﻿Hi if you are new to the channel, my name is Tae from Financial Tortoise. In this channel,
I discuss personal finance, investing and all the while surviving in a multigenerational family.
If these topics sound like something you like to learn more about, I would much
appreciate it if you consider subscribing and also hitting that like button. And if you have yet to
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send out weekly newsletters with other great tips on mastering your money and I wouldn’t want you
to miss them. In the world of Total Market Index funds, the three of the most popular index funds
are Vanguard’s VTSAX - Vanguard Total Stock Market Index Fund. Charles Schwab’s SWTSX - Schwab
Total Stock Market Index Fund. And, Fidelity’s FZROX - Fidelity ZERO Total Market Index Fund.
In this video we are going to deep dive into these three to determine,
which total market index fund is really the king of all total market index funds.
But first, what is a total market index fund? In a nutshell, think of a total market index
fund as a fund that essentially owns all publicly traded stocks in the US market. When you purchase
a share of a total market index fund, you are purchasing a piece of big companies like Apple,
Google and Tesla as well as thousands of smaller companies you might never have heard of. And it
does this by passively tracking the performance of a broad stock market benchmark such as the
Wilshire 5000, the CRSP U.S. Total Market Index or the Dow Jones U.S. Total Stock Index.
And if you are new to the world of investing, total market index funds are one of the best
ways to gain some great exposure to the market. One key reason is due to diversification. You
might have heard of the term, “don’t put all your eggs in one basket.” This is an
important concept when it comes to investing in the market. We might have heard through
the rumor mill about a specific hot stock or a hot company we should invest in. But,
acting on such tips is really a risky move. And study after study have shown that stock picking
is really a losers game. But that doesn’t mean we don’t want to invest in stocks. We just want
diversity. And a total market index fund is one of the most effective ways we can get that diversity.
Essentially through one fund, we automatically get the diversity of thousands of stocks with
various market capitalization. Another reason why purchasing a total market index fund is a smart
move is because these funds are self-cleansing. The market is not stagnant. Companies come and
go routinely. Just take a look at the Dow Jones Industrial Average. When the list was initially
created in 1896, it consisted of 12 of the biggest and most influential corporations of the day - the
titans of the American industry. Do you know how many of the original 12 are still on the list?
Only one - General Electric. The remaining companies transformed or just faded away
with time. But what’s exciting is that they were replaced with new and upcoming companies
that later took on the helm of being the most influential companies of their time. And this
translates to limited downside, but unlimited upside for you. What do I mean by this? Think
of a company and its stock. The worst possible scenario for this company is bankruptcy. And when
a company goes bankrupt, its stock just goes to 0. And it disappears off of a total market
index fund because it no longer has any market capitalization. But if a company is doing well,
the best performance a company can deliver isn’t 100%, it can be 1,000%, 10,000% or more.
Tesla is a great example of this. In the last 10 years, its rate of return has been - if you
can wait for it. 24,000%. If you hold onto a total market index fund, you get the unlimited upside of
companies like Tesla. During these 10 years, there have been many other electric car companies that
have faded away and disappeared. A total market fund automatically replaced these dead and dying
from its fund with new and upcoming companies with great potential. And don’t forget that when
we own a total market index fund, it's not just a slip of traded paper. You own a piece of a real
business. All those companies being represented in a total market index fund are filled with people
working tirelessly to grow and provide excellent service to their customers. And many of you who
might be working for these companies and can attest to this. The market is a competitive,
unforgiving environment, where only the best survive. And because of this intense environment,
companies are working hard to create value and ultimately returns for investors like you and I.
But my personal favorite reason why I love total market index funds is their simplicity. We are all
very busy individuals. You have careers to manage. Families to take care of and lives to live. But
that doesn’t mean I don’t want to invest in the market because I don’t have the time to learn
about all the intricacies of the stock market. This really is where a total market index fund
shines. If you can make one investing decision in your life, and if you take anything away from
this video, it is this - purchase any of the three total market index funds I mention in this video
and hold them for life, it will literally be the best investing decision you will ever make.
Wall Street tries to convince us that we need their professional services because of how
complex the market is and only they know how to navigate it. Well, I say forget them. You can
invest effectively in the market. And though I’ll go through the details here in a bit why I think a
specific total market index fund might be better than the other, to be completely transparent
with you, you will come out a winner with any one of them. I have my personal preference,
but all three are very solid options and you really can’t go wrong with any one of them.
Alright, but you didn’t come here to hear that. You are likely an index fund nerd like me,
so you want the nitty gritty difference between VTSAX, SWTSX and FZROX. So, let’s get right to it.
In order to guide our comparison here, I’m going to anchor off 6 key criteria to determine the best
total market index fund. And it’s in order of least importance to what I believe is the most
important criteria. First, let’s talk about the lowest hanging fruit. Fund history. And
the general assumption I’m going to use is that the older the fund, the more established it is,
and thus you can subjectively rationalize that it is better. And in this category,
VTSAX is the winner. It is the oldest of the bunch. It was created in 1992 whereas SWTSX was
created in 1999. And FZROX is the new kid on the block with only having been created in 2018. Now,
I say again that this is a subjective criteria because it's like saying because someone is older,
he or she is smarter. But I believe it’s a good starting place for our comparison. Next,
let’s take a look at Asset Under Management. That’s a fancy term for how big a fund is.
Now another subjective assumption I’m going to use here is that bigger the fund is, the better
it is. If more people are buying into the fund, it should be a better product right? Well, it could
also be just better marketing, but hang with me here. When it comes to size, VTSAX is another
clear winner. With $1.3 Trillion dollars in assets under management, the SWTSX and FZROX pale in
comparison. They respectively have $18 Billion dollars and $13 billion dollars assets under
management. This is not a surprise when we compare this to when the fund started. VTSAX has been
around the longest, so more people have bought into the fund during the past 30 years. However,
what’s quite interesting is how FZROX has really caught up in size compared to SWTSX. And the next
criteria of comparison will show you why this may be. The next difference between these three funds,
and this is the one that most people talk about, is the expense ratio. VTSAX has an expensive ratio
of 0.04%. What this means is that if you have $10,000 invested in VTSAX, Vanguard will take
$4 dollars annually for the service it provides in managing your money - keeping it secure,
ensuring the fund is well diversified and all other auxiliary services necessary to keep the
company functioning. SWTSX charges 0.03%. And the clear winner here is FZROX with 0.00%. Yes,
you heard me right. Fidelity charges nothing for you to invest with their total market index fund.
At this point, you might be thinking, forget the fund inception or the asset under management,
I’ll take FZROX. I mean who can beat free right? Well, yes, I agree that 0% is better than 0.03%
or 0.04%. However, you want to step back and put this into dollars to understand the real
scale of savings. In a $10,000 portfolio, the difference between 0.04% and 0.00%
is really $4. Yes, if you have $100,000, it’s $40. And if you have $1,000,000, it comes out to $400.
But before you finalize your decision, let’s take a look at a few other comparison criterias. When
it comes to minimum investment, SWTSX and FZROX come out winners compared to VTSAX. And this
is because they have no minimum investment requirement whereas VTSAX requires at least
$3,000. If you don’t have $3,000 to invest, this could be an important criteria to consider in your
decision making. Fund Composition is another notable key difference amongst the three total
market index funds. It’s easy to assume that when we are talking about the total market index, there
is just one index right? I mean all companies mean all companies, no? Well, interestingly,
just like life, it's not that simple. When we look under the hood of these three funds,
what we will find is that the total number of companies being represented in each of these
three funds differ quite a bit. VTSAX is made up of slightly more than 4,000 companies. SWTSX
is made up of somewhere around 3,500 companies. And FZROX is made up of around 2,600 companies.
You might be thinking. What the heck? Those are some big differences. Yes, I agree. All
three funds advertise themselves as “total market index funds” but it seems like some include more
in their definition of total, while others include less. So, why is this the case? The key reason is
that each fund actually follows different total market indexes. VTSAX follows the CRSP US Total
Market Index. CRSP stands for Center for Research in Security Prices and is part of University of
Chicago’s Booth School of Business. It probably is the most comprehensible total market index
that includes around 4,000 companies across mega, large, small and micro capitalization. SWTSX
on the other hand follows the Dow Jones U.S. Total Market Index. Whereas CRSP US Total Market Index
pretty much represents 100% of the US equity market, the Dow Jones US Total Market Index
represents the total 95% of the US stock market based on market capitalization. While it includes
pretty much all large, medium and small cap companies, it excludes very smallest stocks
from its index. Thus the reason that while CRSP US Total Market consists of around 4,000 stocks,
the Dow Jones US Total Market Index is closer to 3,500. And to complicate things further, FZROX,
follows another completely different index. It has its own in-house Fidelity U.S. Total Investable
Market Index. According to Fidelity, this index is designed to reflect the performance of stocks of
large and mid capitalization US companies. It has certain criteria for excluding certain companies
based on market capitalization. Essentially, smaller companies are not included in this index
and thus not reflected in FZROX - making it to only include around 2,600 companies compared
to VTSAX’s 4,000 or SWTSX’s 3,500. You might be thinking at this point. I’m not sure if I like the
fact that FZROX and and SWTSX excludes many small companies. I mean in the case on FZROX vs. VTSAX,
we are talking about 1,500 companies not being included. But before you solidify your
decision here, let’s again take a step back and understand the scale of this impact. Remember,
when a company is being represented in these funds, they are represented based on their market
capitalization - their size. So a small company would not have the same level of representation
as big boys like Apple or Google. If we are to compare the percentage representation of the
top 10 companies in each fund, the percentage is barely different. VTSAX at 24.70% SWTSX at 24.38%
FZROX at 24.67% Are there significant differences in the number of companies
between the three funds? Yes. This is true. However, the impact it makes in percentage of
total market capitalization is barely noticeable because the companies that are excluded in FZROX
and SWTSX from VTSAX are actually less than 1% of total market capitalization. So,
you might hear statements like, VTSAX is the most diverse of all funds so it's the best. Yes,
this is a true statement, but put it in scale and know that the actual impact is
not as big as some people might make it to be. Alright, at this point, you might be thinking,
Tae you told me a lot of things without really telling me much. And I actually agree - all the
stuff I mentioned so far actually aren’t real deal breakers. And if that was all there was to it,
I’d actually say that all three funds are pretty much the same. But for me,
there is one key difference that makes one fund stand far above the others. And that is the firm
overview. And I’m not talking about how awesome their website looks like or what cool new tools
they recently launched. Because frankly these change constantly. I want to talk specifically
about how the company is structured for its stakeholders. Because this is what really matters.
You show me what drives the company’s incentives, and I believe you can envision where it will go in
the future. Let’s start with Charles Schwab. It was founded in 1971 by, as you can guess,
Charles R. Schwab. Today, it is the 7th largest banking institution in the United States with over
$8.5 trillion dollars in client assets. It offers a range of financial services such as banking,
investing, and wealth management services to its clients. But what’s most notable about Charles
Schwab in comparison to Fidelity and Vanguard is that it is a Public Company with stocks that
trade in the market like any other publicly traded companies. And because it has stocks,
it’s key shareholders are its stockholders who expect their stocks to continuously increase in
value. And sometimes it might need to do this at the expense of its employees and
customers - in form of higher costs or reduced services. Well, how about Fidelity? Fidelity
is also an investment giant with $4.5 trillion dollars in assets under management. However,
unlike Charles Schwab, it is a private company. Its shares aren’t traded in the public market,
rather it is owned by the founding Johnson family as well as its employees and ex-employees. So is
this any better? Well let’s think about this. Yes, Fidelity might not have the wider pressure from
all the public mass stockholders that Charles Schwab has to deal with. But it doesn’t mean
it doesn’t have the pressure to keep its share price high as well. The Johnson family as well
as all the employees want their private shares of Fidelity to also increase in value. Yes,
instead of like Charles Schwab where they need to manage the expectations of three parties - the
shareholder, employees and customers, Fidelity only needs to manage two parties,
the employees and customers, given the shareholder and the employees are the same person. However,
the pressure is still there to increase share value. And when push comes to shove,
where do you think a private company like Fidelity will find more money for its shares - employee
salaries or expense to customers. And this is really where Vanguard really shines above the
rest. When Mr. Jack Bogle founded Vanguard in 1975, he started the company with a quite
unique structure. Unique from Charles Schwab and Fidelity. He structured Vanguard as client owned
and to operate at-cost. What this means is whereas in the case of Charles Schwab and Fidelity,
the customers and the shareholders are always two different individuals, in the case of Vanguard,
they are actually the same person. The company is owned by its funds. The company’s funds are then
owned by the customers, its shareholders. Thus the customers are the true owners of Vanguard.
Technically Vanguard is incentives to provide value to only ONE group of people
that plays the role of both the customer and the owner. And this one criteria, to me, triumphs all
other criteria that I mentioned so far and makes VTSAX as my go to total market index fund. Yes,
does FZROX charge you nothing for you to invest with them? Yes, does SWSTX not require $3,000 to
invest with them? All true statements. But for me, I’m investing for the long run. Not only
does VTSAX have the longest track record with 30 years in existence, Vanguard’s company structure
is aligned to my personal interest. We’ll never know if and when Fidelity might start charging
for FZROX or if and when Charles Schwab decides to increase its minimum for SWSTX. But one thing
I am confident about is that Vanguard will always try to keep its costs low to its investors because
it is inherently structured and incentivized to do so. But please don’t take this video
as a rally cry against FZROX and SWSTX. They are frankly great funds to hold given their low cost
and broad market exposure. Compared to actively managed funds or individual stock picking,
any of these three that I mention in this video will help you become a winning investor.
So if your company 401k only offer SWSTX or you already have all your money with Fidelity,
so you are thinking about FZROX so you can keep all your money with one firm, go right ahead.
As long as you are holding low cost total market index funds as your core holding,
I think you are making an excellent decision. But, if I had a choice, you know me. I’ll always take
VTSAX - unless ofcourse Vanguard decides to change things in their company structure. Thank you guys
for watching and if you’d like to learn more about what are some other awesome Vanguard funds to buy,
check out my video here on “5 Best Vanguard Funds to Buy & Hold Forever.” Thank you
again and until next time, all the best.