We are strong advocates of using low-cost index funds for investing. For our sector investing, we use Vanguard funds with an expense ratio of 0.10% and Fidelity funds with an expense ratio of 0.08%. Having two funds allows us to stay invested in the markets while engaging in tax loss harvesting without triggering a wash sale.

Having recently written the article, “Using Franklin Funds in 2022 Saved Clients Over $360,000“, I wondered how much money using Fidelity funds over the Vanguard funds might have been worth. With Franklin funds the difference in expense ratio was a large 0.42%. The difference between Fidelity and Vanguard funds is only 0.02%, meaning random differences between the fund and the index it is following could swamp the difference in expense ratio.

Fidelity has been gradually lowering their expense ratios over the past several years. This is in common with most fund companies, although Fidelity was one of the first fund families to have some funds with expense ratios of zero. They were also among the first custodians to reduce their trading commissions to zero and not gouge the client when they are closing their account and transferring to another custodian. I am not certain how long Fidelity sector funds have had lower expense ratios, but the funds themselves have only been around since 2013 while the Vanguard sector funds have been around since 2004.

When comparing Fidelity’s family of funds, there are some with higher expense ratios and some with lower expense ratios. This is unlike Vanguard, whose funds are near universally low cost.

In the January 2021 Morningstar Fund Family Report , Fidelity came in 13th out of the top 150 fund families for low-cost funds with an average expense ratio of 0.40%. Vanguard ranked first with an average expense ratio of just 0.09%.

As Fidelity has lowered its expense ratio, Vanguard has been emphasizing other factors such as transaction costs, spreads, liquidity, and tax efficiency. But for long-term investors, expense ratio can still matter the most, as even a couple of basis points can make a difference.

Sector (Ticker Symbols)	MSCI 25/50 Benchmark 2022 Return	Fidelity 2022 Return	Vanguard 2022 Return	2022 Fidelity Advantage	Marotta Investment in Vanguard or Fidelity	Potential Savings
Healthcare (FHLC vs VHT)	-5.43%	-5.5460%	-5.6154%	0.0693%	$17,512,606	$12,144.00
Technology (FTEC vs VGT)	-29.58%	-29.5924%	-29.6953%	0.1029%	$31,528,922	$32,435.52
Consumer Staples (FSTA vs VDC)	-1.68%	-1.7167%	-1.7993%	0.0826%	$20,560,020	$16,976.59
Real Estate (FREL vs VNQ)	-26.12%	-26.2107%	-26.2410%	0.0303%	$7,260,389	$2,200.33
TOTAL				0.0829%	$76,861,937	$63,756.43

 

Based on the expense ratio alone, the Fidelity funds had an expected savings of 0.02% or about $15,000 in 2022. In reality over the course of the year, the increased return for Fidelity was 0.0829% or $63,756.

For these sector funds, the Fidelity and the Vanguard funds follow the same benchmark, so any out-performance of one over the other is either due to expense ratio or tracking error. Over 2022, Fidelity had both expense ratio and tracking error in its favor, producing more out-performance over Vanguard than can be explained by expense ratio alone.

In some prior years, Vanguard outperformed. In others, Fidelity did. Since 2020 though, Fidelity has posted annualized higher returns approximately equal to the expense ratio difference.

As mentioned before, in our managed accounts, we use both Fidelity and Vanguard ETFs to represent these sectors. In the past, we’ve shown some preference to Vanguard funds, but going forward we plan to show some preference to the cheaper Fidelity funds.

Photo by Nick Fewings on Unsplash