Spouse and I started our investing with Fidelity over 20 years ago and have no reason to change. We've never had any horrible Fidelity experiences (although others have) and we've been aware of some older customer-service problems at Vanguard (although perhaps a very small fraction of their customers).
I'm enamored of Vanguard's expense ratios, but in our youthful ignorance we stuck to actively-managed mutual funds. Fidelity also charges $75 fees to trade in non-supermarket funds so you're a captive customer. About eight years ago, when we started ditching our mutual funds for index ETFs/stocks, there was no real incentive to move to Vanguard.
I've been vaguely aware of Vanguard's ETFs but I confused them with Fidelity's $75 trading fee. (Duh.) It wasn't until last week that I saw $8 VIPER commissions mentioned while going through George Fisher's asset-allocation tutorial (thanks for the link, George!). I finally realized that we could invest in VIPERs for a fraction of the expense ratios that we were paying for our ETFs. Maybe we could save a pile of money, too.
Our ER portfolio holds three ETFs: iShares' Dow Select Dividend (DVY, 0.40% ER) and S&P600 Small-cap Value (IJS, 0.25%) plus Powershares' International Dividend (PID, 0.62%). I tried to see how much we could save by duplicating them with VIPERs.
The closest VIPER to DVY seems to be Vanguard's high dividend yield (VYM, 0.25%). It's only been around for about a year, but it's lost only 10% in that time compared to DVY's 20%. The sectors are a bit different from DVY and the yield is a lot lower (3.2% instead of 4.6%) but VYM's held its value better. The biggest difference is that DVY is very high in financials (38%) and has been pounded by their epic losses. Owning VYM would also save 0.15% in expenses each year.
VIG is based on Mergent's Dividend Achievers Select Index as opposed to DVY's Dow Select Dividend Index, but it has a much lower 1.7% yield and a similar 0.28% ER to VYM. VIG has only been around for a couple of years, but in that time it's over 15% ahead of DVY.
Two potential drawbacks to VYM & VIG are that they're very small ($115M-$160M) and thinly traded (21,000-35,000 shares/day) so spreads & NAV premiums might be a bit larger. This is not much of an issue for long-term holders and the funds will probably grow quite a bit in the next few years.
IJS's equivalent seems to be VBR, which is based on MSCI's small-cap value index. It's been around for four years and its trading volume is rising. VBR's ER is only 0.12%, less than half of IJS.
PID is tough to replicate with VIPERs because PID is based on Mergent's Dividend Achievers index of non-US stocks. (Having said that, PID is 20% US stocks.) Nearly half of PID is held in British & Canadian stocks. It's essentially an English-language large-cap global value fund with a 4.2% dividend. The closest VIPERs would probably be VEA (Euro/Pac) or VEU (ex-US) and it's still a poor comparison, but the ERs are 0.15% and 0.25% compared to PID's 0.62%. None of these funds have been around long enough to run up a "real" record but I like PID because it's hard to lie about dividends.
If we'd gone with VYM, VBR, and VEA our ER would have dropped from a weighted average of 0.42% to 0.17%. That saves $2500/year on a $1M portfolio.
However (there's always a "however") we'd be paying a healthy slug of cap gains taxes on DVY & IJS (taxable accounts) and giving up quite a bit of dividend yield to save on the ERs. I have a sneaking suspicion that we'd also be bailing on DVY's financials just as they hit bottom, which would hurt us in the long run-- especially since we're reinvesting the dividends. That's enough [-]rationalization[/-] justification to stick with the status quo until at least 2010.
But if you're starting to research ETFs, give Vanguard a good hard look. It's a great way to enjoy low ERs without having to become a captive Vanguard customer, and choices will only get better. I suspect I'll have to revisit our inertia in a few years-- especially if we're rebalancing.
So I'm keeping an eye on this, and I'd appreciate it if the board would help me find holes in my logic.
I'm enamored of Vanguard's expense ratios, but in our youthful ignorance we stuck to actively-managed mutual funds. Fidelity also charges $75 fees to trade in non-supermarket funds so you're a captive customer. About eight years ago, when we started ditching our mutual funds for index ETFs/stocks, there was no real incentive to move to Vanguard.
I've been vaguely aware of Vanguard's ETFs but I confused them with Fidelity's $75 trading fee. (Duh.) It wasn't until last week that I saw $8 VIPER commissions mentioned while going through George Fisher's asset-allocation tutorial (thanks for the link, George!). I finally realized that we could invest in VIPERs for a fraction of the expense ratios that we were paying for our ETFs. Maybe we could save a pile of money, too.
Our ER portfolio holds three ETFs: iShares' Dow Select Dividend (DVY, 0.40% ER) and S&P600 Small-cap Value (IJS, 0.25%) plus Powershares' International Dividend (PID, 0.62%). I tried to see how much we could save by duplicating them with VIPERs.
The closest VIPER to DVY seems to be Vanguard's high dividend yield (VYM, 0.25%). It's only been around for about a year, but it's lost only 10% in that time compared to DVY's 20%. The sectors are a bit different from DVY and the yield is a lot lower (3.2% instead of 4.6%) but VYM's held its value better. The biggest difference is that DVY is very high in financials (38%) and has been pounded by their epic losses. Owning VYM would also save 0.15% in expenses each year.
VIG is based on Mergent's Dividend Achievers Select Index as opposed to DVY's Dow Select Dividend Index, but it has a much lower 1.7% yield and a similar 0.28% ER to VYM. VIG has only been around for a couple of years, but in that time it's over 15% ahead of DVY.
Two potential drawbacks to VYM & VIG are that they're very small ($115M-$160M) and thinly traded (21,000-35,000 shares/day) so spreads & NAV premiums might be a bit larger. This is not much of an issue for long-term holders and the funds will probably grow quite a bit in the next few years.
IJS's equivalent seems to be VBR, which is based on MSCI's small-cap value index. It's been around for four years and its trading volume is rising. VBR's ER is only 0.12%, less than half of IJS.
PID is tough to replicate with VIPERs because PID is based on Mergent's Dividend Achievers index of non-US stocks. (Having said that, PID is 20% US stocks.) Nearly half of PID is held in British & Canadian stocks. It's essentially an English-language large-cap global value fund with a 4.2% dividend. The closest VIPERs would probably be VEA (Euro/Pac) or VEU (ex-US) and it's still a poor comparison, but the ERs are 0.15% and 0.25% compared to PID's 0.62%. None of these funds have been around long enough to run up a "real" record but I like PID because it's hard to lie about dividends.
If we'd gone with VYM, VBR, and VEA our ER would have dropped from a weighted average of 0.42% to 0.17%. That saves $2500/year on a $1M portfolio.
However (there's always a "however") we'd be paying a healthy slug of cap gains taxes on DVY & IJS (taxable accounts) and giving up quite a bit of dividend yield to save on the ERs. I have a sneaking suspicion that we'd also be bailing on DVY's financials just as they hit bottom, which would hurt us in the long run-- especially since we're reinvesting the dividends. That's enough [-]rationalization[/-] justification to stick with the status quo until at least 2010.
But if you're starting to research ETFs, give Vanguard a good hard look. It's a great way to enjoy low ERs without having to become a captive Vanguard customer, and choices will only get better. I suspect I'll have to revisit our inertia in a few years-- especially if we're rebalancing.
So I'm keeping an eye on this, and I'd appreciate it if the board would help me find holes in my logic.
. 
