Bogleheads

Concerned · Joined: 14 Jan 2008 Posts: 7

In setting up our 401(k), we can choose between very low-cost investments. After suffering in high fee/low return plans for many years, I'm ecstatic.

We are deciding between the Vanguard index funds and the Fidelity Spartan index funds. Fidelity Spartan funds have lower expense ratios, but for some reason this hasn't correlated into higher past returns.

I always believed that with index funds the best way to capture the return of the market (or the specific index) was to minimize expenses. If that's true, however, then Fidelity should have better performance numbers than Vanguard, but that hasn't been the case.

How come Vanguard index funds have better index tracking and performance?

Any insights? Thanks in advance.

SpringMan · Joined: 21 Mar 2007 Posts: 2152 Location: Michigan

It could be the ETF share class helps the Vanguard funds by favorable handling of capital gains and losses. I believe Fidelity Spartan funds generally hold more cash than Vanguard's. Cash acts as a drag in both directions. Given a choice I would opt for Vanguard because they have more index funds. Vanguard wins in the bond area too.
Best,
_________________
SpringMan

Laura · Joined: 19 Feb 2007 Posts: 4609

Concerned,

I suspect that what you are seeing is the difference between a company that specializes in index funds and a company who decided to create low cost indexes as a marketing tool. Vanguard has a broad and deep line up of index funds while Fidelity only offers a few index funds. Bottom line is that Vanguard has more experience and expertise. I must say that I have no evidence to back up my opinion.

Laura

EmergDoc · Joined: 02 Mar 2007 Posts: 5474 Location: Home sweet home

Low expenses is an important part of indexing, but tracking the indexes is more important when you get to these ultra-low expense ratios. I suspect this is where Vanguard's indexing expertise pays off.

How to choose index funds:

1) What index?
2) How well does the fund track the index (should be index return minus ER)
3) What is the ER?
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Greenberry · Joined: 26 Oct 2007 Posts: 556

The listed expense ratio that is often quoted only covers administrative costs and management fees. There are other costs to running a fund that are not included in the ER, such as brokerage commissions, bid-ask spreads, market impact costs, and sources of income like lending securities, that all affect your total return. Vanguard has in the past been great at execution in all of these areas.

Simple answer: stick to Vanguard. They also have much better bond fund offerings.

For more, see Bernstein's "It's the Execution, Stupid." http://www.efficientfrontier.com/ef/104/stupid.htm

Derek Tinnin · Joined: 08 Jan 2008 Posts: 708 Location: Cincinnati

Taylor Larimore · Posted: Thu Feb 28, 2008 8:59 pm Post subject: Total Market Indexes?

Hi Derek:

Quote:

Don't overlook the obvious folks. If you are talking about the total market indexes, Fidelity tracks the Wilshire 5000 and Vanaguard tracks the MCSI.

Do you think one or the other is better? Why?

Thank you and best wishes.
Taylor

CFM300 · Joined: 27 Oct 2007 Posts: 85

First, it appears to me that Fidelity's Total Stock Market Index Fund has *outperformed* Vanguard's over the last one, three, and five years. Over ten years, Vanguard outperformed Fidelity's by 0.1%. (Data presented below.)

Second, realize that Fidelity's lower costs have only been in place since late 2004, if I recall correctly. Previously, Fidelity's expense ratios were quite a bit higher than Vanguard's.

Comparing Total Stock Market funds...

Over a one-year period ending 1/30/08...

-02.65 Fidelity
-02.75 Vanguard

Over a three-year period ending 1/30/08...

+07.87 Fidelity
+07.61 Vanguard

Over a five-year period ending 1/30/08...

+13.04 Fidelity
+12.96 Vanguard

Over a ten-year period ending 1/30/08...

+05.53 Fidelity
+05.54 Vanguard

Sources:

http://personal.fidelity.com/p....?315911800

https://personal.vanguard.com/....hart=false

grok87 · Joined: 27 Feb 2007 Posts: 2814

Greenberry · Joined: 26 Oct 2007 Posts: 556

Fidelity says: "Normally investing at least 80% of assets in common stocks included in the Dow Jones Wilshire 5000 Composite Index, which represents the performance of a broad range of U.S. stocks."

Vanguard: "Vanguard Total Stock Market ETF (the Fund) seeks to track the performance of Morgan Stanley Capital International (MSCI) US Broad Market Index (the Index), which includes large, mid and small-cap equity stocks diversified across growth and value styles.... The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index."

As a plan fiduciary, I'd be much more comfortable about using Vanguard's Total Market that uses language like "all or substantially all" rather than Fidelity's "normally at least 80%", especially when Fidelity in the past has used that discretion to invest 20% assets in riskier assets than the nominal fund name in an attempt to increase return, then had those risks show up and result in losses (e.g., their ultra-short bond fund that invested in CDOs ).

Derek Tinnin · Joined: 08 Jan 2008 Posts: 708 Location: Cincinnati

nisiprius · Posted: Thu Feb 28, 2008 9:51 pm Post subject: Re: Vanguard Indexes

Derek Tinnin · Joined: 08 Jan 2008 Posts: 708 Location: Cincinnati

Forgot to post that FSTMX holds 3369 stocks vs 1300 (if I recall correctly) for VTI

Derek Tinnin · Joined: 08 Jan 2008 Posts: 708 Location: Cincinnati

grok87 · Joined: 27 Feb 2007 Posts: 2814

Derek Tinnin · Joined: 08 Jan 2008 Posts: 708 Location: Cincinnati

schellhase · Joined: 04 Mar 2007 Posts: 283 Location: Los Angeles, CA

I my comment may have no actual relevance to the question asked, but when thinking about Fidelity consider that Ned and Abigale Johnson are both on the Forbes list of the wealthiest people. There is no one named Bogle on that list.
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nisiprius · Posted: Fri Feb 29, 2008 9:03 am Post subject:

Taylor Larimore · Posted: Fri Feb 29, 2008 10:39 am Post subject: Total Market Indexes.

Hi Derek:

Thank you very much for answering my question about the differences in Total Market Indexes.

I think most of us agree there is not a significant difference (for investors) between the Wilshire 5000 and the MSCI total market indexes.

Best wishes.
Taylor

Tigershark · Joined: 01 Mar 2007 Posts: 57

PiperWarrior · Joined: 21 Dec 2007 Posts: 4068 Location: right on course

I just looked the size of cash positions at Google Finance and played with the numbers. ERs come directly from Fidelity and Vanguard.

learning · Joined: 07 Dec 2007 Posts: 124

Dear concerned,

One question you might ask each company before deciding is how they build their funds.

I own both Fidelity and Vanguard index funds, but was surprised to learn in the Wall Street Journal (Sat. 17 February) that Fidelity uses "internal" Fidelity funds as building blocks for their publically available index funds.

So what?

The article pointed out that one of those "internal" funds had invested in subprime and had therefore dragged down the return of the Fidelity Total Bond Index fund relative to its benchmark.

Even though Vanguard and Fidelity index funds may attempt to match similar indices, how they go about it may make a difference.

It's one reason I prefer using Vanguard index funds. (And asking more questions about how funds are actually constructed.)

CFM300 · Joined: 27 Oct 2007 Posts: 85

I have not read the Wall Street journal article cited, but there is no Fidelity Total Bond Index Fund. Hence, it's performance could not have been dragged down by questionable construction or investments. (The present King of France cannot be bald, if there is no present King of France.)

Fidelity does have a fund called "Total Bond Fund", but the description clearly states that it's actively managed. These are literally the second and third sentences on the main page describing the fund: "Fidelity Total Bond Fund is actively managed to seek a high level of current income. The fund mainly invests in investment-grade fixed income securities, but also has the flexibility to invest up to 20% of the portfolio in high yield and emerging market debt..." Source:
http://personal.fidelity.com/p....fund.shtml

Similarly, an earlier poster mentioned the Fidelity "Spartan US Bond Fund". I've searched and have been unable to locate any Fidelity fund by that name. Fidelity does have a "US Bond Index Fund", but it does not appear to be Spartan class, and thus does not enjoy an especially low ER. Nonetheless, it outperformed Vanguard's Total Bond Market Index fund over the last 10 years, although not over the last 1, 3, or 5 years.

In the interest of disclosure, I'll say that have never owned any Fidelity funds, index or otherwise, and that I am fully invested in just four Vanguard funds: TSM, FTSE ex-US, Total Bond, and Prime MM.

In my opinion, the problem with Fidelity's index funds is not the funds per se, but rather their paucity. For example, their lone international index offering, Spartan International Index Fund, only tracks the MSCI EAFE developed markets index.

davidkw · Joined: 25 Feb 2007 Posts: 371 Location: Sterling, VA

With Vanguard, you can add to the investment with $100 chunks, while Fidelity it is $1,000, unless you are doing dollar cost averaging then it is $500. Ouch!!!!
_________________
David

From Jack Brennan's "Straight Talk on Investing", page 23 "Living below your means is the ultimate financial strategy"

learning · Joined: 07 Dec 2007 Posts: 124

Apologies to all.

CFM300 is correct. I was wrong.

There is no Fidelity Total Bond Index Fund, as I wrote.
The correct fund name is Fidelity US Bond Index Fund.

Whether you agree with the larger point the WSJ article makes about a Fidelity index fund that misses its index by using other Fidelity funds invested in sub-prime is a matter of opinion.

The name of the fund cited in the article, however, is a matter of fact.
A fact which I misstated from memory.
Below is the WSJ article for those interested:
http://online.wsj.com/article/....73421.html

Again, apologies for the imprecision.

Learning

CFM300 · Joined: 27 Oct 2007 Posts: 85

Learning,

No need to apologize. In fact, I should have realized that the second fund I discussed above, the US Bond Index Fund, was likely the fund the Wall Street Journal article was discussing.

Thanks for the link to the WSJ article, but I was able to read only the first few paragraphs. Apparently, only paying members can read the entire article.

Given the tactics Fidelity employs, calling the fund an index fund might be misleading. However, they make very clear on their site that their fund does not employ a straight-forward index strategy. Quote: "Normally investing at least 80% of the fund's assets in bonds included in the Lehman Brothers U.S. Aggregate Bond Index. Engaging in transactions that have a leveraging effect on the fund." Source: http://content.members.fidelit....mflib_com1

I checked some of Fidelity's other "index" bond funds, including their three Spartan funds with minuscule 0.10% ERs. Unfortunately, they contain the same language about strategy as the US Bond Index fund.

I now better appreciate the concerns you mentioned about Fidelity fund construction and investment strategy, regardless of past performance.

Thanks.