Last year I opened an investing account with Charles Schwab, mainly because they offered a total stock market index fund with an expense ratio of three basis points (0.03%). In contrast, my equivalent fund investment at Vanguard had a five basis point expense ratio (0.05%). That’s a difference of a measly $200 annually for a $1 million investment. Soon afterward, Vanguard lowered its expense ratio to 0.04%. I guess that over twenty years of investing, the numbers do add up…maybe.
The concept was fascinating enough, but the other perk about Charles Schwab’s investing account was that its checking account offered free ATM withdrawals worldwide. That’s right. If I needed Euros in Paris, Francs in Switzerland, or Won in Korea, I could get free-free withdrawals! This was essentially the cheapest way to obtain foreign currency, and I also didn’t have to worry about over withdrawing a currency for the fear of having to make another ATM transaction. Fee-free ATM withdrawals alone is a reason to have an investing account with Schwab.
Fidelity steals the show
Fast forward to last week, where Fidelity announces two of their funds with zero expense ratios. Fascinating. In the investing world, there are two crowds: (1) those who just want to come out ahead to feed their families, and (2) those who analyze everything to the finest detail. I can’t figure out which camp I belong in, since I clearly do more than dumping my earnings into some fund, but I also can’t stand making spreadsheets. Like most people, I also feed into the hype when new products become introduced. Compared to Schwab’s 0.03% expense ratio, I’d “save” roughly $300 a year on a $1 million investment by contributing to the new Fidelity zero-expense fund.
How much analysis should we put into this? Does this really change how we should invest?
Numbers aren’t everything
Expense ratios are important as long as the differences are significant enough to impact your financial future. Once we start dealing with difference of several basis points, you have to be dealing with big numbers in order to make a difference. It may be a tough sell pushing for a difference of several hundred dollars of savings per million dollars invested. It’s definitely not enough for me to move invested funds to another with a lower expense ratio.
But low expenses are only beneficial if the investments fit your financial plan. For instance, I currently invest in SCHB, a broad market ETF that roughly tracks the Dow Jones Industrial Average with an expense ratio of 0.03%. Vanguard, as far as I know, does not have any similar fund for the Dow. If you really get down to the gritty details, having accounts through multiple custodians might help if you like tax-loss harvesting (for the record, I do not tax-harvest). This is another reason why I keep my Schwab account open and active.
Is free really that good?
Fidelity’s new offerings aren’t necessarily going to impact my investment choices significantly, although I plan to contribute new investments to their zero-expense index funds. What’s not like about free? I already invest in their total stock market index fund, which had an expense ratio of 0.04% before Fidelity dropped it to 0.015%. What would be interesting to see is how the fee-free index fund compares to its existing 0.015% expense fund (FXTVX). How different will the tracking errors be, and are there going to be nuances with how the fund managers handle transactions that make the free fund less efficient? Only time will tell.
The financial plan
We should always stick with our financial plan until it makes sense to change it. The success of Fidelity’s new move into zero expense ratio funds is yet to be seen, but it raises eyebrows. If I start contributing more of my assets into their management, perhaps I would be more inclined to use their services. I like their 2% cash back credit card with no strings attached. The software interface is simple to use, and I already use their services to purchase T-bills for short term growth.
I recently made a purchase order for FZROX. The success of this fund will be pitted against FSTVX (Fidelity’s Total Index Fund), and VTSAX. Let’s see how good those fund managers really are with tracking errors.
In the meantime, if you’re bickering over 0.015% you had better reconsider your local barista’s daily latte.