ 0.09%
14% VEA @ 0.16%
4% VWO @ 0.27%
40% BND @ 0.14%
100% Total @ 0.13%
Ari Weinberg says
Always be mindful of what index your ETFs are tracking. SCHB and VTI do not track the same thing.
RetirementInvestingToday says
It continually amazes me how low the fees for ETF’s are in the US. Here in rip off Britain I can only wish for low fees like you describe.
For example
Lyxor FTSE 100 ETF at 0.3%
Lyxor Emerging Markets ETF at 0.65%
It gets even worse buying in a tax wrapper like my employers pension where I am being charged a minimum of 1% for index tracker funds.
This means my total asset allocation has fees of 0.6% and I think I’m doing well to keep it that low.
Harry Sit says
Ari – Thank you for reminding us about the underlying indexes. By coincidence I did not include SCHB in my examples. The Schwab open-end total stock market index fund tracks the DJ Wilshire 5000 Index. Its international index fund tracks a Schwab index. For a small portfolio though, these finer details don’t matter that much. If one has to pay a commission to buy VTI every month, one is still better off buying SCHB without a commission.
Charlotte_Res says
Thanks for this info. If these features are available to IRA’s its a no-brainer for young professionals to begin saving for retirement with these firms.
Jeff says
Does Fidelity have any funds with low minimums?
Harry Sit says
Jeff – Fidelity usually requires $2,500 minimum for each fund. If you commit to $200 a month in an IRA, they will let you start with no minimum. Otherwise you only have those 25 commission-free ETFs for low minimum.
KD says
TFB, does the VEA+VWO combo miss out Canada? If so, would VEU be a better fit, even though its more expensive?
Harry Sit says
KD – Yes, it would. I only gave the example to make it comparable with the portfolios made up of low-minimum, commission-free funds and ETFs at Schwab and Fidelity.
KD says
Yup, I understand. Thanks.
Jesse James says
Hii good idea for commission free ETF funds. Thanx.
zany says
Schwab has recently reduced the fees for the ETFs and I am very tempted to move there for new money (instead of vanguard). I love vanguard but there are all these nuances with the brokerage that I would rather move.
One thing I don’t understand – If two ETFs track the same index (say SCHB/VTI or SCHA/VB), are they really equal, except for the expense ratios? What about dividends and capitals gains? Would a smaller fund (schwab in this case) be giving out higher dividends and capital gains just because it may not be able to absorb the churns of the ETF? I say this because while the graphs look similar, the dividends don’t (on google finance).
Harry Sit says
@zany – Schwab and Vanguard ETFs track similar, but not exactly the same indexes. They are not really equal. Funds and ETFs are required to pass through all dividends to the shareholders. A tax efficient fund or ETF will minimize capital gains. Neither SCHA and SCHB distributed capital gains in 2010.
Jess says
Hi Harry, I’m looking for some insight on my 401k investment options at work. They offer two Vanguard funds: the Vanguard Russell 1000 Growth Index Trust and the VFFSX (Vanguard 500 Index Fund Institutional Select Shares).
I’ve been contributing to VFFSX, which has an attractive expense ratio of 0.01%. However, I noticed VRGWX seems to have had slightly higher returns over the past years.
Here’s the thing: there seems to be some confusion about the expense ratio for VRGWX. My work’s Fidelity account lists it as 0.0173%, but I found information online suggesting it might be 0.07%.
Given the potential for higher returns, I’m wondering if switching to VRGWX (or if I start investing future contributions into it) might be a good move for my 401k.
Any insights or general information you have on the Vanguard Russell 1000 Growth Index Trust or thoughts between these two options would be greatly appreciated! Thank you.
Jess says
Correction: regarding my earlier above post, my employer’s 401k plan does not specify the ticker symbol as VRGWX. Instead, it just stated as: the Vanguard Russell 1000 Growth Index Trust.
Harry Sit says
I treat expense ratios under 0.1% as close enough to zero and don’t worry about the difference between 0.07% and 0.0173% even though one number is 4x the other. The Vanguard Russell 1000 Growth Index Trust is a private version of the mutual fund VRGWX. See Collective Trust vs Mutual Fund. The Russell 1000 Growth Index is more heavily invested in tech than the S&P 500 Index (53% versus 30%). It had higher returns in the past because tech did well in the past. Whether that will continue is your call. It has the potential for higher returns, yes, but also the potential for lower returns due to over-enthusiasm in technology.