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I'm 26 and finally have enough money to my name to put some of it away. I've been planning on putting 2000 dollars into a Roth IRA (and continuing that every year I can afford it). Whenever I talk to people about it, they recommend going with Vanguard saying they've got lower fees, etc...and that the S&P 500 index is always a good bet. But my plans were to open an IRA account with an online broker and just buying $2000 worth of Spyders. Would that not be the same thing? If I find an online broker with no IRA fees, then my only cost is the trade fee when I initially buy the stock.
Am I missing something? Does Vanguard offer some other service that I wouldn't get from a discount broker? Do the online brokerages take some extra money that I don't know about?
I try to be a good fool, but sometimes get overwhelmed with it, though recently I've put some money into stocks to get a feel for how it works, so I'm comfortable with the online discount brokerage gig.
Thanks for any help,
Mike
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It is probably not a bad idea as long as you take advantage of a special startup deal. (Like 10 Free trades with Datek). Otherwise, Vanguard may be the better bet, if you intend to invest in the index fund.

I believe Vanguard charges a $10 annual maintenance fee. A discount broker would likely charge you about $10 per trade, and so they are identical if you make exactly one trade per year.

Good luck,
the hendrys
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Thanks for such a quick reply, the.

Over at www.vanguard.com I noticed that the fee schedule appears to be more like $20/year at first. Correct me if I'm wrong, but there is a custodial fee of $10 charged on the account until it reaches $5000, and then a fund fee of $10 until the account reaches $10,000. The reason I think I may be reading this wrong, is that the discussion here on this board earlier was whether they charged until 5,000 or 10,000, when the answer appears to be both.
I quote from the Vanguard site:

IRA Custodial Fees
Vanguard assesses a $10 custodial fee each year—in addition to any fund-specific fees—for any Vanguard IRA mutual fund account with less than $5,000. However, if you maintain a total Vanguard mutual fund balance of $50,000 or more, custodial fees are waived. Assets in a Vanguard Variable Annuity Plan will count toward this $50,000, but not assets in an employer-sponsored retirement plan or a Vanguard Brokerage Services (VBS) account. Please note: custodial fees are assessed in either June or December, depending on when your account was opened.

--end quote

That alone sounds kind of double-speaky to me. They charge for funds up to $5,000....but if you have more than $50,000 the fee is waived? Shouldn't it have been waived $45,000 dollars back?
I assume that it means that if you have a total of $50,000 in any number of Vanguard accounts, any accounts with less than $5,000 aren't charged.

Then it asks you to pick your fund and it says this:

Vanguard 500 Index Fund Investor Shares
Shareholders are charged an annual $10 account maintenance fee, which is paid directly to the fund. This fee is waived for accounts with balances of $10,000 or more.

--end quote

So you have to get to $10,000 before this one goes away. And what does that bit "which is paid directly to the fund" mean? It's a Vanguard fund, so it's paid to the same place as the custodial fee, no?

So what if I opened a Datek account (the 10 free trades type deals usually don't apply to IRAs) and paid 10 bucks a year (buying $2000 worth of Spyders every year), then when the account clears the $10,000 mark moving it over to Vanguard....would they charge me anything for that?
One thing I know is that Vanguard doesn't require that your fees come out of the account, i.e. you can pay for them separately, so they don't reduce the amount invested. I can't figure out from Datek whether they allow for that or not.

now my brain hurts....I guess that's what I get for putting this off until April 9th.

If anyone actually read this far, thanks.
Mike
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Vanguard assesses a $10 custodial fee each year—in addition to any fund-specific fees—for any Vanguard IRA mutual fund account with less than $5,000.

The low balance fee does not apply to IRAs, so it is still a total of $10 (not $20) that you would be paying once a year.

the 10 free trades type deals usually don't apply to IRAs

At Datek, they do. I got 10 Free trades in each of my 3 accounts when I transferred to Datek. One account was my Roth IRA, Another was my wife's Roth IRA, and we have made a trade in each of a 3 accounts. I think you are right that most brokers do not apply special deals to IRAs, but Datek does (or at least they did 2 months ago).

Good luck,
the hendrys

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P.S. Datek commission fees do come out of your account. So if you invest $2000 and make 1 trade to buy the spyder, you are really only investing $1990 (for example).

the hendrys
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I've been planning on putting 2000 dollars into a Roth IRA (and continuing that every year I can afford it). Whenever I talk to people about it, they recommend going with Vanguard saying they've got lower fees, etc...and that the S&P 500 index is always a good bet. But my plans were to open an IRA account with an online broker and just buying $2000 worth of Spyders. Would that not be the same thing?

Not really. http://news.morningstar.com/news/Wire/0,1230,3236,00.html shows how VFINX and SPY stack up for one(Note pre-tax VFINX is the winner). Secondly, most brokers would require you buy a whole number of shares while a mutual fund is naturally bought in fractional amounts, like could I buy .1 shares of BRK.B? I don't think so.

Am I missing something? Does Vanguard offer some other service that I wouldn't get from a discount broker? Do the online brokerages take some extra money that I don't know about?

Aside from the above not really. There may be small fees initially although keep in mind what drags can happen with an ETF vs the open-end fund that has a wee bit of active management. From http://news.morningstar.com/doc/article/0,1,3305,00.html :
"Another question from Scott Cooley:

Also, in looking at daily performance numbers when a stock enters the S&P 500, it is clear that some managers are buying a stock before it formally enters the index. (We saw variations of as much as 10 basis points in various S&P 500 index funds' returns when Yahoo was added to the index.) What's Barclays' position on this?

Some S&P 500 indexers seemingly put on a rather loose interpretation of the term "full replication." Some own different share classes of the index components and are, as you noted, quite aggressive on the add/delete front. " also http://www.efficientfrontier.com/ef/900/ts.htm has a bit on this.

Just a couple of footnotes,
JB
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I try to be a good fool

This isn't the church. No groveling permitted!!!

;-)

If you put the $2000 in all at once, there's no practical difference between them. With Vanguard, there's also no cost to sell or change between funds.
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So you have to get to $10,000 before this one goes away.
Yes
And what does that bit "which is paid directly to the fund" mean? It's a Vanguard fund, so it's paid to the same place as the custodial fee, no?


No. The custodial fee is paid to the part of Vanguard that manages all your accounts, runs the website, prints statements, etc. That's not considered part of any mutual fund. Its income, assets, and expenses are separated from the funds' unless there's a reason for a transfer between them (fund pays recordkeeping fee to them, for instance).

The account maintenance fee goes into the fund's assets -- the amount that is mutually owned by all the investors and which helps set net asset value.
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TheHendrys wrote:
The low balance fee does not apply to IRAs, so it is still a total of $10 (not $20) that you would be paying once a year.

Unfortunately, that's not accurate. You're accurate about this: the low balance fee for accounts under $2500 doesn't apply to IRAs. But, the poster was talking about the account maintenance fee which does indeed apply for IRA balances under $10,000.

I got 10 Free trades in each of my 3 accounts when I transferred to Datek. One account was my Roth IRA,
Is that legal? IRS Pub 590 says compensation for opening an IRA is limited to items of value under $10 or so (limit may be higher based on the size of the account).

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Is that legal?

Shhhhhh.

I don't know, but I'm not complaining or turning myself in. :)

Good luck, all
the hendrys
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<<<IRA Custodial Fees
Vanguard assesses a $10 custodial fee each year—in addition to any fund-specific fees—for any Vanguard IRA mutual fund account with less than $5,000. >>>

Here's the rub, IN ADDITION TO ANY FUND SPECIFIC FEES. Custodial fees may be waived but the 12(b) and other management fees are still present. That's where Vanguard makes the statement of 0.18% expense charge for the S&P 500 index. That sounds small for accounts less than 10k ($18), but get up to 1M ($1,800) and it's a little rediculus for basically doing "nothing".

Don't know if there are any similar fees for holding SPY.

JLC
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JLC wrote about Vanguard:
Custodial fees may be waived but the 12(b) and other management fees are still present. That's where Vanguard makes the statement of 0.18% expense charge for the S&P 500 index. That sounds small for accounts less than 10k ($18), but get up to 1M ($1,800) and it's a little rediculus for basically doing "nothing".

Vanguard does not charge 12(b) fees. A 12(b) fee is a deferred load paid to a broker. Vanguard handles its own marketing, sells direct and doesn't pay kickbacks to brokers.

Vanguard agrees with you that 0.18% is steep when you get to larger accounts. That's why when you reach one threshold (somewhere like $50k - $250k) the fees get dropped to 0.12% ("Admiral class shares"). Then when you reach $1 million, the fees get dropped to 0.06% ("Institutional class shares"). And when you reach $200 million, the fee is only 0.03%.

Of course, only institutions are likely to reach $1 million in the fund (hence the name of the class).

The fund has to buy and sell shares whenever you order them to, process the mail coming in and out, print statements, run the website, rebalance all their holdings whenever S&P changes the index, etc. It's not "nothing" and it does add value.

SPY has the same expenses as Vanguard, even though they don't have to handle customer service, purchases, redemptions, or statements.
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Author: seldrick Date: 4/9/01 9:17 PM Number: 29000
I'm 26 and finally have enough money to my name to put some of it away. I've been planning on putting 2000 dollars into a Roth IRA (and continuing that every year I can afford it). Whenever I talk to people about it, they recommend going with Vanguard saying they've got lower fees, etc...and that the S&P 500 index is always a good bet. But my plans were to open an IRA account with an online broker and just buying $2000 worth of Spyders. Would that not be the same thing?

In reading through the responses on this I didn't notice several things:

1) There are hidden costs in Spyders. I think I remember the equivalent expense ratio to be around 0.14%. When you add trading commissions, I think the costs between SPY and FVINX are about the same.

2) If you are using Spyders, each year, when you add your $2000, you will pay the $10 transaction fee to buy more spyders.

3) What about dividend reinvestment. I know that dividend reinvestment is free at Vanguard, but I don't know about the brokerage.

4) If you ever want shift some of your SPY funds to something else (ie, bonds), you will pay a commission at the brokerage, while these types of shifts (ie, a bond fund) are free at Vanguard.

Russ
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Greetings russ,

1) There are hidden costs in Spyders. I think I remember the equivalent expense ratio to be around 0.14%. When you add trading commissions, I think the costs between SPY and FVINX are about the same.

No, it is just people forget what SPY really is: It is a TRUST that has expenses just like alot of other investment products and the S & P 500 DOES change quite a bit, eg there are 8 changes so far in 2001(Or do we not realize most of these things?):

http://www.spglobal.com/indexmain500_changes.html shows them.

Also, SPY has a prospectus that I wonder how many people read before jumping in. The end costs are likely nearly equal due to Vanguard's account maintainence fee that will stick around on an IRA for at least a few years(Since it applies for all accounts with balance under $10,000).

2) If you are using Spyders, each year, when you add your $2000, you will pay the $10 transaction fee to buy more spyders.

One thing to keep in mind is can you nail $2,000 in a whole number of SPY shares? (At $118.13 now you could buy 16 shares of SPY which is $1890.08 leaving $109.92 unless you use something like buyandhold.com or sharebuilder that do fractional shares while a mutual fund's transactions is almost always done in whole dollar amount and fractional shares are the norm.)

I find it surprising how IVV seems to get almost no mentions although it is a cheaper ETF with expenses of .0945% if those expenses tell the whole picture(Which they don't because of tracking error that an index fund can have along with open-end funds possibly deviating a bit through futures and trading techniques that may add value or backfire depending on the fund in question).

JB
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Author: jbking Date: 4/12/01 2:19 PM Number: 29080
Hi jb,

I find it surprising how IVV seems to get almost no mentions although it is a cheaper ETF with expenses of .0945% if those expenses tell the whole picture(Which they don't because of tracking error that an index fund can have along with open-end funds possibly deviating a bit through futures and trading techniques that may add value or backfire depending on the fund in question).

I don't understand it either, but IVV is very thinly traded compared to SPY. Volume, yesterday, was 692,800 IVV compared to 9.233 million SPY. Maybe it's just because SPY has been around longer.

Russ

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