Duking it out in the index fund wars
Fidelity Investments wants more of the index fund business, so it's trying to lure customers away from rival Vanguard by taking out full-page newspaper ads boasting that Fidelity has lower expenses. Nancy Marshall Genzer has the story
Index fund charts in a newspaper (iStockphoto)
More on Investing
TEXT OF STORY
Tess Vigeland: This week, we're featuring a grudge match. A catfight! A 15-round pay-per-view battle to the bell! Over index funds. In one corner, Fidelity Investments. In the other, Vanguard. Fidelity is trying to beef up its share of the business and that growth could come at the expense of Vanguard. All this over something that doesn't usually generate a whole lot of money. We asked Marketplace's Nancy Marshall Genzer to put her finger on the index fund wars.
Nancy Marshall Genzer: (Dueling banjo music plays in the background) It started quietly enough. Fidelity slashed the fees on its index funds four years ago. Since then, Fidelity has nearly doubled the money in its index funds to about $85 billion. That's still dwarfed by the $600 billion in Vanguard's index funds. So, Fidelity took out full-page ads recently. The headline: Attention Vanguard Index Fund Owners: Fidelity has index funds with lower expenses.
Dan Culloton: Part of it is, you know, to hit a competitor, a fierce rival, where it hurts. You know, saying, "Oh, you say you're the low-cost leader in mutual funds? We offer lower index funds. So there."
Dan Culloton is a senior mutual fund analyst with Morningstar. He says Fidelity and Vanguard aren't dueling over crumbs. Even low fees can add up if you have enough customers. And index funds are easy. They just follow an index -- say the S&P 500. Computers do a lot of the work. Dan Wiener edits the Independent Adviser for Vanguard investors.
Dan Wiener: You don't need to have a big research department. You don't need analysts speaking to corporate management, digging into the financials.
But Fidelity isn't getting rid of the high-priced experts who manage its traditional mutual funds. After all, that's where most people have their money invested. Morningstar's Dan Culloton says Fidelity could be using index funds as a loss leader.
Culloton: You know, an attempt to get new investors in the door, you know, to sample its other financial services offerings, its other mutual funds.
Of course, those other funds have higher fees. Will the new Fidelity campaign work? I trekked out to the suburban Washington office of financial planner Steve Weisman to find out.
Steve Weisman: (Speaks to someone in his office.) We're going to have a new client coming in this morning.
Weisman told me Fidelity might pick up new customers, but from brokerage houses.
Weisman: So, it might be people who were with Merrill Lynches, the Smith Barneys, the UBS's, Fidelity will pick up its share from that.
(More dueling banjos) Weisman says Vanguard investors are loyal. They won't sell the company down the river. And Vanguard isn't about to let its customers float away. So, the dueling will continue, although it may end in a draw.
I'm Nancy Marshall Genzer, for Marketplace Money.
(Banjo music ends. Musician says, "You wanna play another one? Give him a couple bucks.")
Comments
Comment | Refresh
From TX, 06/04/2008
Couple of tidbits to chew on:
"loss leader" - be careful. Yes Fidelity may have some index funds that have lower expense ratios, but they'll make it up elsewhere.
Case in point:
Fidelity Freedom 2045 Fund (YTD return -4.27) Expense Ratio = 0.83, four times as expensive as Vanguard Target Retirement 2045 Fund's (YTD return -3.45) Expense Ratio of 0.19. The reason they have higher fees here is because they sneak actively managed (Fidelity) funds into their target-date retirement funds' portfolios. Sneaking in the actively managed funds = higher fees = unhappy customers (me) but happier shareholders (someone else).
Let me get this straight: Fidelity offers more combinations of mutual funds than any company out there - yet using the target-date funds and index investing turns out to be mutually exclusive. In other words, if I want to invest using indexes and employ the daily rebalancing strategies of target-date funds, I'd have to log into my account and manually rebalance every day - they don't have any funds to do that for me. Vanguard takes care of it for me.
Another thing - 4 years of low-cost indexing does not equal a 33-year track record.
[Key Eagles music]: "Johnny come lately, the new kid in town"
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.