Vanguard vs. Fidelity: Who comes out on top?

It looks like the fee wars are finally over.

Earlier this month, Fidelity invoked the nuclear option by lowering both fees and minimums to zero on some funds. It would seem the only way to lower fees further would be to actually pay investors to invest.

Specifically, Fidelity launched two funds — the Fidelity Zero Total Market Index fund (FZROX) and the Fidelity Zero International Stock Index Fund (FZILX). They own a very broad basket of U.S. stocks and international stocks with no fees and no minimums.

In looking at broad total stock index funds, Vanguard is now in fifth place when it comes to expense ratios. Fidelity, on the other hand, appears to have routed the competition and taken home the gold in this area.

1. Fidelity Zero Total Market Index Fund (FZROX) 0.00% expense ratioar1
2T. Schwab Total Stock Market Index Fund (SWTSX) 0.03% expense ratio
2T. iShares Core S&P Total US Stock Mkt ETF (ITOT) 0.03% expense ratio
2T. SPDR Portfolio Total Stock Market ETF (SPTM) 0.03% expense ratio
5. Vanguard Total Stock Market ETF (VTI) 0.04% expense ratio

Clearly, Vanguard’s competitors are using these funds as loss leaders, while Vanguard continues to gain market share. Fidelity, Schwab, iShares and State Street all have more expensive products they can use to cross-subsidize their low-fee or no-fee offerings, whereas almost everything at Vanguard is already ultra-low cost. But as financial advisors, our fiduciary duty is to our clients, so we should put our clients in the best funds, irrespective of the firms’ motives.

When I consider the once-undisputed champion, Vanguard, against Fidelity’s new Zero funds in five areas — fees, index construction, fee offsets, tax efficiency and trust — I found Vanguard still came out on top.

That said, it was a close call between the two rivals.

1. Fees: This wasn’t pretty for Vanguard. I’m used to scoring a percentage higher fee one fund has versus another. For example, VTI is 33% more expensive than SWTSX, ITOT and SPTM. But dividing by Fidelity’s zero expense ratio doesn’t work. Fidelity is the clear winner of this round.

2. Index construction: Broader is better. The closer a fund is to owning the entire market, the less uncompensated risk it takes on. Fidelity scores...