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I would like to invest $1000 in index funds. Both Vanguard and Schwab track the same S&P 500 index. However, Vanguard's S&P ETF has a unit price of $196 and Schwab's S&P mutual fund has a unit price of $35.

For $1000, I would get 5 Vanguard ETFs and 28 Schwab's index funds. So, why or why should I not invest in the cheaper index fund? Am I not getting bang for the buck?

  • You should add what the administration expense for those funds are. – Mindwin Oct 21 '16 at 12:46
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As has been pointed out, one isn't cheaper than the other. One may have a lower price per share than the other, but that's not the same thing.

Let's pretend that the total market valuation of all the stocks within the index was $10,000,000. (Look, I said let's pretend.) You want to invest $1,000. For the time being, let's also pretend that your purchasing 0.01% of all the stock won't affect prices anywhere.

One company splits the index into 10,000 parts worth $1,000 each. The other splits the same index into 10,000,000 parts worth $1 each. Both track the underlying index perfectly.

If you invest $1,000 with the first company, you get one part; if you invest $1,000 with the second, you get 1,000 parts. Ignoring spreads, transaction fees and the like, immediately after the purchase, both are worth exactly $1,000 to you.

Now, suppose the index goes up 2%. The first company's shares of the index (of which you would have exactly one) are now worth $1,020 each, and the second company's shares of the index (of which you would have exactly 1,000) are worth $1.02 each. In each case, you now have index shares valued at $1,020 for a 2% increase ($1,020 / $1,000 = 1.02 = 102% of your original investment).

As you can see, there is no reason to look at the price per share unless you have to buy in terms of whole shares, which is common in the stock market but not necessarily common at all in mutual funds.

Because in this case, both funds track the same underlying index, there is no real reason to purchase one rather than the other because you believe they will perform differently. In an ideal world, the two will perform exactly equally.

The way to compare the price of mutual funds is to look at the expense ratio. The lower the expense ratio is, the cheaper the fund is, and the less of your money is being eroded every day in fees. Unless you have some very good reason to do differently, that is how you should compare the price of any investment vehicles that track the same underlying commodity (in this case, the S&P 500).

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    And the expense ratio matters a lot! $100 a month for 30 years (principle 37.6k) at 8% compounded monthly (because I'm lazy) is 149k, or 3.96 times your principle. If your fee is 1% this drops to 122k (3.24 times) and a 2% fee is only 100.4k (2.67 times.) Now that's still a lot of money, but man the difference between 6 and 8 percent effective return over 30 years ends up being half again as much. – corsiKa Oct 21 '16 at 21:29
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So, why or why should I not invest in the cheaper index fund?

They are both same, one is not cheaper than other. You get something that is worth $1000.

To give a simple illustration; There is an item for $100, Vanguard creates 10 Units out of this so price per unit is $10. Schwab creates 25 units out of this, so the per unit price is $4.

Now if you are looking at investing $20; with Vanguard you would get 2 units, with Schwab you would get 5 units. This does not mean one is cheaper than other. Both are at the same value of $20.

The Factors you need to consider are;

  • Expense Ratio.
  • Tracking Errors.
  • Ease of Transactions.
  • Minimum size

Related question What differentiates index funds and ETFs?

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    I haven't looked at these funds specifically,but, if all else is truly equal, the lower price per share will offer greater flexibility. For example, if you have $175 you're looking to invest you couldn't afford any additional Vanguard shares, but could still invest in Schwab's funds. – pwcnorthrop Oct 21 '16 at 14:04
  • @pwcnorthrop Vanguard's mutual funds can be purchased as partial shares. – ceejayoz Oct 21 '16 at 19:17
  • @ceejayoz But not the ETFs. And unless you can invest in the Vanguard Admiral-class mutual funds (minimum investment of $10,000), the ETFs are cheaper than the "investor class" (0.05% expense ratio vs. 0.16%) – pwcnorthrop Oct 21 '16 at 19:33
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"Cheaper" would refer to the fees of a fund rather than the share price, IMO. Are 2 quarters worth more or less than 10 nickels? This is another way to express your question though most open-end funds bought directly from the fund family or through fund supermarkets would do fractional shares that may be better than going through ETFs though there can be some brokers like Sharebuilder that used to do fractional shares though not necessarily having the best execution as I recall.

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