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Schwab vs. Vanguard: War of Words Heats Up

By Murray Coleman April 5, 2017

As price wars intensify among index mutual fund and ETF providers, advisors might want to warn clients that the active vs. passive hype is getting louder.

That’s a key takeaway by advisor Daniel Wiener. In an alert sent to clients on Tuesday, the chief executive of Adviser Investments in Newton, Mass., notes that Charles Schwab & Co. has taken out a full-page ad in a leading business publication to promote its funds based on the Schwab 1000 Index.

But he notes that such publicity purporting its benchmark’s outperformance over the S&P 500 misses on at least one key point. Such a comparison isn’t an apples-to-apples analysis since these are different indexes capturing different market segments, observes Wiener, who separately serves as editor of an independent newsletter that tracks Vanguard funds.

"Index comparisons mean nothing until you get out into the real world," he says in his latest note.

A better analysis might be to contrast results over time for the Schwab index fund to something like the Vanguard Total Stock Market Fund.

In similar-priced share classes – or even more expensive classes of the TSM fund – Vanguard’s performance victory ranges from 0.22% per year to 0.57% over periods Wiener studies. Those include five-year, 10-year and even longer timeframes.

"You know where this is headed," Wiener adds. "For all Schwab’s bluster, their fund can’t compete."

Daniel Wiener

This isn’t to suggest that Schwab is putting out technically incorrect information. And it’s hardly alone in putting out ads that can tend to oversimplify more encompassing comparisons. Still, the veteran investment advisor clearly sees a blurring of the lines.

"Whether it’s the fee wars or the diversification wars," Wiener adds, FAs and their clients need to keep in mind that "in the end" choosing funds always comes down to "investor performance."

The bottom line, according to Wiener: "Caveat emptor" to those who don’t take the time to read through all of the asset manufacturing hype trying to capture the imaginations of investors big and small.