Although ETFs get onto a lot of news these days, some investors still prefer traditional open-end index funds because it’s easier to set up recurring purchases with them.
Fidelity added some index funds under its Spartan name back in September 2011. I’m considering these because I have accounts at Fidelity. These funds are still quite new with very low assets. As you will see below, they are often 1,000 times smaller than the more established funds and ETFs.
All Spartan index funds come with two share classes. Investor shares require a $10k minimum initial investment. Advantage shares require a $100k minimum initial investment. Advantage shares of course have a lower expense ratio. I’m looking at Investor shares in this post.
Spartan Global ex US Index Fund
This fund invests in international stocks. It tracks the MSCI ACWI ex USA Index. It includes both developed and emerging markets but it does not include international small caps.
The closest match from Vanguard are Vanguard FTSE All-World ex-US ETF (VEU) and Vanguard Total International ETF (VXUS). VEU does not include international small caps; VXUS does. Both Vanguard ETFs will cost $8 commission per trade at Fidelity.
|Spartan Global ex US (FSGUX)||Vanguard FTSE All-World ex-US ETF (VEU)||Vanguard Total Intl ETF (VXUS)|
|Assets ($ million)||13||6,800||777|
|# of Holdings||1,787||2,337||6,423|
Over the few months since inception, the Spartan Global ex US fund tracked both Vanguard ETFs very closely. It’s a good alternative to Vanguard ETFs.
The 0.24% expense ratio on $13 million in assets only generates $30k a year in revenue for Fidelity. It’s not enough to pay the salary of even one employee.
Spartan Emerging Markets Index Fund
This fund invests in emerging markets stocks. It tracks FTSE Emerging Index. The closest match from Vanguard would be Vanguard Emerging Markets Stock ETF (VWO).
|Spartan Emerging Markets (FPEMX)||Vanguard Emerging Markets ETF (VWO)|
|Assets ($ million)||54||53,900|
|# of Holdings||713||903|
I don’t know what happened there. There was an almost 3% gap in a few months time. Not that the underperformance is meaningful over such a short time period, the large tracking error makes me want to pay the commission and use the Vanguard ETF VWO.
Spartan Real Estate Index Fund
This fund invests in US real estate stocks. It tracks Dow Jones U.S. Select Real Estate Securities Index. Its closest match from Vanguard would be Vanguard REIT ETF (VNQ).
|Spartan Real Estate (FRXIX)||Vanguard REIT ETF (VNQ)|
|Assets ($ million)||12||12,400|
Another photo finish, but this fund’s expense ratio is double that of the Vanguard ETF. I would still use the Vanguard ETF.
Spartan Mid Cap Index Fund
This fund invests in US mid-cap stocks. It tracks Russell Midcap Index. There is a commission-free ETF alternative: iShares Mid Cap 400 ETF (IJH). The closest match from Vanguard is Vanguard Mid-Cap ETF (VO).
|Spartan Mid Cap (FSCLX)||iShares Mid Cap 400 ETF (IJH)||Vanguard Mid Cap ETF (VO)|
|Assets ($ million)||8||9,934||3,700|
|# of Holdings||783||401||443|
During the 7-month period, the Spartan fund and the Vanguard ETF tracked very closely to each other but there is a visible gap between those two and the iShares ETF. Which is a purer representation of mid cap stocks? I don’t know.
Spartan Small Cap Index Fund
This fund invests in US small cap stocks. It tracks Russell 2000 Index. Commission-free ETF alternatives include iShares S&P 600 ETF (IJR) and iShares Russell 2000 ETF (IWM). The closest match from Vanguard is Vanguard Small-Cap ETF (VB).
|Spartan Small Cap (FSSPX)||iShares Russell 2000 ETF (IWM)||iShares S&P Small Cap 600 ETF (IJR)||Vanguard Small-Cap ETF (VB)|
|Assets ($ million)||12||14,206||7,700||4,300|
|# of Holdings||1,946||1,956||601||1,735|
The Spartan small cap fund tracked the iShares Russell 2000 ETF very well. iShares S&P Small Cap 600 ETF did slightly better during the 7-month period. In general I like S&P’s more prudent requirements for inclusion into an index than Russell’s more mechanical approach even though the iShares S&P Small Cap 600 ETF doesn’t hold as many stocks as the other funds.
In summary, here’s my take on these new Spartan index funds:
- Spartan Global ex US Index Fund: OK
- Spartan Emerging Markets Index Fund: Use Vanguard ETF VWO instead
- Spartan Real Estate Index Fund: use Vanguard ETF VNQ instead
- Spartan Mid Cap Index Fund: no opinion; I don’t have a separate allocation for mid caps
- Spartan Small Cap Index Fund: use iShares S&P 600 ETF IJR
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regarding the emerging markets fund comparison, I see overlapping methodological and substantive flaws:
1) you seem to treat a real fund, VWO, as though IT were the index tracked by FPEMX, in attributing their divergence over the period shown to tracking error on the part of the latter.
2) these two funds don’t even track the same index: FPEMX tracks FTSE Emerging; VWO tracks MSCI Emerging. It’s entirely possible that the 3% divergence between the funds over the period owes more to divergence of the two indices than to tracking error in either fund.
If you are going to use another fund rather than the tracked index itself as a chartable benchmark for VPEMX, a better choice might be Schwab SCHE, another FTSE Emerging Markets tracker of about 10x size. These two hew much more closely over the period….though keeping the first point above in mind, I don’t mean to suggest that this concordance is itself primary evidence of low tracking error to the FTSE Emerging index.
Harry Sit says
Art – Points taken. “Tracking error” was the wrong choice of words. I didn’t mean to imply that the Spartan fund didn’t track its index. I should’ve stated my preference for Vanguard or iShares ETFs because they are more established and usually less expensive. If a Spartan fund does similarly as a Vanguard or iShares ETF, I would consider using the Spartan fund for convenience; otherwise it doesn’t matter whether the fund tracks its index or not. I haven’t looked into it further. Chances are the 3% difference was entirely due to differences between FTSE and MSCI emerging markets indexes.
Harry Sit says
P.S. I just looked. The biggest difference is South Korea, which is the second largest component in MSCI Emerging Markets Index with a 15% weight. FTSE considers South Korea a developed country. South Korea must have done better lately.
Fidelity also launched a new Spartan inflation-protected bond index fund, FSIQX/FSIYX, just a couple days ago, with an ER of 0.2%/0.1% for the regular and advantage classes, respectively.
This is a welcome change to me because until now their only TIPS fund has been FINPX, which was not an index fund and had a high ER of 0.45%.
This should make it easier to make automatic periodic investments in TIPS for those who have Fidelity 401k’s. Of course it’s too early to see exactly how well they manage it, as many have pointed out in the Bogleheads thread: http://www.bogleheads.org/forum/viewtopic.php?p=1399768
@Art: You beat me to it. ETF is only as good as the underlying index.
Ideally an ETF should consist of all the instruments of the index it’s tracking. But in reality fund managers pick and choose a subset of the instruments to closely mimick the index performance.
@Dan: Thanks! I might switch from FINPX to FSIQX as well.
Their composition however are different:
Normally investing at least 80% of assets in inflation-protected debt securities of all types. Normally investing primarily in U.S. dollar-denominated inflation-protected debt securities. Engaging in transactions that have a leveraging effect on the fund.
Normally investing at least 80% of assets in inflation-protected debt securities included in the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L). Engaging in transactions that have a leveraging effect on the fund, including investments in derivatives – such as swaps (interest rate, total return, and credit default) and futures contracts – and forward-settling securities, to adjust the fund’s risk exposure
The one advantage that the Fidelity mutual funds have over the ETFs is that you can automatically re-invest distributions and buy additional shares without paying a brokerage commission.