Many of us take for granted that we should be paying next to nothing for our index funds.
Vanguard, Fidelity, 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 ($bn) | Expense Ratio |
| Vanguard | VFIAX | 367.5 | 0.04% |
| Fidelity | FSKAX | 46.4 | 0.015% |
| Schwab | SWPPX | 30 | 0.03% |
International Index Funds
What about international index funds? We can quibble about a basis point here or there, but these expense ratios are nowhere close to that of Vanguard, Fidelity, or Schwab:
| Fund Family | Ticker | Assets ($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 ($bn) | Expense Ratio |
| Vanguard | VTIAX | 315.6 | 0.11% |
| Fidelity | FSPSX | 20.8 | 0.045% |
| Schwab | SWISX | 4.1 | 0.06% |
Bond Funds
Again, there was not a single no-transaction-fee fund listed that had an expense ratio comparable to Vanguard, Fidelity, or Schwab.
| Fund Family | Ticker | Assets ($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 | VBTLX | 204.0 | 0.05% |
| Fidelity | FXNAX | 41.8 | 0.025% |
| Schwab | SWAGX | 2.4 | 0.04% |
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:
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 5-10 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.”
All that wheezes is not asthma, and not all index funds have low expense ratios.
What do you think? Are you invested in a “high-cost” index fund? Do you know any low-cost index fund providers besides Vanguard, Fidelity, and Schwab?
I have certainly tweaked our investment portfolio over the years as we learned more about expense ratios and found out that some of our index funds were a bit on the expensive side. I didn’t realize what a difference the expense ratio could make!
We’ve tweaked our accounts over the years so our 401K only focuses on the low cost available providers there and we make up the asset allocation across other accounts with better low cost alternatives. My 401K provider has good large cap, but poor small cap and international. Thus these allocations are somewhere else.
I feel locked into my 401K fund (Nationwide). What options do we have? I have a financial advisor for the past 25 years whom I trust, but am hoping there are other options for a 401k. Any ideas would be appreciated.
Thank you for your thoughtful posts.
Unfortunately, with 401(k)s you can only invest in the funds that the plan offers. Your best approach is to lobby your HR department to have your 401(k) provider offer lower-cost index fund options.
The Bogleheads wiki explains how you might campaign for lower 401(k) fees:
https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan
As the account balances grow, those expense ratios actual cash value differences are surprising. I new it, but I didn’t really know it until I ran the math.
I suggest everyone calculate the actual dollar amount the expense ratio represents.
I am stuck in a 457B for the next 10 yrs where the funds available have higher expense ratios. I am uncertain who came up with the fund choices, but I feel they shortchanged the participants. Fortunately, the majority of my savings and retirement funds are held where low expense ratios funds are available.
I’m sorry to hear that you are stuck in a 457b with higher expense ratios. Is there any way to lobby for better fund choices where you work?
I retired in June. The largest Catholic medical organization I left was absolutely not employee friendly. They offered essentially no help or help was a matter of multiple 30+ minutes on hold only to end up with a long phone tree ending with a dead line. To even think of petitioning for more investment choices would have been fantasy. Our HR here was closed and multiple HR sites were closed. My 457 distribution choices were a. taxable lump sum now b. taxable yearly withdrawals over my time choice. We could not rollover to a low cost brokerage. The distribution decision made was final and unable to be changed. (I also had a heck of time with the rollover to Vanguard of the other 401 and 403 retirement accounts I had with the organization’s high cost brokerage/ insurance company.) I am in the only 2 low cost index (.02, .04 )Vanguard funds with the 457. My other choice is .30 International fund. This gives me a net .126 expense ratio which really isn’t too bad. I can reshuffle my overall asset allocation and drop the International in this account to go even lower. Or I can be satisfied that it is not worse and make overall periodic reallocation easier. The remainder fund choices are in the .50 to 1.0 expense ratio ranges.
As you mention, one option would be to have the international funds in your taxable or 401/403 accounts and only have the low-cost Vanguard funds in your 457. Congratulations on your retirement!
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