Stop Worshiping Vanguard Funds Already!

In the personal finance world, it’s very well known that mutual fund expenses can significantly reduce your real returns over the typical 20 to 30 year period that most people have for retirement savings. Vanguard, the company that pretty much invented low cost mutual fund investing, has achieved an almost cult-like status among the personal finance blogging community due to their ultra-low expenses ratios, which are around 0.04%. And, compared to funds that charge 1% or higher, that is a steep discount that can save you tens of thousands of dollars over your investment time frame.

But let’s try to cut back on drinking the Vanguard Kool-Aid, ok?

Yes, Vanguard is great for saving investors money. Yes, they were the first to introduce low costs index funds to the masses. Yes, John C. Bogle was a wise man.

But does Vanguard still deserve the automatic recommendation that many people give it? I’m not sure it does anymore.

You Could Do Worse Than Vanguard. But You Could Do Better, Too

Look, choosing a Vanguard fund will probably never be a flat out bad choice. It’s well established that index funds do better in the long term than actively managed funds, that they have less turnover, which results in less of a tax bill (if you are investing outside of a tax-preferred plan such as an IRA), and that they have some of the lowest fees of all the mutual funds out there.

However, index funds have become something of a commodity now and when something becomes a commodity, competition reaches a peak and differences between various offerings become almost negligible. Think gasoline or milk or multivitamins. It doesn’t really matter which brand you buy because they are all pretty much the same.

Index funds have become commoditized. Just about every broker offers their own version and because they all seek to mirror a particular benchmark, there isn’t much to differentiate them other than price. For years, that was what set Vanguard apart from other funds, but that advantage is now gone.

I've written before about how many brokerages are now charging a surcharge to invest in Vanguard funds. This can either come as a flat percentage surcharge, as Fidelity has implemented, or a higher transaction fee, like Schwab charges. So it’s time to look for alternatives to Vanguard. I was quite surprised to see they are easy to find.

A Comparison

Let’s compare the granddaddy of Vanguard funds – the Vanguard S&P 500 Index Fund Admiralty shares (VFIAX) with Schwab’s version of the same fund – The Schwab S&P 500 Index Fund (SWPPX). (I’m picking the Vanguard Admiralty shares because, although it requires a $10,000 minimum investment, that is the one that gets you the ultra-low 0.04% expense ratio. The non-Admiralty shares have a higher 0.14% expense ratio.)

The expense ratio is actually lower for the Schwab fund: 0.03% versus 0.04%. Turnover is also lower at 2% versus Vanguard’s 3%. Both funds limit frequent traders, although Vanguard has stricter rules. If you sell shares of the Vanguard fund, you cannot buy more shares within 30 days of the sale. The Schwab fund, according to the prospectus, MAY limit purchases of traders who buy and sell the fund multiple times within 60 days, but the limit will extend for 90 days from the last roundtrip buy / sell. VFAIX has a $10,000 minimum investment. SWPPX has a $1 minimum investment (however, as of Oct 2017, you must be a Schwab customer to purchase shares). And of course, there are also the higher transaction fees some brokerages are now charging for Vanguard funds.

	VFIAX	SWPPX
Min. Purchase	$10,000	$1
Expense Ratio	0.04%	0.03%
Turnover	3%	2%
Total Assets	$400 Billion	$32 Billion

So far, I don’t see anything that gives Vanguard a huge edge. If anything, I would say the Schwab fund is looking slightly more attractive at this point.

How About Performance?

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As you might expect, performance is just about identical and both funds mirror the S&P 500 perfectly.

What About Holdings?

The top 5 holdings of each fund differ only in the fourth and fifth spots. This seems a little strange because both funds are supposed to have holdings in the same proportion that the S&P 500 is comprised of. But for the most part, their holdings are identical as well.

What About Distributions?

Here, at last, there is a significant difference - the frequency at which they distribute dividends and capital gains. The Schwab fund does it yearly while Vanguard does it quarterly. I suppose if you were retired and looking for cash flow, then the Vanguard fund would be the better choice.

Although the distribution amounts are different, when you look at dividend yield, the distribution as a percentage of asset price, the two are very close: 1.84% for Vanguard and 1.76% for Schwab. That's a 0.08% edge to Vanguard. But remember they have a 0.01% higher expense ratio, so the true edge is just 0.07%. On a $10,000 investment, that works out to an extra $212 over 30 years. That's less than peanuts. Peanut shells.

Leave The Cult

So there you have it. Vanguard, without a doubt, changed the mutual fund industry with their low cost fund offerings. Their influence was, and still is, huge and consumers have benefited from it. But other companies have learned that lesson and offer funds that are just as good as, if not better than, Vanguard. It's time for an intervention. Stop the blind devotion to Vanguard and start exploring other comparable funds.