As investors look for a home for their money, many of them may choose between Vanguard or Fidelity Investments, two mutual fund industry giants.
There are other investment firms, such as T. Rowe Price and Charles Schwab, but Vanguard and Fidelity are two of the oldest firms around and even for non-investors, may be the best known.
There are a lot of similarities between the two firms. Both offer brokerage and savings accounts for taxable and tax-sheltered money. Additionally, both provide an array of branded and third-party products to choose from, which are low cost and come with mobile app offerings.
But there are also some key differences, enough that it may make an investor choose one over the other, depending on their needs. Here are a few key points for many investors to know when deciding between these two mammoth fund companies:
— Product offerings and costs
— Access and education
— Mobile app experience
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An April 2019 working paper published under the Economic Research Initiatives at Duke University compares the two investment giants on 21 comparable funds in five aspects: performance, tax-efficiency, cost, diversification, benchmark and tracking precision.
The report's research shows Vanguard has a better after-tax return and is more tax-efficient than Fidelity. In the funds sampled, Fidelity had a lower expense ratio than Vanguard. They also found Vanguard funds are more diversified. Fidelity funds offer a higher tracking precision to their benchmarks than Vanguard, but the authors note the difference is small, as Vanguard's average tracking error is 0.08% and Fidelity's is 0.04%.
Todd Rosenbluth, director of exchange-traded fund and mutual fund research at CFRA, says Fidelity in recent years has expanded its suite of index-based mutual funds and alternative-weighted ETFs, but that it remains predominantly an actively managed fund shop.
"Even within the ETF universe, Fidelity does not offer broadly diversified market-cap weighted index ETFs, but now has a suite of actively managed equity ones," he says. The company recently launched ETF versions of some of its mutual funds, such as the Fidelity Blue Chip Growth ETF (ticker: FBCG) in 2020 and Fidelity Magellan ETF (FMAG) in 2021. In addition, it added ESG-focused products such as Fidelity Women's Leadership ETF (FDWM). This gives investors the choice of wrapper, he says.
Rosenbluth considers Vanguard's ETFs to be more broadly diversified building blocks and asset allocation products, whereas Fidelity's ETFs are either sector, smart beta or actively managed.
Vanguard's investing philosophy is built around four core principles: Create clear investment goals, use broadly diversified funds to develop a suitable asset allocation, keep costs low and maintain a long-term perspective.
"Vanguard clients are not short-term or frequent traders," says Matt Benchener, managing director of Vanguard's Retail Investor Group. "Less than one quarter of Vanguard clients trade in any given year, and those who do typically only trade twice."
Alec Lucas, strategist with Morningstar's manager research team, who covers Vanguard, says the company has a "paternalistic streak," and it won't offer some products. For example, Vanguard makes available every publicly traded, U.S. domiciled ETF on its brokerage platform commission free, but it won't list leveraged ETFs.
"That would be a more concrete example of the sort of 'we don't think this will lead to good outcomes for you because investors tend to not use these well, so we're not going to offer them,'" he says.
Robby Greengold, a strategist with Morningstar's manager research team, who covers Fidelity, says the firm takes a view of being a one-stop financial shop for investors.
"Fidelity's fundamental objective is to attract new clients, build durable relationships with existing clients and retain them," he says. "And that means building an ecosystem that's meant to sit at the center of people's financial worlds. Fidelity wants to give clients absolutely no reason to open an account with a competitor."
Scott Ignall, head of Fidelity's retail brokerage business, says the firm wants to meet retail customers where they are in life, whether it's someone wanting to learn to trade or someone starting a first job, as well as offering private wealth management. It also offers access both online and in person.
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Product Offerings and Costs
Both Vanguard and Fidelity offer very low costs for their branded products as well as access to thousands of third-party mutual funds and ETFs.
Vanguard funds have lower expense ETFs that hover around 0.03%, or $3 for every $10,000 invested annually. The average ETF expense ratio is 0.06%. Investors can expect about a 0.18% expense ratio on actively managed funds. Vanguard has more than 200 mutual funds and more than 70 ETFs available to U.S. retail investors.
Typically, an initial minimum investment on Vanguard mutual funds is about $3,000, but the Vanguard STAR Fund (VGSTX) and Target Retirement 2025 Fund (VTTVX) have $1,000 minimums. The minimum investment for an ETF is the price of a single share.
Fidelity boasts more than 300 branded mutual funds available to U.S. retail clients and 37 ETFs, including seven actively managed ETFs. Costs for Fidelity's mutual funds vary, but the expense ratios are as low as 0.015% for most index funds. In 2018, Fidelity started offering zero-expense ratio mutual funds under their Fidelity Zero Index Funds such as the Fidelity Zero Total Market Index Fund (FZROX) and the Fidelity Zero International Index Fund (FZILX).
Fidelity charges $0 for equity, ETF and Fidelity mutual fund trading fees in a retail account, and there are no account minimums.
Access and Education
Both firms have a desktop and mobile app, but there are differences. Only Fidelity has a service for people who want to actively trade, Active Trader Pro, which has streaming data and customized charting and is available to any customer who requests it, no matter their trading frequency.
Educational tools and information are also geared to their respective audiences. Vanguard's research and blog posts are focused on helping investors reach long-term goals. Recently they've focused on behavioral economics and how emotions play into investing.
Fidelity offers information and research in different formats, including webinars, skills-based lessons for people who want to learn to trade, and it also has educational pieces on other topics, like college planning or charitable giving.
When it comes to investing advice, Fidelity has a robo advisor for self-directed investors called Fidelity Go, which is available at a $0 fee for balances less than $10,000, $3 per month for balances between $10,000 and $49,999 and 0.35% for balances of $50,000 or more. There's no minimum to open an account. Clients can also use a hybrid robo advisor called Fidelity Personalized Planning & Advice, which provides access to financial coaches for a 0.5% all-in advisory fee and $25,000 account minimum.
In 2020, the firm launched Fidelity Spire, an app designed to help young adults to stay motivated and informed about their money decisions. Users can plan, save and invest for short- and long-term investor goals through the app.
The firm also has dedicated call centers and brick-and-mortar locations for clients with simple questions. Anyone can speak with a representative free of charge.
Currently, Vanguard has a hybrid advisory offering called the Vanguard Personal Advisor Services, with algorithms that give portfolio construction answers, but a human advisor can answer financial planning concerns around investing such as saving enough for retirement and other questions that aren't driven by algorithms. Advisors are available via phone, email or video conference.
The annual cost is 0.3% of the assets managed, plus product fees. Vanguard has also launched an all-digital financial planning and money management service called Digital Advisor. The service gives investors a personalized plan and ongoing guidance and is particularly compelling for younger investors who want help meeting financial goals, such as retirement planning or investing to pay down debt. It now also includes a debt calculator to help you pay off debt as efficiently as possible, an emergency savings tool that provides recommendations for how to allocate savings between cash and investments and the ability to define and customize non-retirement savings goals. You can also get an advisor fee waiver to try out the service for 90 days without paying an advisor fee.
Vanguard will manage portfolios that include third-party offerings from a 401(k) rollover or other established investment, but any cash that is added will only be used to buy Vanguard products.
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Mobile App Experience
Both Fidelity and Vanguard offer mobile apps for Android and Apple users, while Fidelity also has apps for Amazon Echo and Kindle devices. You can view your accounts, trade, transact and perform basic research on both firms' apps. Fidelity's app appears to be more popular with more than 5 million installs on Android compared to more than 1 million for Vanguard. It's also more highly rated, earning 4.3 stars from more than 100,000 reviews on Google Play and 4.8 stars from 1.8 million ratings in the Apple store.
Vanguard's mobile app, called Beacon, only rates 1.8 out of 5 stars from the 7,219 users who rate the app on Google Play. Users claim recent updates have not fixed common bugs, but the app gets 4.7 stars from 169,500 users on Apple. Other common complaints include a poor check deposit feature and poor charting and research capabilities.
Vanguard says it's continually working to improve both its mobile and online experience for users. Its digital desktop platforms have also recently been updated to include new and improved online resources, such as a new stock and ETF trading platform that is touch-friendly.
The Bottom Line
Both Vanguard and Fidelity are solid options for where to invest your money.
Chuck Self, chief investment officer at iSectors, says his firm uses investment products from Vanguard and Fidelity, and his usage depends on a client's needs. "When it comes down to it, which ones we use is somewhat subjective. Overall they both have tremendous liquidity, they both have tight bid and offers. There's really only small differences. They're both the top ETF shops we use," he says.
Each firm has a diverse offering of educational content, investment products, and digital or personalized advice platforms. If you are more of an active trader, you may prefer Fidelity, but if it's ETF investing you're after, Vanguard has a broader selection. If you like to trade and transact via a mobile app, Fidelity may be a better choice. It's also worth noting that only Fidelity has branch offices where you can meet with a financial advisor in person (though perhaps not during the pandemic). Whichever firm you choose, you'll be in good hands.