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When investing in the stock market, it’s important to have a mix of different investments so you don’t put all your eggs in one basket. Building a diversified portfolio can be a challenge, but mutual funds can make it easier. Mutual funds allow you to pool your money with the money of many other investors. This big pot of money is then invested in a mix of different assets.
Mutual funds minimize your risk because you’re investing in so many different things rather than just buying shares in one company. And because your money is invested in the stock market, you have the potential to earn a good return on investment, which can help you build wealth.
But you need to make sure you choose the right mutual funds, which charge affordable fees and which have a good mix of different investments. Two of the biggest names in the mutual fund business are Vanguard and Fidelity.
Both Vanguard and Fidelity manage trillions of dollars in assets in their proprietary mutual funds — but there are differences between each fund managers offerings. This guide will help you to compare Fidelity vs Vanguard funds so you can decide which are right for you.
In this comparison:
- Things to Look for When Comparing Vanguard or Fidelity Mutual Funds
- Fidelity Fees vs Vanguard Fees
- Vanguard vs Fidelity: Which Has Higher Returns?
- The Benefits of Vanguard vs. Fidelity
- The Downsides of Vanguard vs Fidelity
Things to Look for When Comparing Vanguard or Fidelity Mutual Funds
When you’re comparing mutual funds, the right choice will depend upon your specific investment goals as well as other factors, including the amount that you have to invest. Some of the key things to look for when making your comparison include the following.
- Products offered: You’ll want to consider carefully how many different mutual funds each fund manager offers, as well as the mix of different assets that you can gain exposure to by investing in either Fidelity or Vanguard mutual funds. You also want to make sure that the products are highly rated, with good returns on investments, low costs, and minimal barriers to entry.
- Fees: Keeping investment costs down is very important, as fees can eat into your returns and make it much more difficult for you to accomplish your long-term savings goals. Look for mutual funds with low management fees and that cost little or nothing in commission to buy.
- Specialties: Pay attention to whether a fund manager tends to specialize in a particular type of mutual funds, such as fixed income funds, equity funds, and index funds. Each different kind of mutual fund targets different investors and chooses a different asset mix to accomplish different financial goals.
- Actively vs passively managed funds: Actively managed funds have a fund manager that chooses investments based on market research. Passively managed funds invest in assets with the goal of mirroring the performance of a market index, such as the Dow Jones Industrial Average. Some investors believe active management is good because of the expertise fund managers bring; but it comes at an added cost. Other experts don’t think individuals can outperform the market, so passively managed funds are preferred. In general, Vanguard offers more passively managed funds, while Fidelity offers more actively managed funds.
- Resources: You want to make sure that the fund manager you choose has tools and resources to help you select the fund that’s right for you. Fund screeners and educational materials can help you to become a better investor.
- Account and deposit minimums: Find out if the fund manager you’re considering investing with has a minimum deposit requirement to open an account, or a minimum investment amount you must have before you can buy into a mutual fund. If you don’t have the minimum investment necessary, it doesn’t matter how good the fund is because you won’t be able to afford to buy in.
By taking a holistic approach to evaluating Vanguard, Fidelity, and other mutual fund providers, you can make a fully informed choice about where to invest your hard-earned dollars.
Fidelity Fees vs Vanguard Fees
There are different kinds of fees you may have to pay when you invest with Vanguard or Fidelity. This can include fees for having accounts open, as well as commissions to buy mutual funds and investment fees to fund managers.
Vanguard Costs and Fees
Here are some of the costs you need to be aware of as an investor:
- Vanguard charges a $20 annual fee for many types of brokerage accounts including non-retirement accounts, Roth, traditional and SEP IRAs; and UGMAs, UTMAs, and education savings accounts. This fee is charged if the total value of your Vanguard assets (including mutual funds and ETFs) is less than $10,000. However, this fee can easily be waived if you sign up to have all of your communications delivered electronically; if you’re a Voyager, Voyager Select, Flagship, or Flagship Select client; or if you have an account registered under an EIN.
- There is a $25 annual fee for each Vanguard mutual fund in each Simple IRA account. This fee can be waived if you’re a Voyager, Voyager Select, Flagship, or Flagship Select client.
- 403(b) plan participants are charged $5 per month per participant
- There’s a $20 annual fee for each Vanguard mutual fund in each Individual 401(k) and/or Individual Roth 401(k) plan. This fee can be waived if Voyager, Voyager Select, Flagship, or Flagship Select client.
In addition to account service fees, you also incur other costs including mutual fund expenses. These expense ratios vary by fund. However, Vanguard indicates the average mutual fund expense ratio is 84% less than the industry average.
>> Read More: ETF Index Funds vs Mutual Funds
The good news is, Vanguard doesn’t charge front-end or back-end loads or other sales commissions on their own mutual funds. And, most Vanguard funds don’t charge fees when you buy or sell charges. A small number of funds do charge these fees to cover higher transaction costs and discourage speculative trading. When these funds are charged, the fees range between .25% and 1.00% of the transaction amount.
Fidelity Costs and Fees
Fidelity is very affordable for investors. Unlike Vanguard, Fidelity does not charge any account fees for retail brokerage accounts, including IRAs. Fidelity also has zero expense ratio mutual funds offered directly to investors — which is an industry first.
Fidelity not only charges no commissions for investing in Fidelity funds, but it also allows you to use its trading platform to invest in hundreds of other funds with no transaction fees. Some Fidelity mutual funds do charge management fees and expenses. However, Fidelity indicates its stock and bond index mutual funds have lower expense ratios than comparable funds at Vanguard.
Because you don’t have to worry about account minimums and have the option to buy zero expense ratio mutual funds, Fidelity wins out when it comes to costs for most investors.
Vanguard vs Fidelity: Which Has Higher Returns?
Vanguard has around 190 U.S. mutual funds and 220 additional mutual funds in markets outside of the United States. Fidelity, on the other hand, manages 504 different mutual funds.
Because there are so many funds, investors will need to research the individual funds they are interested in to see how each fund has performed historically. Many funds by Vanguard and Fidelity have performed very well. For example:
- Vanguard had 23 recommended mutual funds on the Money 50 list of recommended mutual funds in 2018.
- 10 Vanguard ETFs were designated by Morningstar as gold-rated and another 26 funds received a silver rating in 2018. This is the highest number of gold and silver-rated funds for any investment firm.
- 18 Fidelity funds received 22 U.S. Lipper Fund Awards in 2018. Individual mutual funds can win Lipper Fund Awards if they consistently outperform peers in risk adjusted returns.
When researching funds, you should look for funds with a long-term track record of successful performance. Don’t just compare how the fund has performed over the past year; look back at the past 10 or 20 years of returns if available. The longer a fund’s track record of success, the better.
You should also consider returns versus expenses. If one mutual fund has slightly better returns than another but its expense rate is much higher, you may be better off with the cheaper fund because the slight increase in returns won’t make up for the fees you’re charged.
The Benefits of Vanguard vs. Fidelity
It’s important to carefully consider pros and cons of both Vanguard and Fidelity.
Some of the big benefits of Fidelity include:
- No account fees
- No minimum deposit requirements and you can buy many mutual funds with zero investment minimums
- Zero-expense ratio mutual funds
- A wide selection of 504 different mutual funds including many actively managed funds
Some of the big benefits of Vanguard include:
- It’s strong educational tools and robust fund screening
- Most investors will be able to waive account fees
- It’s size — Vanguard is the world’s largest no-load mutual fund company
- It’s wide selection of inexpensive passively managed funds
- It’s history — Vanguard started in 1975 and was one of the first investment management firms to offer low-cost index funds. Many of its funds have decades of performance history to evaluate returns.
Both Vanguard and Fidelity offer brokerage services and allow you to open a large number of account types, including:
- Rollover IRA
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Self-employed 401(k) / Individual 401(k)
- 529 College Savings Plans
The Downsides of Vanguard vs Fidelity
You also need to consider the cons of both Vanguard and Fidelity.
Some of the downsides of Fidelity include:
- Much higher margin rates than Vanguard (When you trade on margin, you borrow money to trade with)
- Fewer passively managed funds than Vanguard
- Fewer funds than Vanguard that received gold and silver Morningstar ratings in 2018.
Some of the downsides of Vanguard include:
- Potential annual account service fees
- Many proprietary mutual funds require you to invest at least $1,000
- Fewer fund options than Fidelity
Vanguard or Fidelity: Making the Choice That’s Right for You
Fidelity is generally the best choice for active traders who plan to make more trades on a daily or weekly basis. Vanguard tends to be a better choice for passive, long-term investors who plan to hold investments over a longer period of time — such as those planning for retirement. But because each investment management firm has its own pros and cons to consider, you’ll need to carefully evaluate the costs and benefits of each in order to decide which one is right for you.
Author: Christy Rakoczy