Invest Wisdom

Fidelity and Vanguard have long been the leaders in offering index funds with paltry fees. Vanguard’s S&P 500 fund has an expense ratio of 0.15%. Fidelity’s Spartan 500 index fund has only 0.10% in annual expenses. If you asked me yesterday what fund company I thought was going to take the axe to fees next, I would have probably guessed Vanguard, as the two fund giants continued to outdo each other.

But no, ladies and gentleman, we have a completely different company throwing down the gauntlet in the low fee battle. Charles Schwab, whose S&P 500 and Total Stock Market index funds had expenses ranging from 0.19% to 0.53% yesterday, now will offer both its S&P 500 Index fund and its Total Stock Market Index Fund at an expense ratio of only 0.09%, making it the new market leader. There will be only one, no-load share class for both funds (that is, there will be no upfront or backend fees for buying or selling), and the minimum investment for the mutual funds will only be $100.

The Schwab International Index Fund and Small-Cap Index Fund also had their fees reduced—-to 0.19%.

The guys representing Schwab at a press conference this morning said that the change is immediate and permanent, and that there are no catches. Even if you had only $100 to invest, $100 could go into the S&P 500 fund, and you’d only pay about 9 cents per year in expenses. No upfront fee, no backend fee, no nothing.

Schwab made the announcement today and is letting their advisors know about the change as I type. I wonder if Vanguard and Fidelity knew it was coming and are preparing similar moves. I’m not sure of the regulatory requirements in changing fees. So there’s a chance there was some sort of public indication that this was happening, and I missed it.

For investors, if there really is no catch, this is great news. In fact, in recent weeks, more of a focus has been on expense ratios going up as mutual funds lose assets. If you’re looking to simply track a stock index (there doesn’t appear to be any news on the bond front, unfortunately), Schwab has the most cost efficient way of doing it. In fact, its expense ratio is the same as that of the most popular market-tracking ETF (SPY). But whereas you’d have to pay a broker commission every time you bought the ETF, buying Schwab’s mutual fund has no fee associated with it.

Just how much does a 0.01% smaller fee help you? If you invested $100,000 in the Schwab fund and $100,000 in the Fidelity fund, the Schwab fund would be worth about $850 more after 20 years (A difference so small that I couldn’t even draw an effective chart). Not a huge amount. And probably not enough of a difference to get fee-conscious investors to change mutual fund companies. But it’s nothing to sniff at either. Let’s hope Vanguard and Fidelity don’t take this lying down. It’d be great to have a low fee battle on our hands.

This is where I typically offer a “but…”, and I don’t want to sound like a Schwab advertisement. They said a lot of other stuff at the meeting, like how they think their active mutual funds are going to outperform and how the recession might already be over that I’m extremely skeptical about (more on that later). On first take, though, I’m having trouble finding a bad angle on lower mutual fund fees. Let me know if you see something I don’t.

- Joe Light