There was a time when just about every conversation about index funds took all of three words to complete.
Index fund? Vanguard.
Thanks to the fund family's refreshingly welcome low-cost philosophy, Vanguard 500 Index Fund
Competing with Vanguard was pretty much fruitless. If you ran a family of actively managed mutual funds, charging 1% or more in fees, you wouldn't want investors to switch over to an index fund within the same fund family charging a fraction of that in management fees. Yet by not slashing fund fees, the passive index tracker would be doomed to a life of underperformance.
It was a catch-22 -- or as in a joke that knocks them dead in the mutual fund manager stand-up circuit -- a catch-12b-1.
Still, times are changing, and that may mean good news for index fund investors. Last week, it was Fidelity that lowered the expense ratio on its Spartan index funds to a measly 0.1%. This week, it was E*Trade
Why are they doing this? Undercutting Vanguard -- literally by half -- can't be a profitable move in its own right. But here is where you can load up on investing terminology like competitive advantages, razors and blades, and "woohoo, buddy, it's a fire sale!"
Fidelity remains the country's largest mutual fund operator, and letting its high-end index funds ($10,000 minimum investment as compared to $5,000 at E*Trade and $3,000 at Vanguard) take one for the team should help keep Vanguard away. E*Trade is in an even more understandable position, as folks who open an account with the popular discount broker to take advantage of the dirt-cheap index funds may be tempted to make a few stock trades or consider some of the company's other personal finance offerings.
So while our Motley Fool Champion Funds continues to single out promising actively managed mutual funds, the index fund space is proving that it, too, wants in on a good fight to earn the champion title. As an investor, that ultimately means you.
Are you a fan of index funds, or do you like an active manager giving you a shot to beat the indexes? Would you ever buy a load fund? Is your portfolio mixed with equities and mutual funds? All this and more in the Mutual Funds discussion board.
Longtime Fool contributor Rick Munarriz thinks index cards -- and index funds -- are cool. He does not own shares in any company mentioned in this story.