Fidelity vs. Vanguard: How to Choose the Index Fund

So you've got some extra cash hanging around and you’re ready to invest it. Great! But how?

Investing was not part of the medical school curriculum, and coupled with your schedule and clinical hours, there’s barely time to relax, much less to study under Warren Buffett. So how can you get your money to work as hard for you as you do for your patients? One answer could be investing in passively managed index funds.

For context, an investment in an S&P 500 passively managed index fund, which is a fund that tracks 500 large and profitable U.S. companies, has generated 15-year returns of 495%, or 12.6% annually. Thus, a $10,000 investment in 2008 would have grown to approximately $60,000 by 2023.

Investing in index funds is simple and very cost effective. And while there are lots of new investing platforms like Webull and Robinhood, Vanguard and Fidelity are two of the biggest names that’ve been around for over 40 years. This article will break down their funds so you can determine what’s right for you.

What Are Index Funds and How Do They Work?

An index is a collection of stocks, bonds or other securities that share a commonality. Different indexes represent segments of the market. For example, the S&P 500 is an index that tracks the stock prices of 500 of the largest companies traded in the U.S.

Other types of indexes can be focused on companies within certain sectors (technology, energy, healthcare), companies within certain regions (Europe, Asia) and even different types of financial securities (stocks, bonds, commodities).

How Index Funds Help You 'Match the Market'

Investing in an index fund is a way of investing in a certain segment of the market, with the goal matching a certain market’s average returns — not beating it. And because index funds are passively managed by managers not trying to beat the market, these funds are extremely cost efficient to operate (compared to actively managed funds), thereby boosting returns for investors.

While “matching the market” may sound like a bad thing (imagine telling your parents back in the day that you intentionally earned the average MCAT score), it actually can be a sound investment strategy. You’re investing in an index that you believe has potential to yield. For example, the stock prices of the S&P 500 increase on average 10% each year, so if you invest in an S&P 500 Index fund, which aims to replicate the return of the S&P 500 index, you can expect your investment to increase 10% in value.

Popular Types of Index Funds for New Investors

Index funds are managed by financial institutions including Vanguard, Fidelity, Blackrock and others. They can either be mutual funds or exchange traded funds (ETFs). The main difference is how often they can be bought and sold. Mutual funds’ prices are set at the end of the trading day and can be bought or sold after the market closes, while ETFs can be traded all day when the markets are open. Mutual funds tend to have higher fees than ETFs.

In choosing which index fund to invest in, you’ll want to consider expense ratios (i.e. fees), trading costs, what kinds of index funds are available at individual investment companies, and how easy they are to buy from them.

How Index Fund Fee Structures Work

Index funds have low-cost fee structures. Make sure to check a fund’s expense ratio, which reflects the percentage of your investment allocated towards fund management fees.

• Fidelity index funds range from 0.015% to 0.50%
• Vanguard index funds range from 0.03% to 0.20%

The higher the ratio, the more you are paying in fees.

Fidelity Index Funds

Here are the ticker symbols (short identifiers for an investment, the same way NKE is Nike’s ticker symbol, for example) of popular Fidelity index funds. To check the year-to-date returns and other performance metrics, enter the stock ticker here (upper right corner).

Some of the best zero expense ratio index funds at Fidelity:

• FZROX, which mirrors the total stock market index - mutual fund
• FNILX, an index fund made up of large companies (i.e. valued at or above $10 billion) - mutual fund

Other noteworthy Fidelity index funds with small fees:

• FXAIX, which aims to match the S&P 500 - expense ratio: 0.015% - mutual fund
• FXNAX, comprised of U.S. bonds - expense ratio: 0.025% - mutual fund

Fidelity has three ESG funds, all with no minimum investment:

• FNDSX, which is invested in sustainable bonds - expense ratio: 0.10% - mutual fund
• FITLX, covering ESG-friendly U.S. stocks - expense ratio: 0.11% - mutual fund
• FNIDX, comprised of foreign stocks - expense ratio is: 0.20% - mutual fund

Here’s how to set up a brokerage account with Fidelity to invest in index funds of your choosing. Fidelity has 24/7 customer support and a user-friendly interface. To get started, add your cash then buy shares via the corresponding ticker symbol. You may also be able to buy Fidelity index funds with a non-Fidelity brokerage account. However, you might have to pay extra fees.

Vanguard Index Funds

Vanguard index funds also have stock market tickers just like publicly traded companies (think AAPL, which is Apple’s ticker symbol, or MSFT for Microsoft). You can search for year-to-date performance of these funds on Vanguard’s site, linked here.

Top Vanguard index funds include:

• VOO, which is an ETF that aims to match the S&P 500 - expense ratio 0.03% - ETF
• BND, designed to mirror the total bond market - expense ratio 0.03% - ETF
• VTI, which seeks to emulate the total stock market’s returns - expense ratio 0.03% - ETF

Each requires a $1 minimum investment. - All have very low fee structures when compared to an average index fund (0.12%) or actively managed mutual fund (0.5% to 0.75%) fee.

There are three ESG Vanguard index funds with a $1 minimum investment:

• VSGX, made up of international stocks - expense ratio 0.12% - ETF
• VCEB, comprised of U.S. corporate bonds - expense ratio 0.12% - ETF
• ESGV, which covers U.S. stocks - expense ratio 0.09% - ETF

If you’re ready to buy, you can open a new brokerage account with Vanguard. Once your account is funded, you’ll then use the ticker symbols noted above to purchase shares. Alternatively, you may be able to buy Vanguard ETFs with a non-Vanguard investment account, but you may have to pay extra fees to your brokerage firm.

Bottom Line

• Index funds are investments which aim to mirror market returns rather than beat them.
• Investing in index funds is a cost effective approach to building investment wealth over time
• Both Vanguard and Fidelity offer cost effective Index Funds
• Investors can generally buy Fidelity and Vanguard index funds at different brokerage firms like Charles Schwab, but there may be additional fees.

Vanguard’s ETFs and Fidelity’s index mutual funds and ETFs offer great options to investors who want to diversify their portfolio across sectors with minimal active management. Both brokerages have low (or for some of Fidelity’s, no) cost investments that can be great for your portfolio.

But if your portfolio is at another brokerage firm, such as Charles Schwab or E*Trade, be sure to check their fees. Some brokerages tack on additional costs or commissions to let customers access another brokerage’s funds.

Join the Discussion

Have you chosen Vanguard or Fidelity for your index fund investments? What would you recommend to other physician investors? Let us know in the comments below.