The popular piece of investment advice shared by Warren Buffet and many others is to invest in a low-cost stock index fund. I agree, but what index are you to choose? In this post I will identify some core index funds to choose from that simplify the process. Kind of like the 20 page diner menu narrowed down to a one pager. What’s even better, the simpler options are also the lowest cost!
People will tell you to invest in the stock market, but for anyone who has never investing in the stock market that is an intimidating task. A deer in head lights type of stare may follow after contemplating how to invest. Even picking a simple S&P 500 index is very intimidating for most people. When I tried to find the ticker symbol of certain indices, I resorted to web searches that left me confused and going in circles. Below are two sets of options. First, those that are fee based and offer more granular selections to certain markets. Second, the new zero cost funds that Fidelity came out with in 2018. I will also provide equivalent index funds to Fidelity Zero Fee funds for reference.
Fee Based Index Funds
Fidelity, Vanguard, and iShares offer the below index funds. The Fidelity and Vanguard choices are mutual funds that allow automatic investing. This is the cornerstone to any savings plan during ones working years when they are accumulating wealth. iShares are ETFs that do not allow easy automatic investing since you cannot set up an automatic investment schedule on your brokerage account, but they do allow intra-day trading and increased tax efficiency. I propose a long investment horizon, which makes intra-day trading irrelevant. Leave intra-day trading, along with stress and the likely lower returns that will result, for day traders.
ETFs are marginally more tax efficient than index mutual funds. The slight tax efficiency is not worth giving up the ease and certainty of automatic investing. If you have a lot of money to invest all at once, then I suggest ETFs, otherwise stick with mutual funds.
Fidelity | Vanguard | iShares (ETFs) | ||||
---|---|---|---|---|---|---|
Investment Categories | Ticker | Exp Ratio | Ticker | Exp Ratio | Ticker | Exp Ratio |
US Large Cap | FXAIX | 0.015% | VFIAX | 0.04% | IVV | 0.04% |
US Mid Cap | FSMDX | 0.025% | VIMAX | 0.05% | IJH | 0.07% |
US Small Cap | FSSNX | 0.025% | VSMAX | 0.05% | IJR | 0.07% |
International | FSPSX | 0.045% | VTMGX | 0.07% | IEFA | 0.08% |
Emerging | FPADX | 0.08% | VEMAX | 0.14% | IEMG | 0.14% |
US Bond Fund | FXNAX | 0.025% | VBTLX | 0.05% | AGG | 0.05% |
International Bond Fund | Not Available | VTABX | 0.11% | IAGG | 0.09% | |
Investment Types Explained
- US Large Cap: These are the mega companies in the United States. Apple, Exxon, Microsoft, Google, Facebook, Amazon, JP Morgan, and so on.
- US Mid Cap: ‘Cap’ is short for market capitalization which is the size of the company. Size being measured by shares of stock outstanding times the current market price. Company size loosely ranges from 2 billion to 10 billion in this index.
- US Small Cap: The smallest publicly traded companies. Over a long period of time, this index has historically offered the greatest return of the three US Cap indices discussed, along with volatility.
- International: This index will represent small, mid, and large cap companies in developed nations outside of the US. Approximately 50% of this index in in Europe.
- Emerging: Markets such as Brazil, Russia, India, Taiwan, and China. Risk and volatility will generally be high in this selection.
- US Bond Fund: Investment grade bonds rated BBB or higher. The rating is determined by rating agencies such as Moody’s or Fitch. Investment grade is generally considered to have a lower risk of loss and deemed to be a safer investment. It is approximately a mix of around 30% corporate bonds and the remainder being US government debt.
- International Bond Fund: Here you will find Non-US investment grade bonds comprised of international governments and corporations. Approximately 50% will be in Europe.
Zero Cost Option
Did you say free? Now before you get to excited, yes, fidelity is offering zero fee index funds, but there are some things to consider.
- Fidelity may increase fees in the future. While unlikely, it is possible and worth consideration. Imagine that you have a lot of gains in a zero-fee fund and the fees are increased. You may not want to sell and pay capital gains. You will be stuck paying the higher fees as a result.
- In order to save cost, Fidelity funds do not truly track their respective indices. For example, the FNILX is the largest stocks in the S&P 500 but will not track the S&P 500 exactly. While tracking will be close, it may be important to some people to get the same return offered by the S&P 500.
- As of writing this article, the zero cost funds do not give investors the option of investing in small caps in the US, emerging markets, or bond funds.
Fidelity | Vanguard | iShares (ETFs) | ||||
---|---|---|---|---|---|---|
Investment Categories | Ticker | Exp Ratio | Ticker | Exp Ratio | Ticker | Exp Ratio |
US Large Cap | FNILX | 0% | VFIAX | 0.04% | IVV | 0.04% |
US Mid/Small Cap | FZIPX | 0% | VEXAX | 0.08% | Not Available | |
US - All Stocks | FZROX | 0% | VTSAX | 0.04% | ITOT | 0.03% |
International Stock | FZILX | 0% | VTIAX | 0.11% | IXUS | 0.1% |
- US Large Caps: Previously discussed.
- US Mid/Small Cap: This is a mix of the mid and small cap. If you want exposure to just small cap, then you will have to choose the fee-based index.
- US – All Stocks: If you don’t have a preference to cap size and want an investment that corresponds to the US, then this is your choice.
- International Stock: A mix of both developed and emerging markets.
I still think the Fidelity zero fee funds are a great option, but I would not let them be the driving factor on using them exclusively. After all we are talking about saving a fee of 0.05% on average, which on a 100,000 invested comes out to 50 dollars a year. While that annual cost will add up over your investment lifetime, Vanguard does offer some peace of mind. Fidelity is using these zero fee funds as a loss leader to get you to buy more profitable products from them. Vanguard can be considered a non-profit that uses revenue to drive down their expenses to offer investors lower cost products. To further the point, the late John Bogle, the founder of Vanguard is worth around 80 million while the Johnson family who founded fidelity is in excess of 20 billion, potentially 30 billion. Who do you think is more likely to profit from you?
Decision Tree
Which to choose? I suggest the below in helping to decide.
- Do you plan to invest money on a consistent monthly basis? If so, choose a mutual fund. If not, then an ETF would suit you well as you can buy them from any brokerage account, regardless if it’s with Schwab, E*Trade, or any of the many others that are out there.
- Next, if you already have a brokerage account set up at Fidelity, stay there. Same thing with Vanguard. The other popular choice is Schwab who has many low-cost funds to choose from. They are not mentioned in this post, but their offerings are comparable to Fidelity and Vanguard.
- If you don’t have a brokerage account, then how much do you have to invest? Fidelity mutual funds listed do not have a minimum amount to purchase. Vanguard does, generally around 3,000 and stepping up to 10,000 for their admiral shares which have lower cost. If you have enough funds to meet the minimums, then I recommend Vanguard because there are so many ways that you can pay hidden fees, it’s very difficult to catch them all. I rather start with a firm that I know is not out to make maximum profit, rather deliver the best value.
Conclusion
There are close to 10,000 mutual funds to choose from. Actively managed funds charge higher fees. Others offer unique niches of market sectors. The indices provided in this post reduce your decisions and will serve your investment portfolio well. Also, you will beat most other investors who claim to have the ability to outperform the market. All that for less than 0.10%. What a bargain!
Note
Mutual funds names can change often. If any of the tickers do change after publishing this post, I recommend the below website as a useful reference of funds names.
https://www.bogleheads.org/wiki/Fidelity