I recently wrote about the significance of commission-free ETF offerings at Schwab and Fidelity.  For investors who make small, regular contributions to their accounts, ETF commissions had previously been a deal-breaker, making index funds the default choice for building a long-term investment plan.  In the wake of these announcements, it seemed as though Vanguard, the historical leader in low-cost investment products, had fallen behind the competition.  Well, don’t call it a comeback, but today’s unveiling of commission-free ETF trades and other significant cost reductions clearly re-establishes Vanguard as the low-cost investing leader.  [...]

Index investing, an approach that attempts to mirror the performance of market indices at minimal cost, has been maligned and misunderstood for decades.  The criticism began even before Vanguard founder Jack Bogle created the first index mutual fund in 1975, as the concept was prematurely labeled as “Bogle’s folly.”  Upon creation of the fund, which would later become the Vanguard 500 Index Fund, Fidelity Chairman Edward C. Johnson III was asked if his company would follow Vanguard’s lead.  He replied, “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns.” [...]

I love index funds.  Their low costs have historically translated into high returns, they greatly simplify the difficult task of portfolio management, and they perfectly complement a disciplined, long-term investing approach.  Do-it-yourself investors can’t go wrong with a risk-appropriate portfolio of low-cost index funds, and Vanguard is still the only one-stop shop when it comes to building an index fund portfolio.  Index funds form the backbone of every portfolio recommendation on Invest-it-Yourself.com. 

That being said, recent developments in the Exchange-Traded Fund (ETF) marketplace are causing index investors to re-examine the case for ETFs.  [...]