Can Fidelity Top Vanguard’s Index Fund Dominance?

by Jason Unger

We’ve spent plenty of time talking about index funds and why they’re the best investment option for most people, and when paired with dollar cost averaging and automated investing, you’ll be in a great position when you’re ready to retire.

The first index fund was created by John Bogle of Vanguard in 1975, and since that time Vanguard has become incredibly popular for index fund investors, thanks to their wide range of options and low costs.

Just look at these numbers from The Wall Street Journal: “Investors pulled more than $300 billion from U.S. actively managed funds in the 12 months through the end of May, according to Morningstar, while investing upwards of $375 billion in passive funds.”

As more and more investors switch to index funds, investment houses are doing their best to keep up.

One of the largest investment houses, Fidelity Investments, is doing their best to grab a share of the index fund market. Our friends at Kiplinger explain:

Some Fidelity funds are downright cheap, with annual fees that are as low as — or lower than — comparable funds from Vanguard.

It’s all part of Fidelity’s plan to compete more vigorously with Vanguard, the big kahuna of index funds. Earlier this year, Fidelity removed the word “Spartan” from its index-fund names to simplify the lineup’s branding. They’re now simply called “Fidelity” funds. And in July, the firm cut fees on 27 of its index mutual funds and exchange-traded funds, which usually track indexes.

Fidelity recently rolled out three new index funds, Fidelity Large Cap Growth Index Fund (FSUIX), Fidelity Large Cap Value Index (FLCDX), and Fidelity Total International Index (FTIGX). On their website, Fidelity explains why you should use them for index fund investing:

We understand why you’re buying index funds—you want an investment that performs as closely to its benchmark as possible. Over time we seek to minimize tracking error — the amount an index fund’s performance deviates from its target index. Whether through solid trading techniques that completely replicate an index or our use of statistical sampling and optimization techniques when necessary, we are focused on tracking benchmark performance and delivering results our clients have come to expect.

Though Colby Penzone, senior vice president for Fidelity’s investment product group, says the company still believes “in the powers of active management and the value it can provide our customers,” the index fund fee cut is “hugely significant,” says Fidelity Investor editor Jim Lowell.

“It reflects the fact that Fidelity is becoming increasingly more aggressive both in promoting its own product line up and seeking market share from its number one competitor in the low-cost space: Vanguard.”

It’ll be interesting to see if Fidelity can take a bite out of Vanguard’s dominance in the index fund market. It seems like Vanguard investors have a huge brand loyalty, so I can’t imagine a lot of people switching, but if Fidelity can actively market their index funds to new investors, there’s certainly money to be made.

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