Vanguard Versus Fidelity: Which is Best for You?

As investors look for a home for their money, many of them may choose between Vanguard or Fidelity Investments, two mutual fund industry giants.

There are other investment firms, such as T. Rowe Price, BlackRock, Charles Schwab and others, but Vanguard and Fidelity are two of the oldest firms around and even for non-investment people may be the best known.

There are a lot of similarities between the two. Both offer brokerage and savings accounts for taxable and tax sheltered money. Additionally, both provide an array of branded and third party products to choose from, which are low cost and come with mobile app offerings.

But there are also some key differences, enough that it may make an investor choose one over the other, depending on their needs. Here are a few key points for many investors to know when deciding between these two mammoth fund companies:

-- Philosophy.

-- Product offering and costs.

-- Performance

-- Access and education.

Philosophy

Karin Risi, managing director and head of Vanguard Retail Investor Group, says the firm focuses on long-term investing, whether that means an investor is opening an account for retirement or a brokerage account for taxable money such as a place to put an emergency fund.

[See: 7 Types of Popular Investment Portfolios.]

"We do not attract the short-term traders," Risi says. "We do not put out lots of tools and calculators to facilitate short-term trading."

On that point, Alec Lucas, senior analyst with Morningstar's manager research team, who covers Vanguard, says the company has a "paternalistic streak," and it won't offer some products. For example, Vanguard makes available every publicly traded, U.S. domiciled exchange traded fund on its brokerage platform commission free but it won't list leveraged ETFs.

"That would be a more concrete example of the sort of 'we don't think this will lead to good outcomes for you because investors tend to not use these well, so we're not going to offer them,'" he says.

Robby Greengold, a senior analyst with Morningstar's manager research team, who covers Fidelity, says the firm takes a view of being a one-stop financial shop for investors.

"Fidelity's fundamental objective is to attract new clients, build durable relationships with existing clients and retain them," he says. "And that means building an ecosystem that's meant to sit at the center of people's financial worlds. Fidelity wants to give clients absolutely no reason to open an account with a competitor."

Ram Subramaniam, head of brokerage and investment solutions at Fidelity Investments, says the firm wants to meet retail customers where they are in life, whether it's someone wanting to learn to trade, someone starting a first job, to private wealth management and they offer access both online and in person.

Product Offerings and Costs

Both Vanguard and Fidelity offer very low costs for their branded products as well as access to thousands of third-party mutual funds and ETFs.

Vanguard funds' lower-expense ETFs hover around 0.07%, $7 for every $10,000 invested annually. Investors can expect about a 0.19% expense ration on active-traded funds. Vanguard has about 180 mutual funds and 80 ETFs in the U.S. Typically an initial minimum investment is about $3,000, depending on the type of fund.

Fidelity boasts more than 250 branded mutual funds available to U.S. retail clients and 28 ETFs. Costs for Fidelity's mutual funds vary but the expense ratios are as low as 0.15% for index funds. Just recently Fidelity started offering zero-expense ratio mutual funds under their Fidelity Zero Index Funds such as the Fidelity Zero Total Market Index Fund (ticker: FZROX) and the Fidelity Zero International Index Fund ( FZILX).

Fidelity charges $4.95 for equity trading fees in a retail account and there are no account minimums.

Performance

An April working paper published under the Economic Research Initiatives at Duke University compares the two investment giants on 21 comparable funds in five aspects: performance, tax-efficiency, cost, diversification, benchmark and tracking precision.

[See: 7 Retirement Investment Strategies to Avoid.]

The report's research shows Vanguard has a better after-tax return and is more tax-efficient than Fidelity. In the funds sampled, Fidelity had a lower expense ratio than Vanguard. They also found Vanguard's funds are more diversified. Fidelity funds offer a higher tracking precision to their benchmarks than Vanguard, but the authors note the difference is small, as Vanguard's average tracking error is 0.08% and Fidelity's is 0.04%.

Todd Rosenbluth, director of ETF research at CFRA, says he's noticed Fidelity is increasingly launching index-based mutual funds and alternative-weighted ETFs, but that they remain predominately an actively managed fund shop. "Even within the ETF universe, they don't offer broadly diversified market-cap weighted index ETFs," he says.

Rosenbluth says Fidelity partners with other firms on ETFs, including BlackRock, one of the top global ETF issuers. He considers Vanguard's ETFs to be more broadly diversified and are more building blocks and asset allocation products, whereas Fidelity's ETFs are either sector, smart beta or actively managed.

Access and Education

Both firms have a desktop and mobile app, but there are differences. Only Fidelity has a service for people who want to actively trade, Active Trader Pro, which has streaming data and customized charting.

Educational tools and information are also geared to their respective audiences. Risi says their research and blog posts are focused on helping investors reach long-term goals. Recently they've focused on behavioral economics and how emotions play into investing.

Subramaniam says Fidelity offers information and research in different formats, including webinars, skills-based lessons for people who want to learn to trade, and it also has educational pieces on other topics, like college planning or charitable giving.

When it comes to investing advice, Fidelity has a robo advisor for self-directed investors called Fidelity Go, but also dedicated call centers and brick-and-mortar locations for clients with simple questions.

"Anyone can call in or go to a branch and have a conversation, and there's no fee for that," he says.

For people who want a dedicated human financial planner, the all-in cost is 0.35% annual advisory fee, he says, and advisors pick from a variety of products.

Currently, Vanguard has a hybrid advisory offering called the Vanguard Personal Advisor Services, with algorithms that give portfolio construction answers, but a human advisor can answer financial planning concerns around investing such as saving enough for retirement and other questions that aren't driven by algorithms. Advisors are available via phone or online, Risi says.

[See: 10 Ways to Maximize Your Retirement Investments.]

The annual cost is 0.3% of the assets managed, plus product fees. Vanguard is also in the early stage of creating a robo advisory, according to several news reports.

Vanguard will manage portfolios that include third-party offerings from a 401(k) rollover or other established investment, but any cash that is added will only be used to buy Vanguard products. "We will not recommend a non-Vanguard product, but we will certainly take in non-Vanguard products if it's on our brokerage platform," Risi adds.

Chuck Self, chief investment officer at iSectors, says his firm uses investment products from Vanguard and Fidelity, and his uses depends on a client's needs. "When it comes down to it, which ones we use is somewhat subjective. Overall they both have tremendous liquidity, they both have tight bid and offers. There's really only small differences. They're both the top ETF shops we use," he says.

Debbie Carlson has more than 20 years experience as a journalist and has had bylines in Barron's, The Wall Street Journal, the Chicago Tribune, The Guardian, and other publications. Follow her on Twitter at @debbiecarlson1.