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. Since their introduction in 1993, ETFs have offered many of the same advantages as index-based mutual funds, as well as increased trading flexibility and lower expense ratios. Until recently, however, ETF trading commissions were a deal-breaker for investors who make small, regular contributions to their accounts. Well, times have changed. Schwab (eight commission-free ETFs) and Fidelity (25 commission-free iShares ETFs) are now offering commission-free ETF trades, joining firms like Wells Fargo, who continues to offer 100 free trades per year with a combined minimum of $25,000 in brokerage and checking assets. I consider these low-cost offerings to be a major development for long-term investors, especially if more firms follow suit.
Before you jump on the ETF bandwagon, however, let me give you a few words of caution. First of all, commission-free trading doesn’t guarantee an inexpensive product; be sure to compare expense ratios, bid-ask spreads, and all other fees prior to investing. Secondly, sticking with your long-term investment plan is much more important than choosing the right investment vehicle. Before moving assets to a new brokerage firm, ensure that your new setup will provide all of the funds and services necessary to stay aligned with your Investment Policy Statement. Finally, be aware of short-term trading temptations. Prominent indexing advocates like Jack Bogle and Warren Buffett have voiced concern that ETF trading could cause investors to stray from a long-term, disciplined investing approach. If you aren’t comfortable with ETF trading, stick with low-cost index funds.
The chart below lists some popular ETFs, including some of the commission-free offerings from Schwab and Fidelity, organized by asset class. As you can see, it’s still tough to beat the selection of low-cost index funds available at Vanguard, but ETF investors have more competitive options than ever before. I hope to fill in the blanks as more commission-free ETFs become available in the coming months.
|Asset Class||Vanguard |
|US Equity - Total Stock Market||VTSMX||SCHB||IWV||VTI, TMW|
|US Equity - Small Cap Value||VISVX||SCHV+SCHA||IJS||VBR, DSV|
|Int'l Equity - All-World ex-US||VFWIX||SCHF+SCHE||EFA+EEM||VEU, GWL|
|Int'l Equity - Small Cap||VFSVX||SCHC||SCZ||VSS, GWX|
|Int'l Equity - Value||VTRIX||EFV|
|Bonds - Total Bond Market||VBMFX||AGG||BND, LAG|
|Bonds - TIPS||VIPSX||TIP||IPE|
|Bonds - Municipals||VWITX||MUB||TFI|
|Real Estate (REITs)||VGSIX||VNQ, RWR|
*Note: Vanguard announced their own lineup of commission-free ETFs on May 4, 2010. Check out this updated chart of commission-free ETF offerings.
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