When to Dump Your Index Fund

One of my favorite features in Motley Fool Champion Funds is Shannon Zimmerman's monthly update on exchange-traded funds (ETFs) and index funds. Though I'm a stock investor at heart, I believe almost everyone should have index funds at the core of their portfolios.

But there are some index trackers out there that should be dumped, because they simply don't deserve your hard-earned dollars.

Fees are heading downward
A small revolution is under way in the industry, and it's been very good news for you and me. Vanguard, Fidelity, and some of the other big index fund providers -- perhaps under pressure from low-cost ETFs -- have been lowering the management fees for their products.

Take Fidelity Spartan 500 Index (FSMKX), for instance. If you have at least $10,000 to invest, you'll now be charged only a minuscule 0.10% expense fee. If that $10,000 is too high a hurdle, you can start with as little as $500 if you use the "automatic account builder" option, which makes automatic deposits for you on a regular schedule. Another option is the stalwart Vanguard 500 Index (VFINX), which charges only 0.18% and carries a minimum initial investment of just $3,000.

So, those two provide a baseline comparison for any S&P 500 trackers. What about other index offerings? Let's take a look at two international index funds:

Fidelity Spartan International
Index (FSIIX) Top Holdings*

Merrill Lynch International
Index A (MDIIX) Top Holdings*


iSharesMSCI EAFE Index

HSBC Holdings (NYSE: HBC  )


Toyota (NYSE: TM  )

HSBC Holdings (NYSE: HBC  )

GlaxoSmithKline (NYSE: GSK  )

Toyota (NYSE: TM  )

Total SA (NYSE: TOT  )

GlaxoSmithKline (NYSE: GSK  )

Novartis (NYSE: NVS  )

Total SA (NYSE: TOT  )

Mitsubishi UFJ Financial Group (NYSE: MTU  )

Novartis (NYSE: NVS  )

Expense ratio: 0.10%

Expense ratio: 0.80%

*As of March 31, 2006, for FSIIX. As of April 28, 2006, for MDIIX.

Both funds seek to duplicate the Morgan Stanley Capital International EAFE Index, yet Merrill's expense ratio is a lofty 0.80% -- a full 70 basis points above Fidelity's. What's more, Merrill's top holding is iShares MSCI EAFE Index, which is nothing more than an ETF that tracks the same index, and thus is made up of the same stocks!

Is it time to dump your index fund? When it comes to index trackers, you can expect that on average, your fund will lose to the index by the amount of its expense fees. And while the gap between, say, 0.80% and 0.10% may seem small, it's actually a huge difference that will cost you big money over the years. "With that in mind," Shannon says, "there's simply no reason to pay any more than you absolutely have to for a fund that merely tracks a benchmark."

Check out your index fund's expense ratio to see how it stacks up with competing products. Keep in mind that Vanguard's and Fidelity's low-cost offerings range from 0.10% to 0.23%. If yours is significantly higher, you should definitely consider moving your money into a lower-cost fund that tracks the same index.

More fund fun
The monthly "ETFs & Index Funds" feature in Champion Funds is an interesting read that can profit any index investor. It certainly caused me to scrutinize my index fund's fees.

Shannon is offering a free trial to his newsletter, which will grant you access to every pick he's ever made and every index-fund column. His recommendations are beating the market and equivalent benchmarks, 14% to 6%. Try it for free for 30 days, and if you don't like it, it won't cost you a penny.

This article was originally published on Jan. 6, 2006. It has been updated.

Rex Moore indexes in his 401(k). Rex does not own shares of any company mentioned. GlaxoSmithKline and Total SA are Income Investor recommendations. This information is brought to you by the Fool'sdisclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 504914, ~/Articles/ArticleHandler.aspx, 10/26/2016 7:07:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:01 PM
BP $35.85 Down -0.19 -0.53%
BP CAPS Rating: ****
GSK $40.34 Up +0.02 +0.05%
GlaxoSmithKline CAPS Rating: ***
HSBC $38.12 Down +0.00 +0.00%
HSBC Holdings CAPS Rating: ***
MTU $5.07 Down +0.00 +0.00%
Mitsubishi UFJ Fin… CAPS Rating: **
NVS $71.13 Down -1.50 -2.07%
Novartis CAPS Rating: ****
TM $115.50 Up +0.25 +0.22%
Toyota Motor CAPS Rating: ***
TOT $47.95 Down -0.32 -0.66%
Total CAPS Rating: ****