Fidelity Undercuts Vanguard Again

They may both be big dogs on Wall Street, but Fidelity continues to play the role of puppyish provocateur to rival Vanguard. “Fido” nipped at Vanguard’s heels again this month, rolling out another batch of index funds carefully crafted to match similar offerings from Vanguard while beating them on price.

The five new funds include four mid- and small-cap stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. index funds, along with a municipal bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index fund, and each undercuts a comparable Vanguard index fund’s Admiral share class expense ratio by two basis points, as seen in the table below:

Fidelity isn’t trying to best its rival solely on costs with this new set of funds, however: They are banking on brand name recognition as well.

The new stock index funds track the widely used Russell small- and mid-cap indexes (e.g. the small-cap growth fund tracks the Russell 2000 Growth Index) while Vanguard prefers the lesser-known Center for Research in Security Prices (CRSP) indexes. You’ll see the Russell indexes quoted in print and on TV, but we’d wager that hardly anyone other than academics and Vanguard indexing fans have ever heard of CRSP.

Vanguard does offer Russell 2000-tracking exchange-traded funds (ETFs), but they come at a higher price than Fidelity’s new small-cap growth and value funds, with annual expenses of 0.20%. On its website, Vanguard steers people from the Russell ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. to its lower-cost options covering similar segments of the market—the ones listed in the table above.

Meanwhile, Fidelity’s municipal bond fund tracks the Bloomberg Barclays Municipal BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index; Vanguard’s fund seeks to match the S&P National AMT-Free Muni Bond Index. We’d call this a toss-up in terms of the layperson’s awareness of either index, though the Vanguard benchmark is under the same umbrella as the ubiquitous S&P 500 index.

Last, Fidelity’s new funds have no minimum required investment, unlike Vanguard’s Admiral shares, which typically require a $3,000 initial investment for index funds. This makes Fidelity’s funds accessible to those with very little to invest, another edge when it comes to attracting people to the fold.

Benchmark comparisons aside, however, the new fund launch marks yet another exchange of blows in the price-cutting slugfest among index-fund giants, proving that there’s still more room for combat even after the “victory” notched by Fidelity last year in the race to zero.

We think these battles are ultimately to investors’ benefit, though we would not recommend rushing to buy any of the new Fidelity funds (nor to make trades into them that would generate significant capital gains taxes) unless they fit a specific role in a well-considered investment strategy.

And while this all sounds great for Fidelity’s marketing efforts, some perspective on just what these tiny differences in expenses represent in real-world dollars is needed. To wit, 2 basis points (or 0.02%) represents just $20 a year in savings on a $100,000 investment. That can add up, but we’d argue that picking well-managed mutual funds with the potential to outperform the stock market over time will get you further than shaving off a few basis points here and there on funds that will at best match the market or a small slice of it.