Dan Wiener sent out a sharp email this morning to his subscribers. It's well-written, focused and does a nice job of reminding folks how to bring a critical eye to investment ads.
Here's an excerpt of Dan's missive:
"Over this morning’s third cup of coffee I turned my Wall Street Journal to a full-page ad from Charles Schwab & Co. that caught my eye. Citing “Decades of advantages” the advert compares the Schwab 1000 Index to the S&P 500 Index and, not surprisingly, declares the Schwab index a winner.
… let’s compare the Schwab 1000 Index Fund against another, oh, 600+-stock portfolio like, oh, Vanguard’s LargeCap Stock Index. The fund is relatively new, with only a 13-year history but over that period its 5-year and 10-year returns outpace the Schwab fund by anywhere from 12 basis points to 28 basis points, per annum. Not bad.
More importantly, if you believe Charles Schwab’s ad, more stocks means better diversification and better performance. So, how about comparing the Schwab index and fund … with Vanguard’s even broader Total Stock Market Index?
You know where this is headed. For all Schwab’s bluster, their fund can’t compete. Pick your Vanguard share class, Total Stock Market Index outperforms. Sometimes by as little as 22 basis points per annum, and sometimes by as much as 57 basis points depending on the share class and the time frame."
Comments
It's all marketing. Vanguard does the same thing. A decade ago, when Vanguard's large cap stock index was new, I suggested to my mother that she take advantage of Vanguard's (then) free financial plan review. The CFP suggested a respectable mix of Vanguard index funds - no surprise there.
But I questioned one selection - Vanguard 500 over their Large Cap Stock fund. Vanguard had made a big deal out of how it worked with MSCI to design indexes for making tracking funds more efficient. For example, adding buffer zones to reduce turnover. If you believed Vanguard (and I do believe they do a lot of work on how to best manage index funds), then this should have been the better fund, and the one to recommend. (In reality, you need a microscope to see the performance differences, and which one does better depends upon the time period selected.)
But everyone knows the S&P 500. So Vanguard 500 was recommended based on brand recognition (sellability), not on it being the best Vanguard had to offer. I'm sure Schwab has made a calculation based on how much it gets for one fund vs. another, how much it has to pay S&P for licensing fees, how much better or worse one fund will sell than another, and tilted its advertising accordingly.
BTW, if there's anything out there on how Schwab manages its index funds as contrasted with Vanguard, MSCI, Fidelity, etc., I'm interested. (For example, how much portfolio lending is done, what percentage of that income goes back into the fund, timing flexibility on trades with index reconstitutions, etc.) I haven't seen anything from Schwab, but then again, I haven't really gone looking for Schwab's methodology.
I suspect this is a bigger factor than which index Schwab is tracking ineach of its large cap blend index funds. Which brings us full circle to the title of this thread.
Regards,
Ted
I have used market watch fund comparison page to compare VTSMX and SWTSX and also to compare VFINX and SWPPX with the clear, if small advantage, consistently going to Schwab. Perhaps their miniscule fee of 0.03% is here reflected.