Watch the expense ratios: Not all index mutual funds are cheap

Many of us take for granted that we should be paying next to nothing for our index funds.

VanguardFidelity, and Schwab offer great index funds with very low expense ratios.

But there are many other providers of index funds. And unfortunately, they do not charge the low expense ratios we have come to expect from Vanguard, Fidelity, and Schwab.

Interactive Brokers and no transaction fee index funds

Interactive Brokers is well-known as a trading brokerage firm. They have very low commissions on stocks (0.5 cents a share, with a $1 minimum), and if you ever plan to buy stocks on margin, they offer some of the lowest interest rates in the industry.

To buy mutual funds at Interactive Brokers, however, you have to pay a $14.95 transaction fee, or 3% of the purchase amount. They do have a list of over 4,300 funds with no transaction fee.

Unfortunately, most of them are actively-managed mutual funds — definitely not something you want as an index fund investor. But there are 109 index funds that have no transaction fee. Unfortunately, none of Vanguard’s, Fidelity’s, or Schwab’s index funds made the list.

Using the list of mutual funds from Interactive Brokers and searching them on Morningstar, Let’s take a look at the “other” guys in the index fund world.

S&P 500 index funds

Among S&P 500 index funds, none of the index funds listed had the types of low expense ratios we come to expect from Vanguard, Fidelity, and Schwab:

Fund Family Ticker Assets ($bn) Expense Ratio
Blackrock BSPAX 12 0.36%
Deutsche Bank SXPAX 0.99 0.60%
Invesco SPIAX 1.1 0.59%
Mainstay MSXAX 1.3 0.53%
Principal PLSAX 5.6 0.48%
Victory MUXAX 0.24 0.58%

 

Fund Family Ticker Assets ($bn) Expense Ratio
Vanguard VFIAX 367.5 0.04%
Fidelity FSTVX 46.4 0.04%
Schwab SWPPX 30 0.03%

International index funds

What about international index funds? We can quibble about a basis point here or there, but these expense ratios are nowhere close to that of Vanguard, Fidelity, or Schwab:

Fund Family Ticker Assets ($bn) Expense Ratio
Blackrock BDOAX 0.6 0.41%
Blackrock MDIIX 10.3 0.37%
Dreyfus DIISX 0.61 0.60%
Principal PIIPX 1.1 0.72%
TIAA-CREF TRIPX 11.6 0.21%

 

Fund Family Ticker Assets ($bn) Expense Ratio
Vanguard VTIAX 315.6 0.11%
Fidelity FSIVX 20.8 0.06%
Schwab SWISX 4.1 0.06%

Bond funds

Again, there was not a single no-transaction-fee fund listed that had an expense ratio comparable to Vanguard, Fidelity, or Schwab.

Fund Family Ticker Assets ($bn) Expense Ratio
Blackrock BMOAX 0.99 0.35%
Deutsche BONDX 0.08 0.41%
Dreyfus DBMIX 1.4 0.40%
Mainstay MIXAX 0.14 0.75%
Principal PBIPX 1.9 0.63%
TIAA-CREF TBIPX 8.8 0.27%

 

Fund Family Ticker Assets ($bn) Expense Ratio
Vanguard VTIAX 315.6 0.11%
Fidelity FSIVX 20.8 0.06%
Schwab SWISX 4.1 0.06%

Assets under management versus expense ratio

For all of these other index funds with high expense ratios, I made a scatter plot of assets under management and expense ratio:

Investors are voting with their money. Index funds with lower expense ratios tend to attract more assets.

It turns out that as your expense ratio goes down, your assets under management goes up. Who knew that investors would put their money with the companies with the lowest fees?

Why don’t these index funds charge less?

I suspect that some of these firms have exclusive contracts with 401(k) or other retirement account providers, essentially locking in some investors into these relatively high-cost index funds.

They may also have captured index fund money many years ago, and have chosen not to lower their rates with Vanguard, Fidelity, and Schwab, leaving their investors to pay expense ratios that were competitive 5 to 10 years ago. Some of these investors have never bothered to switch to a lower-cost index fund, or it may be too costly from a tax perspective to switch.

Conclusion

There are many index funds out there, but some are cheaper than others. Index funds are a commodity, and you should look for the one with the lowest expense ratio.

Vanguard, Fidelity, Schwab, are doing an exceptional job by offering their index funds at such low expense ratios. By offering index funds at competitive rates, they have cornered the index fund market, leaving their competitors in the dust.

When you look for index funds in your 401(k) or brokerage, look very carefully at the expense ratio before immediately jumping into any fund that is called “index.”

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

Image credit: Shutterstock.com

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