What Is The Cheapest Way To Build A 3-Fund Portfolio In 2019?

The three-fund portfolio is one of the most popular ways to build a lazy index fund portfolio. By using just three index funds, you can get exposure to the entire global stock market and the entire U.S. bond market, maximizing your diversification to the global equity and U.S. bond markets.

As a result, trillions of dollars have poured into funds tracking these three asset classes. The three biggest mutual fund providers of index funds are Vanguard, Fidelity, and Schwab. Each is aggressively marketing their index funds to three-fund portfolio investors, and they are engaged in a price war, advertising ever lower index fund expense ratios.

So what is currently the cheapest way to create a 3-fund portfolio in 2019?

The Vanguard, Fidelity, and Schwab Three-Fund Portfolios

We used the following portfolio to compute our head-to-head comparison:

1. 60% Total Stock Market Index Fund
2. 30% Total International Stock Market Index Fund
3. 10% Total U.S. Bond Fund

We assume that you are able to get the lowest cost shares of a mutual fund (i.e. Admiral shares at Vanguard).

This portfolio is a great starting point, although your portfolio may use the S&P 500 instead of the total stock market index, include a different amount of bonds based on your risk tolerance, or have more or less international stocks based on your view of the value of international stock exposure.

The Cheapest Portfolio at Vanguard, Fidelity, and Schwab

Here’s how you would build the three-fund portfolio using the big three index fund providers (Vanguard, Fidelity, and Schwab):

Fidelity has the Cheapest Three-Fund Portfolio (For Now)

Using only index funds, Fidelity has the cheapest three-fund index fund portfolio, because it now offers zero expense ratio index funds for the S&P 500, Total Stock Market, and international stocks. You can build a three-fund portfolio of 60% U.S. stocks, 30% international stocks, and 10% U.S. bonds for a minuscule 0.0025%, or $25 on a $1,000,000 portfolio.

Schwab offers the second cheapest way to buy a three-fund portfolio, at 0.04% for our model portfolio, or $400 on a $1,000,000 portfolio.

Vanguard “lags” behind the other two companies, costing only 0.062% a year to own a three-fund portfolio.

Calculating The Fees on Your Own Three-Fund Portfolio

If the asset allocation on your three-fund portfolio is slightly different than mine, use the spreadsheet below to calculate the expense ratio of your three-fund portfolio at Vanguard, Fidelity, and Schwab:

(If you’re looking at this spreadsheet on a mobile device, it may be helpful to turn your phone sideways and view the spreadsheet in Landscape mode).

Don’t Choose a Fund Manager based on Fees Alone

It’s important to take a step back and look at the forest instead of the trees.

You shouldn’t choose a fund manager on fees alone.

Other factors, including tax efficiency and the tracking error of the individual index funds, may influence your portfolio’s returns more than any difference in expense ratios. Remember that some financial moves may be statistically significant, but clinically (or financially) insignificant.

Expense Ratios Are A Moving (Falling) Target

And remember, these are the costs for building the three-fund portfolio in 2019. Vanguard, Fidelity, and Schwab have all cut expense ratios, and I expect fees for index funds to continue to fall in the future. So the lowest cost index fund provider today may not be the lowest cost index fund provider tomorrow.

Conclusion

Fidelity currently has the lowest fees on a three-fund portfolio, but Schwab and Vanguard offer index funds that are so low in fees that cost should not be the determining factor of which broker you use.

What do you think? Which funds do you use to build your index fund portfolio? Did the expense ratios influence your decision on which firm to invest your money?