Author Topic: Fido index S&P500 vs Total Stock Market  (Read 6300 times)

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Fido index S&P500 vs Total Stock Market
« on: November 29, 2016, 09:37:20 AM »
I love this website and forum.  I’ve always been a great saver but I’ve had a long learning curve learning about investing.  After years of learning from mistakes and learning here and there plus this website and the JL Collins stock series I feel well educated and confident with investing and the markets.  With that said I have begun selling off actively managed funds from my wife and my Fidelity Roth accounts into their index funds.  I was gung ho on placing the majority of my retirement money in the Total Stock Market Index (premium class…FSTVX) through Fidelity but I noticed how strongly the S&P500 index (premium class….FUSVX) outperforms the  total market.  They have the same expense ratio (.045%), both are transaction free, but for the life of the fund the 500 index is returning 9.96% and with a higher dividend compared to the 6.75% from the Total Stock Market Index.  Could someone help me understand why the total stock market is the better option?  Thanks

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Fido index S&P500 vs Total Stock Market
« Reply #1 on: November 29, 2016, 10:30:08 AM »
I do see that the 500 index has an inception date of 1988 whereas the total stock market index has an inception date of 1997.  Could this be the reason behind the difference in returns?

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #2 on: November 29, 2016, 11:39:52 AM »
I do see that the 500 index has an inception date of 1988 whereas the total stock market index has an inception date of 1997.  Could this be the reason behind the difference in returns?

Yes. Briefly, more diversity is generally better. But 500 funds typically perform very similarly to TSM.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #3 on: November 29, 2016, 11:43:40 AM »
Even if this all came down to you looking at the "inception date" and not realizing the two funds are using different dates, that doesn't completely solve your problem. You're looking at the past returns of two index funds, and using that information in an attempt to determine which one to invest in.

This is where you messed up.

You need to get out of the mindset of comparing funds based on past returns. If you want stocks, then buy the Total Market, not a slice because you saw on a chart that it outperformed over an arbitrary time period in the past. That said, here's a graph comparing the two:


Tyler

  • Handlebar Stache
  • *****
  • Posts: 1172
Re: Fido index S&P500 vs Total Stock Market
« Reply #4 on: November 29, 2016, 12:34:32 PM »
I do see that the 500 index has an inception date of 1988 whereas the total stock market index has an inception date of 1997.  Could this be the reason behind the difference in returns?

Definitely.  Here is an explanation of how timeframe affects calculated returns.  The specific example references Emerging Markets, but the same logic applies to any fund. 

Practically speaking, the S&P500 is a subset of the Total Stock Market.  But it's a very large subset that covers the top 85% of the market.  Their returns are basically identical and most advisers would consider them interchangeable. 

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Fido index S&P500 vs Total Stock Market
« Reply #5 on: November 29, 2016, 12:37:21 PM »
Even if this all came down to you looking at the "inception date" and not realizing the two funds are using different dates, that doesn't completely solve your problem. You're looking at the past returns of two index funds, and using that information in an attempt to determine which one to invest in.

This is where you messed up.

You need to get out of the mindset of comparing funds based on past returns. If you want stocks, then buy the Total Market, not a slice because you saw on a chart that it outperformed over an arbitrary time period in the past. That said, here's a graph comparing the two:



Thanks for the reply and aiding in my understanding.  My point wasn't to compare funds, I was just surprised (before I realized that there were different inception dates) that there was such a large disparity between the s&p and total stock market (which is measured by the Dow???).   I guess I was surprised that the Total Stock Market had returned 6.73% over the past 28 years according to Fido.  It seemed like all the MMM articles and JL Collins talks about a 8-10% return over the course of time and particularly 30 year increments.  Thus I was taken aback and a little confused because the numbers didn't add up.  I guess I was comparing indexes to buy funds based off of and initially the numbers didn't make sense. 
What has the Total Stock Market Returned all time?  What has the S&P 500 returned?  Based off fidelity numbers the S&P was considerably higher (10.12%) since this index fund was created and it didn't make sense (10.12% to 6.73%).  I wasn't trying to arbitrarily pick a time period it was just surprising of the difference.
« Last Edit: November 29, 2016, 12:48:28 PM by daltonthecooler »

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #6 on: November 29, 2016, 12:43:43 PM »
Even if this all came down to you looking at the "inception date" and not realizing the two funds are using different dates, that doesn't completely solve your problem. You're looking at the past returns of two index funds, and using that information in an attempt to determine which one to invest in.

This is where you messed up.

You need to get out of the mindset of comparing funds based on past returns. If you want stocks, then buy the Total Market, not a slice because you saw on a chart that it outperformed over an arbitrary time period in the past. That said, here's a graph comparing the two:



Thanks for the reply and aiding in my understanding.  My point wasn't to compare funds, I was just surprised (before I realized that there were different inception dates) that there was such a large disparity between the s&p and total stock market (which is measured by the Dow???).   I guess I was surprised that the Total Stock Market had returned 6.75% over the past 28 years.  It seemed like all the MMM articles and JL Collins talks about a 8-10% return over the course of time and particularly 30 year increments.  Thus I was taken aback and a little confused because the numbers didn't add up.  I guess I was comparing indexes to buy funds based off of and initially then numbers didn't make sense

FSTVX is tied to the Dow Jones Total Stock Market Index, which is different than "The Dow" people usually refer to (Dow Jones Industrial Average).

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Fido index S&P500 vs Total Stock Market
« Reply #7 on: November 29, 2016, 12:49:44 PM »
I do see that the 500 index has an inception date of 1988 whereas the total stock market index has an inception date of 1997.  Could this be the reason behind the difference in returns?

Definitely.  Here is an explanation of how timeframe affects calculated returns.  The specific example references Emerging Markets, but the same logic applies to any fund. 

Practically speaking, the S&P500 is a subset of the Total Stock Market.  But it's a very large subset that covers the top 85% of the market.  Their returns are basically identical and most advisers would consider them interchangeable.

Thanks for the reply, that makes sense. 

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Fido index S&P500 vs Total Stock Market
« Reply #8 on: November 29, 2016, 12:52:42 PM »
Even if this all came down to you looking at the "inception date" and not realizing the two funds are using different dates, that doesn't completely solve your problem. You're looking at the past returns of two index funds, and using that information in an attempt to determine which one to invest in.

This is where you messed up.

You need to get out of the mindset of comparing funds based on past returns. If you want stocks, then buy the Total Market, not a slice because you saw on a chart that it outperformed over an arbitrary time period in the past. That said, here's a graph comparing the two:



Thanks for the reply and aiding in my understanding.  My point wasn't to compare funds, I was just surprised (before I realized that there were different inception dates) that there was such a large disparity between the s&p and total stock market (which is measured by the Dow???).   I guess I was surprised that the Total Stock Market had returned 6.75% over the past 28 years.  It seemed like all the MMM articles and JL Collins talks about a 8-10% return over the course of time and particularly 30 year increments.  Thus I was taken aback and a little confused because the numbers didn't add up.  I guess I was comparing indexes to buy funds based off of and initially then numbers didn't make sense

FSTVX is tied to the Dow Jones Total Stock Market Index, which is different than "The Dow" people usually refer to (Dow Jones Industrial Average).

Thanks again for aiding my understanding

doneby35

  • Bristles
  • ***
  • Posts: 297
Re: Fido index S&P500 vs Total Stock Market
« Reply #9 on: November 29, 2016, 01:44:12 PM »
Speaking of this, would there be any benefit for using Vanguard total stock market (VTSAX) instead of Fidelity?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5338
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Fido index S&P500 vs Total Stock Market
« Reply #10 on: November 29, 2016, 02:22:06 PM »
Speaking of this, would there be any benefit for using Vanguard total stock market (VTSAX) instead of Fidelity?

Not really. They're essentially the same. If your account is already with Fidelity and you don't have any burning desire to move it, the Fidelity fund should suit your needs quite well.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #11 on: November 29, 2016, 02:28:49 PM »
Speaking of this, would there be any benefit for using Vanguard total stock market (VTSAX) instead of Fidelity?

Personally, I trust Vanguard more than I trust Fidelity. I'm investing my money for (hopefully) 6-7 decades, and thanks to taxes, changing funds down the line can be a very expensive proposition. Looking at how Fidelity is structured, pricing their Index funds as loss-leaders to get people into their ecosystem, I simply don't trust them to be able to keep that going for the next 60-70 years.

Not a problem with Vanguard.


Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1657
Re: Fido index S&P500 vs Total Stock Market
« Reply #12 on: November 30, 2016, 09:20:22 AM »
I can relate to a ton of what's been discussed here.  Back before someone said "hey Jack, what's the cost on those funds in your 401k?" and I had to answer "no clue".....so went and looked at Contrafund and almost fell over and got gravel in my stache......what was I saying?

Oh yah, I've used both S&P 500 and total stock and compared and contrasted them and reached the following conclusion:  Theoretically, total stock should be better because it has more stocks so is more diversified.....but in reality, they're virtually the same. 

On the Vanguard vs all the dark lords of the world:  It used to be that Vanguard had THE cheapest funds anywhere.  That is no longer true and for most basic high volume index funds, someone has a cheaper fund or a cheaper ETF or both.  Does Vanguard look out for you more than the evil Johnson family?  I don't think so.  They're not the Salvation Army and their CEO isn't taking home under $100k.  I honestly believe that they are inefficient and have been cutting people way too much for the service they need to provide.  In the last year and a half, they're usually cited as having the worst customer service of any of the major providers.  I still have an international fund with them with a quarter mil in it so I do want them to improve, but for my other money, I'm using Fidelity (cheaper bond and equity funds) and Schwab (cheaper ETFs than either of the above).  Both Schwab and Fidelity will pick up the phone or email chat at 3 in the morning on a Sunday morning.  Vanguard is sleeping then.

So my long rant simply is saying to check out everyone before blindly going with the big V.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #13 on: November 30, 2016, 01:32:16 PM »
I can relate to a ton of what's been discussed here.  Back before someone said "hey Jack, what's the cost on those funds in your 401k?" and I had to answer "no clue".....so went and looked at Contrafund and almost fell over and got gravel in my stache......what was I saying?

Oh yah, I've used both S&P 500 and total stock and compared and contrasted them and reached the following conclusion:  Theoretically, total stock should be better because it has more stocks so is more diversified.....but in reality, they're virtually the same. 

On the Vanguard vs all the dark lords of the world:  It used to be that Vanguard had THE cheapest funds anywhere.  That is no longer true and for most basic high volume index funds, someone has a cheaper fund or a cheaper ETF or both.  Does Vanguard look out for you more than the evil Johnson family?  I don't think so.  They're not the Salvation Army and their CEO isn't taking home under $100k.  I honestly believe that they are inefficient and have been cutting people way too much for the service they need to provide.  In the last year and a half, they're usually cited as having the worst customer service of any of the major providers.  I still have an international fund with them with a quarter mil in it so I do want them to improve, but for my other money, I'm using Fidelity (cheaper bond and equity funds) and Schwab (cheaper ETFs than either of the above).  Both Schwab and Fidelity will pick up the phone or email chat at 3 in the morning on a Sunday morning.  Vanguard is sleeping then.

So my long rant simply is saying to check out everyone before blindly going with the big V.

Vanguard's funds are more tax efficient, due to their method of distributing capital gains through the corresponding ETF (something like that). The patent on this runs out in a decade or two I believe, then the others can copy them.

Vanguard's ETFs have a lower spread, typically overcoming any difference in fees.

In actual practice, however, it's all negligible. If you're choosing between Vanguard/Fidelity/Schwab index funds/etfs, you'll likely be fine. As things are now anyway. The investing world is moving towards indexing in a big way. Vanguard owns the world's largest stock fund, the world's largest bond fund, and the world's largest international stock fund (the 3 components of the 3-fund portfolio).

If I'm betting on which one of these 3 companies will still be around and offering low-cost index funds in 70 years (which Fidelity/Schwab are currently losing money on, hoping to get you to switch to a high-fee fund)...it's an easy choice.

daltonthecooler

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Fido index S&P500 vs Total Stock Market
« Reply #14 on: November 30, 2016, 04:45:40 PM »
I can relate to a ton of what's been discussed here.  Back before someone said "hey Jack, what's the cost on those funds in your 401k?" and I had to answer "no clue".....so went and looked at Contrafund and almost fell over and got gravel in my stache......what was I saying?

Oh yah, I've used both S&P 500 and total stock and compared and contrasted them and reached the following conclusion:  Theoretically, total stock should be better because it has more stocks so is more diversified.....but in reality, they're virtually the same. 

On the Vanguard vs all the dark lords of the world:  It used to be that Vanguard had THE cheapest funds anywhere.  That is no longer true and for most basic high volume index funds, someone has a cheaper fund or a cheaper ETF or both.  Does Vanguard look out for you more than the evil Johnson family?  I don't think so.  They're not the Salvation Army and their CEO isn't taking home under $100k.  I honestly believe that they are inefficient and have been cutting people way too much for the service they need to provide.  In the last year and a half, they're usually cited as having the worst customer service of any of the major providers.  I still have an international fund with them with a quarter mil in it so I do want them to improve, but for my other money, I'm using Fidelity (cheaper bond and equity funds) and Schwab (cheaper ETFs than either of the above).  Both Schwab and Fidelity will pick up the phone or email chat at 3 in the morning on a Sunday morning.  Vanguard is sleeping then.

So my long rant simply is saying to check out everyone before blindly going with the big V.

Vanguard's funds are more tax efficient, due to their method of distributing capital gains through the corresponding ETF (something like that). The patent on this runs out in a decade or two I believe, then the others can copy them.

Vanguard's ETFs have a lower spread, typically overcoming any difference in fees.

In actual practice, however, it's all negligible. If you're choosing between Vanguard/Fidelity/Schwab index funds/etfs, you'll likely be fine. As things are now anyway. The investing world is moving towards indexing in a big way. Vanguard owns the world's largest stock fund, the world's largest bond fund, and the world's largest international stock fund (the 3 components of the 3-fund portfolio).

If I'm betting on which one of these 3 companies will still be around and offering low-cost index funds in 70 years (which Fidelity/Schwab are currently losing money on, hoping to get you to switch to a high-fee fund)...it's an easy choice.

How are FIdelity and Schwab currently losing money on these funds?

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #15 on: November 30, 2016, 11:29:36 PM »
I can relate to a ton of what's been discussed here.  Back before someone said "hey Jack, what's the cost on those funds in your 401k?" and I had to answer "no clue".....so went and looked at Contrafund and almost fell over and got gravel in my stache......what was I saying?

Oh yah, I've used both S&P 500 and total stock and compared and contrasted them and reached the following conclusion:  Theoretically, total stock should be better because it has more stocks so is more diversified.....but in reality, they're virtually the same. 

On the Vanguard vs all the dark lords of the world:  It used to be that Vanguard had THE cheapest funds anywhere.  That is no longer true and for most basic high volume index funds, someone has a cheaper fund or a cheaper ETF or both.  Does Vanguard look out for you more than the evil Johnson family?  I don't think so.  They're not the Salvation Army and their CEO isn't taking home under $100k.  I honestly believe that they are inefficient and have been cutting people way too much for the service they need to provide.  In the last year and a half, they're usually cited as having the worst customer service of any of the major providers.  I still have an international fund with them with a quarter mil in it so I do want them to improve, but for my other money, I'm using Fidelity (cheaper bond and equity funds) and Schwab (cheaper ETFs than either of the above).  Both Schwab and Fidelity will pick up the phone or email chat at 3 in the morning on a Sunday morning.  Vanguard is sleeping then.

So my long rant simply is saying to check out everyone before blindly going with the big V.

Vanguard's funds are more tax efficient, due to their method of distributing capital gains through the corresponding ETF (something like that). The patent on this runs out in a decade or two I believe, then the others can copy them.

Vanguard's ETFs have a lower spread, typically overcoming any difference in fees.

In actual practice, however, it's all negligible. If you're choosing between Vanguard/Fidelity/Schwab index funds/etfs, you'll likely be fine. As things are now anyway. The investing world is moving towards indexing in a big way. Vanguard owns the world's largest stock fund, the world's largest bond fund, and the world's largest international stock fund (the 3 components of the 3-fund portfolio).

If I'm betting on which one of these 3 companies will still be around and offering low-cost index funds in 70 years (which Fidelity/Schwab are currently losing money on, hoping to get you to switch to a high-fee fund)...it's an easy choice.

How are FIdelity and Schwab currently losing money on these funds?

Source (one of many): http://www.etf.com/sections/features/14649-inside-schwabs-etf-price-cuts-.html

-------------------------------------
A Loss Leader

Moreover, it’s hard to get away from the conclusion that, after the price cuts, Schwab is losing money on its ETFs, according to Rick Ferri, head of Michigan-based registered investment advisor Portfolio Solutions and a well-known figure in the world of index investing.

That’s because we know that Vanguard—a mutual fund company that’s owned by its fund holders—runs its funds at cost as a matter of course. Vanguard’s funds are considerably bigger than Schwab’s, meaning it has better economies of scale than Schwab. So, if Schwab’s smaller funds are cheaper, it’s pretty obvious Schwab is losing money on them, Ferri said.

Ferri stressed that Schwab will try to use the cheap and commission-free ETFs as loss leaders.

“What they’re trying to do is get people to come to their platform,” said Ferri. “Get them into the store, then they’ll spend money there,” he added, noting Schwab is said to make good money on products such as its money market funds. Its Options Express unit is also said to be very profitable.

A Vanguard official made clear that Vanguard will never use a loss-leader approach to selling its funds, again, because it’s owned by fund holders, and such a policy would violate its at-cost pricing policy.

“If it is a loss leader for them, we just wouldn’t be pulled into that,” Vanguard spokesman Dave Hoffman said in a telephone interview. “We would also ask, how long can a company play that game?,” Hoffman added.

“We don’t view reducing our prices as being competitive. We reduce our costs because it’s a function of our structure. We pass on savings with increased assets.”
-------------------------------------

Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1657
Re: Fido index S&P500 vs Total Stock Market
« Reply #16 on: December 01, 2016, 06:39:24 AM »
I don't think I believe that Schwab and Fidelity lose money on their low cost offerings.  Heck.....you can get ERs less than the 0.045% of the normal, human 500 and total market funds at Fidelity if you can just scrape the $5MM minimum or even better, the $10MM minimum for the even lower ER class of funds.  I truly believe that Fidelity is so much more efficient than Vanguard that they are able to offer these funds.

In like manner, Schwab is unbeatable with their ETFs.  My taxable is with Schwab and I only buy SCHB at an ER of 0.03%.  I know that I'm small, girlymon potatoes to Schwab but the trend everywhere is towards index funds and index-like ETFs.  Saying that they are a loss leader is stretching, in my opinion.  If Charlie or Abigail would come out and say that they were offering these funds as loss leaders, I might buy it.  Otherwise.....no, I don't.  I respect Rick as an advisor and very knowledgeable guy.  But I have to wonder if he's carrying the memories of the bad old days where nobody offered anything for less than a 1% ER and parlays that into thinking that they can't possibly make money at 0.03%.  I'd not be surprised to find that SCHB is kept to its target by a computer program that cost $300 to write and $0.75 a year in electricity to run for the entire fund.

In any case, we're the beneficiaries. 

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #17 on: December 01, 2016, 09:02:44 AM »
I don't think I believe that Schwab and Fidelity lose money on their low cost offerings.  Heck.....you can get ERs less than the 0.045% of the normal, human 500 and total market funds at Fidelity if you can just scrape the $5MM minimum or even better, the $10MM minimum for the even lower ER class of funds.  I truly believe that Fidelity is so much more efficient than Vanguard that they are able to offer these funds.

In like manner, Schwab is unbeatable with their ETFs.  My taxable is with Schwab and I only buy SCHB at an ER of 0.03%.  I know that I'm small, girlymon potatoes to Schwab but the trend everywhere is towards index funds and index-like ETFs.  Saying that they are a loss leader is stretching, in my opinion.  If Charlie or Abigail would come out and say that they were offering these funds as loss leaders, I might buy it.  Otherwise.....no, I don't.  I respect Rick as an advisor and very knowledgeable guy.  But I have to wonder if he's carrying the memories of the bad old days where nobody offered anything for less than a 1% ER and parlays that into thinking that they can't possibly make money at 0.03%.  I'd not be surprised to find that SCHB is kept to its target by a computer program that cost $300 to write and $0.75 a year in electricity to run for the entire fund.

In any case, we're the beneficiaries.

Bloomberg - Schwab is selling the bare bones "market" as a loss leader

Reuters - Right now, Schwab - which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 - is winning.

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

"We believe we will keep that client for a long time," said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Forbes - When asked if Schwab Funds is able to turn a profit on ETF products – a concern echoed by many in the industry, CEO Walt Bettinger seemed to treat ETFs as more of a loss leader and part of Schwab’s complete offering, although he did say the products affect the company’s bottom line positively.

“It’s like asking Apple if they make money on the glass of an iPhone,” said Bettinger. “If I’m running Apple, I’m worried about building a client base that loves Apple products. At Schwab, we’re worried about delighting investors and building our franchise.”


NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #18 on: December 01, 2016, 11:09:54 AM »

Bloomberg - Schwab is selling the bare bones "market" as a loss leader

Reuters - Right now, Schwab - which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 - is winning.

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

"We believe we will keep that client for a long time," said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Forbes - When asked if Schwab Funds is able to turn a profit on ETF products – a concern echoed by many in the industry, CEO Walt Bettinger seemed to treat ETFs as more of a loss leader and part of Schwab’s complete offering, although he did say the products affect the company’s bottom line positively.

“It’s like asking Apple if they make money on the glass of an iPhone,” said Bettinger. “If I’m running Apple, I’m worried about building a client base that loves Apple products. At Schwab, we’re worried about delighting investors and building our franchise.”

IMO, there are enough people who aren't comfortable fully managing their own money that using index ETFs as loss-leaders isn't a long-term structural problem. They're basically subsidizing the indexers.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #19 on: December 01, 2016, 11:47:29 AM »

Bloomberg - Schwab is selling the bare bones "market" as a loss leader

Reuters - Right now, Schwab - which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 - is winning.

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

"We believe we will keep that client for a long time," said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Forbes - When asked if Schwab Funds is able to turn a profit on ETF products – a concern echoed by many in the industry, CEO Walt Bettinger seemed to treat ETFs as more of a loss leader and part of Schwab’s complete offering, although he did say the products affect the company’s bottom line positively.

“It’s like asking Apple if they make money on the glass of an iPhone,” said Bettinger. “If I’m running Apple, I’m worried about building a client base that loves Apple products. At Schwab, we’re worried about delighting investors and building our franchise.”

IMO, there are enough people who aren't comfortable fully managing their own money that using index ETFs as loss-leaders isn't a long-term structural problem. They're basically subsidizing the indexers.

Are you willing to bet your net-worth, and your ability to retire early, on that opinion? If so, why, for what benefit?

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #20 on: December 01, 2016, 12:06:54 PM »

Bloomberg - Schwab is selling the bare bones "market" as a loss leader

Reuters - Right now, Schwab - which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 - is winning.

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

"We believe we will keep that client for a long time," said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Forbes - When asked if Schwab Funds is able to turn a profit on ETF products – a concern echoed by many in the industry, CEO Walt Bettinger seemed to treat ETFs as more of a loss leader and part of Schwab’s complete offering, although he did say the products affect the company’s bottom line positively.

“It’s like asking Apple if they make money on the glass of an iPhone,” said Bettinger. “If I’m running Apple, I’m worried about building a client base that loves Apple products. At Schwab, we’re worried about delighting investors and building our franchise.”

IMO, there are enough people who aren't comfortable fully managing their own money that using index ETFs as loss-leaders isn't a long-term structural problem. They're basically subsidizing the indexers.

Are you willing to bet your net-worth, and your ability to retire early, on that opinion? If so, why, for what benefit?

I basically am. Due to the structure of my particular employer-sponsored plan, I have more in mutual funds than ETFs, but my SP500 expense is 0.02%. My IRA is all ITOT though.

If I'm wrong, I'll do my best to adapt to a changed landscape when it happens. Ultimately, I feel there isn't currently a better option for returns/risk. So I index.

I'm not particularly worried that, should loss-leading become a problem, that the brokers would choose collapse over raising prices. That would be pretty irrational.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 657
Re: Fido index S&P500 vs Total Stock Market
« Reply #21 on: December 01, 2016, 12:48:44 PM »

Bloomberg - Schwab is selling the bare bones "market" as a loss leader

Reuters - Right now, Schwab - which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 - is winning.

Their theory? You'll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

"We believe we will keep that client for a long time," said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Forbes - When asked if Schwab Funds is able to turn a profit on ETF products – a concern echoed by many in the industry, CEO Walt Bettinger seemed to treat ETFs as more of a loss leader and part of Schwab’s complete offering, although he did say the products affect the company’s bottom line positively.

“It’s like asking Apple if they make money on the glass of an iPhone,” said Bettinger. “If I’m running Apple, I’m worried about building a client base that loves Apple products. At Schwab, we’re worried about delighting investors and building our franchise.”

IMO, there are enough people who aren't comfortable fully managing their own money that using index ETFs as loss-leaders isn't a long-term structural problem. They're basically subsidizing the indexers.

Are you willing to bet your net-worth, and your ability to retire early, on that opinion? If so, why, for what benefit?

I basically am. Due to the structure of my particular employer-sponsored plan, I have more in mutual funds than ETFs, but my SP500 expense is 0.02%. My IRA is all ITOT though.

If I'm wrong, I'll do my best to adapt to a changed landscape when it happens. Ultimately, I feel there isn't currently a better option for returns/risk. So I index.

I'm not particularly worried that, should loss-leading become a problem, that the brokers would choose collapse over raising prices. That would be pretty irrational.

Yea, I don't see a problem with that. The problem would probably manifest itself in one of two ways:

  • Expenses increase from 0.05% to 1% or something crazy like that.
  • They move everyone to an Active fund, or remove the fund altogether, forcing a switch.

Either one of these isn't a problem in a tax-advantaged account, as you can just switch to someone else. The problem only arises in a taxable account. I'm imagining someone with $500,000 in taxable, and trying to decide if they'd be better off paying 1% a year in fees with the new fund, or paying 20%-25% in taxes (federal + state) to switch.

If that's the worst-case scenario (is it?), that's not earth-shattering, but again, for what benefit?

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #22 on: December 01, 2016, 03:30:54 PM »
Yea, I don't see a problem with that. The problem would probably manifest itself in one of two ways:

  • Expenses increase from 0.05% to 1% or something crazy like that.
  • They move everyone to an Active fund, or remove the fund altogether, forcing a switch.

Either one of these isn't a problem in a tax-advantaged account, as you can just switch to someone else. The problem only arises in a taxable account. I'm imagining someone with $500,000 in taxable, and trying to decide if they'd be better off paying 1% a year in fees with the new fund, or paying 20%-25% in taxes (federal + state) to switch.

If that's the worst-case scenario (is it?), that's not earth-shattering, but again, for what benefit?

I sincerely doubt they would axe index funds all together. They're very popular, and they could run one at cost for well under 1%. To me, worst case scenario is fees in the 0.5% range, which is still less bad than active management fees and performance. We're sort of biased in that we feel it's easy to choose our funds and allocations. I think we're in the minority in the general population, so plenty of people choose funds that offer more management (even if it's just a target date index).

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1172
Re: Fido index S&P500 vs Total Stock Market
« Reply #23 on: December 01, 2016, 03:48:32 PM »
IMHO, considering paying more today to track the same index because you fear that cheaper (but equally well-established) options may hypothetically raise their rates in the future is not something worth losing sleep over.  Even Vanguard is not immune from unforeseen costs.  Just do the best you can and don't stress about it.

aspiringnomad

  • Pencil Stache
  • ****
  • Posts: 934
Re: Fido index S&P500 vs Total Stock Market
« Reply #24 on: December 01, 2016, 09:36:11 PM »
I have money with both Vanguard and Schwab, and Schwab is by far more customer focused and technologically adept. And the ERs have dropped below Vanguard's. If their ERs eventually tick up a bit to match, or even exceed Vanguard's by a basis point or two, I won't lose any sleep. Right now, and for at least a couple years now, Schwab offers far better value so they get my business. I can't see them pulling the rug out any time soon, but I have no special insight into their long-term business plans and don't pretend to. I think IC brings up a fair point, but even in the worst case scenario where Schwab completely changes its business model, accounts should be eligible for an in-kind transfer, avoiding a potential tax hit and making this all moot, or am I wrong about that?
« Last Edit: December 01, 2016, 09:38:02 PM by dcmustachio »

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2137
  • Location: Cleveland
Re: Fido index S&P500 vs Total Stock Market
« Reply #25 on: December 02, 2016, 06:02:56 AM »
I have money with both Vanguard and Schwab, and Schwab is by far more customer focused and technologically adept. And the ERs have dropped below Vanguard's. If their ERs eventually tick up a bit to match, or even exceed Vanguard's by a basis point or two, I won't lose any sleep. Right now, and for at least a couple years now, Schwab offers far better value so they get my business. I can't see them pulling the rug out any time soon, but I have no special insight into their long-term business plans and don't pretend to. I think IC brings up a fair point, but even in the worst case scenario where Schwab completely changes its business model, accounts should be eligible for an in-kind transfer, avoiding a potential tax hit and making this all moot, or am I wrong about that?

An in-kind transfer wouldn't solve the problem of increased expenses in the fund. You'd just be selling it at Vanguard instead of Schwab. Obviously, in tax-advantaged accounts it's irrelevant.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28268
  • Age: -999
  • Location: Seattle, WA
Re: Fido index S&P500 vs Total Stock Market
« Reply #26 on: December 04, 2016, 05:12:23 AM »
Following for the Schwab v. Vanguard discussion.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.