Book Review: All About Asset Allocation

All About Asset Allocation (McGraw-Hill, Sept 2005, 256 pp), written by Rick Ferri, CFA, seeks to educate individuals about the fundamentals of asset allocation and why implementing a sound strategy is key to long-term success.  Ferri first covers the basics of asset allocation, risk, and diversification, explaining why asset allocation accounts for largely 90% of one's portfolio performance (that is, market timing and security selection aren't nearly as significant).  He then goes on to break down each asset class and specific index funds to choose to represent such classes.  Ferri highly recommends low-cost index funds and explores US equity, international equity, fixed-income, real estate, and alternative investments (e.g. stamps, artwork, collectibles, commodities).  Finally, he speaks to managing and building a sound portfolio, realistic expectations, behavioral psychology and its influence on investment decisions, and fund and financial advisor expenses.

In the end, Ferri succeeds in his core mission to convince individual investors to ignore most of the "advice" spewed by Wall Street and CNBC and instead rely on a sound systematic and non-emotional portfolio of diversified index funds that explore all asset classes held in appropriate proportions based on age, goals, and risk tolerance.  He also provides a list of funds to look at near the end of each chapter.  Having said that, frankly, I found the book a bit boring as it is probably more well-suited for a novice investor.  He explains concepts in layman terms so that anybody can understand - a positive for most, but I found that it almost too simplistic and not terribly interesting.  Ferri simply stated things I already knew and didn't really add to my knowledge; it simply served as reinforcement (which certainly isn't a bad thing).   One portion where he did go above and beyond a typical book, however, is describing the asset allocation of fixed-income in quite some detail.  That certainly is a welcome addition.  Ferri stresses the importance of holding asset classes that have little correlation and then re-balancing; backing up these assertions with illustrations as to how this strategy increases overall long-term returns.

For an individual investor who wants an easy to read guide on how to develop and stick with a sound asset allocation, All About Asset Allocation is a great choice.  While I found it generally elementary in nature and simply reinforcing concepts I already knew, it certainly is a nice change of pace to read an author who holds a similar investing philosophy as I do.  I'd certainly recommend reading the book for those just starting out, individuals who want to simplify their investment approach and lower costs, or those who want confirmation that their portfolio currently covers all appropriate asset classes in reasonable percentages.

Rating: 4 out of 5 stars

Market Timing using Exponential Moving Averages

Chartists and momentum investors typically look to moving averages (MA) as signals of market movement trends.  As such, even if you don't use such indicators, it is helpful to understand them as other traders certainly do pay attention to them and act on their signals.   Moving averages are lagging indicators, meaning they are used to identify pre-existing trends rather than predict future movements.  For example, when a stock price is above its 50-day MA, it is seen as being in a uptrend and many investors choose to go long in such circumstances.  On the other hand, once a price is below its MA, it is seen as being in a downtrend.

While one MA alone gives a generic sense of a price's trend, more commonly two are used in tandem.  As a short-term momentum indicator, the 12- and 26-day MAs are frequently used.  When the 12-day average is above the 26-day it is seen as a bullish phase with positive momentum going forward.  Conversely, when the 12-day passes below the 26-day, it indicates negative momentum.  These two are also used to create more complex indicators such as the Moving Average Convergence Divergence (MACD).

(Source: StockCharts.com)

For example, in the above chart for Google (GOOG), the crossover of the 12-day indicator below the 26-day signals a negative trend and potential sell signal.  On the other hand, the MACD signals a slight buy (although it being in negative territory is usually seen as slightly bearish).  As you can see, different indicators can say opposite things about the same stock at the same time.  Thus, looking at just one in a vacuum doesn't seem wise as it's best to have a complete picture.  Volume is another key aspect that chartists tend to look at to see if a movement is legitimate or not.  (Note that I do not consider myself a chartist or technical analyzer.  I find it interesting and appreciate the sentiments learned by such analyses, but prefer to generally rely on fundamentals).

For long term trends, it is more appropriate to use the 50 and 200-day moving averages.  The same logic applies as the above, but these signals are much less frequent and are used to identify significant bear and bull markets.  There are two types of moving averages - simple and exponential.  While the SMA gives the same weight to all the data within the range, the EMA gives more weight to the latest data.  Thus, EMAs reacts slightly faster to price changes than their SMA counterparts.

The Strategy

An interesting market timing strategy is to use the long-term EMAs as signals to enter and exit the market as key points.  Since they're so long-term, the signals are not very frequent and it's quite simple to follow.   The purpose of such a strategy is to avoid the worst downturns while being able to maintain market positions during bullish phases.

I tested a strategy that uses the 50-, 100-, and 200-day exponential moving averages.  Using a $10,000 investment in an S&P 500 ETF (SPY), I went back to 1993 to start the backtest and went through the open on 2/16/10.  My strategy was quite simple: sell when the 50-day EMA moves below the 200-day EMA and buy when the 50-day EMA moves above the 100- or 200-day EMA.  The reason I added the 100-day for the buy signals instead of simply using the 200-day is that in extreme bear markets, the 200-day is far too long of a laggard.  Investors would then miss most of the upswing (as what would have occurred in 2009).  Plus, I think being in the market more often than not is a reasonable strategy and selling only when downward trends are clear is advisable. 

Using the above strategy, there were only six roundtrip transactions in 17 years.  That is about one buy and sell every three years.  As you can see, this doesn't require that much monitoring and keeps you in the market for the majority of the time.  I didn't calculate T-bill rates or cash equivalents when the strategy called for being out of the market, so it is inherently at a disadvantage.

Results

Of the seven transactions (one more than previously indicated since I'm including the start and end points), two were marginal losers in the amounts of 3% and 5%.  The other five accounted for gains of 1%, 110%, 22%, 58%, and 14%.  

EMA Timing

Buy Date	Buy Price	Shares	Cost Basis	Sell Date
1/29/1993	43.94	227.58	$10,000.00	4/13/1994
8/18/1994	46.45	218.42	$10,145.65	12/9/1994
1/17/1995	47.03	209.23	$9,839.86	10/5/1998
10/30/1998	110	187.71	$20,648.43	10/18/2000
3/18/2002	116.67	216.00	$25,200.48	4/11/2002
5/1/2003	91.9	259.93	$23,887.21	1/2/2008
6/1/2009	94.77	397.50	$37,671.09	2/15/2010

Sell Price	Sell Value	Difference	% Net Change	Cumulative
44.58	$10,145.65	$145.65	1.46%	1.46%
45.05	$9,839.86	-$305.79	-3.01%	-1.60%
98.69	$20,648.43	$10,808.57	109.84%	106.48%
134.25	$25,200.48	$4,552.04	22.05%	152.00%
110.59	$23,887.21	-$1,313.27	-5.21%	138.87%
144.93	$37,671.09	$13,783.88	57.70%	276.71%
108.04	$42,945.92	$5,274.83	14.00%	329.46%

Cumulative: +329% 

The S&P 500 was up 146% over the same period.  If you had invested $10,000 in 1993 and used the EMA strategy, you'd have $42,946 today, while buy-and-hold would have left you with $24,600.  Note that the above only captures capital appreciation and excludes dividends.  Thus, the gains are actually greater than stated in both circumstances.  As you can see, this timing strategy had some impressive outperformance over this period which encompassed one of the greatest bull markets of all time and two large bear markets in 2000-2002 and 2008.

Source: investingguy.blogspot.com

Red = S&P 500 buy and hold

Blue = EMA Timing

Similar to other market timing strategies, one can plainly see that it trails buy and hold in continuous bull markets (1993 - 2000).  This is no surprise since being out of the market when it's up virtually every month never helps performance.  Despite this, since EMAs indicate past trends, there were only thee very short periods through 2000 that it indicated to be out of the market, and thus the strategy captured the majority of the gains.

Another performance figure that I like to examine to measure volatility and risk is the year-by-year values.  Of the five years in this sample range wherein the market had a negative return, the EMA strategy outperformed in four of them.  In the two worst years, the EMA considerably outperformed.  In 2002, the S&P was down 21%, while the EMA strategy called for being in the market only about a month the entire year and thus was down a mere 5%.  In the disastrous 2008, the S&P sunk 34%.  The EMA strategy signals a sell right at the beginning of the year and never got into buy territory, so it remained unchanged.  See below for the year-by-year performance with the better performing strategy in green, if applicable.

Year	Buy and Hold	EMA     Strategy
1993	6.03%	6.03%
1994	-5.11%	-10.22%
1995	30.22%	30.22%
1996	16.92%	16.92%
1997	23.62%	23.62%
1998	23.48%	12.29%
1999	15.20%	15.20%
2000	-5.55%	-3.94%
2001	-16.04%	0%
2002	-21.43%	-5.21%
2003	29.73%	21.60%
2004	6.91%	6.16%
2005	5.87%	5.87%
2006	11.29%	11.29%
2007	1.65%	1.65%
2008	-34.44%	0%
2009	37.76%	18.57%
2010	-3.85%	-3.85%

_______________________

  Total       +146%         +329%

On the other hand, during years the market performed very well, the EMA strategy sometimes underperformed.  There were five years of greater than 20% gains: 1995, 1997, 1998, 2003, 2009.  The EMA strategy got all the gains of '95 and '97.  It captured about half of that in '98, 2/3 of it in 2003, and half in 2009.  Since the strategy is a laggard, if the market was up in a year following a bull market, the EMA never signaled a sell and then captured all the gains.  If, however, the run-up was after a large correction as those that happened in 2000-2002 and 2008, then it took some time for the buy signal to be initiated and the EMA strategy missed some of the uptick.

Conclusion

As a long-term trend indicator, the 50-, 100-, and 200-day exponential moving averages do signal momentum shifts in the market.  This simple strategy had an impressive outperformance of the market during this time period, but there is certainly no guarantee that such a pattern will continue to exist.  Having said that, I think this strategy actually makes more intuitive sense than Sy Harding's Seasonal Timing Strategy (that I explored in this post) and requires very few transactions over a long period.  Its key to success is exiting the market near the relative beginning of huge downturns.  

Furthermore, this strategy is successful during periods of high volatility, while during a sideways market, it would simply signal nothing and thus is the same as buy-and-hold.  It is for that reason, that I like it more than many other timing tactics.  Instead of trying to enter and exit the market frequently at opportune times, this approach only acts when trends have been clearly established.  

Rather than taking these signals without reservation and having them dictate the complete selling of your equity position, I personally could see risking a bit less and selling about half of your equity position and investing in bonds with that half.  That way, it's a combination of a buy-and-hold and market timing strategy.  While no market timing strategy has really shown to outperform the market in all conditions over a lengthy period of time, those risk averse investors who cannot stomach large downturns might consider this simple EMA timing strategy (or simply reduce their equity percentage).

2010 Sector Outlook: XLK, XLV, XLU, and XLE

Technology, health care, utilities, and energy appear to be the sectors most poised for outperformance of the market at large in 2010. Although nobody can effectively and reliably predict the sector movements at any given time (and sector rotation strategies are a high-risk, high-reward proposition), the current macroeconomic factors at play lead me to believe that these four areas will perform well in 2010. The corresponding Select Sector SPDR ETFs are XLK, XLV, XLU, and XLE. Here is a breakdown of these four industries.

Technology

Although technology had a huge upswing in 2009 (up 54%), I still think there is room for continued upside as the valuation on a forward P/E basis is still reasonable. The close of XLK today was 20.84 - a level in the trading range of 18.3 -22 that XLK was in from the beginning of 2004 until September 2006. XLK is down about 9% YTD, making it a good entry point at this time in my mind. Although this move has been on some considerable volume, which causes me some concern as high volume often indicates that a move is legitimate. Nevertheless, I see technology as the single most important catalyst in the worldwide economy for continued recovery and growth. And I'm cautiously optimistic that we will see that growth this year. On top of that, technology typically performs well in inflationary periods, which is what many expect us to see in the next year or two. With its top holdings as Microsoft (MSFT), Apple (AAPL), IBM, AT&T (T), Cisco (CSCO), and Google (GOOG), technology has some major innovators and stalwarts that are key for our economic well-being. And with forward P/Es averaging about 13.5 versus a current P/E for the market at large at 16.2, they seem to be a bit undervalued.

The are, however, many negatives. For one, it seems like most pundits and investors are extremely bullish on tech and this oftentimes serves as a contrarian indicator. Likewise, in typical stock market cycles, technology leads the way at the beginning of the bull market, but only modestly outperforms six months after the recession. From a technical perspective, as you can see in the chart below, the MACD signal is showing "sell" with both the EMA-26 and EMA-9 in negative territory, often also seen as a bearish sign. In addition, the 20-day moving average just pierced through the 50-day moving average from the top (on fairly high volume as I stated earlier), which also signals a "sell." If I was going only by the technical analysis, I would be a complete bear on tech. However, I prefer to analyze the fundamentals and use that to dictate my investment choices. I am certainly not a chartist or momentum trader, although I like to point the technicals out to those who find it intriguing. Ned Davis research also points to the fact that the breadth is weakening, the seasonality trade has ended, and that production from a factory perspective for high-tech machinery remains quite weak.

Despite all these negatives, the valuation of the sector and ability of the aforementioned companies to spark an economic rally and innovation war with one another, leads me to think that XLK will be a good sector to own during 2010. Tech is always a fairly volatile industry, though, so it's certainly not for the faint of heart and is a bit riskier of a proposition than perhaps other options. (Disclosure: I picked up some XLK today, 2/4/10 with a limit order at 20.94.  Sold it on 5/11/10 at 22.93 for about a 10% gain in a bit over two months).

(Source: StockCharts.com)

Health Care

This sector will benefit from increased inflation and an aging population in the upcoming year. Although the one trump card in this sector is certainly any changes coming out of Washington, which may affect the profitability of certain areas. But such a proposal out of Congress seems unlikely at this point based on what has been passed and the proposals currently floating around that have ample support. Another pause for concern is the ending of patents for several major blockbuster drugs in the next couple years. The points that make this sector really attractive to me is its defensive nature in times of economic uncertainty, its undervaluation on an absolute basis compared to all other nine sectors (per Ned Davis Research), its ability to deliver sizable dividend yields, and the amount of cash on hand. XLV's top holdings include Johnson and Johnson (JNJ), Pfizer (PFE), Abbott Labs (ABT), Merck (MRK), Amgen (AMGN), and Bristol-Myers Squibb (BMY).

XLV is flat YTD and was up about 20% in 2009. It's 20-day MA is still above the 50-day MA signaling a bullish phase (although it's teetering), while the MACD that is a shorter-term indicator is in a slightly bearish. Not too much to glean from the technical chart, but the fundamentals to me signal a buy. XLV closed at 30.88 today.

(Source: StockCharts.com)

Utilities

Utilities as a sector is quite often defensive and boring; but that is why I like it. Its volatility isn't that great and many of the companies offer solid dividends. The demand for utilities will probably remain relatively weak given the state of the housing market, but with energy prices likely increasing and investors seeking undervalued, dividend-oriented plays, I think utilities and XLU is a solid bet for 2010. They only returned about 10% in 2009 and are down about 7% YTD, but I really expect them to be an attractive place for many risk-averse investors.

Standard & Poor's and Ned Davis Research appear to be more negative on this sector that I am, though, so I certainly will admit it if I made a wrong call. S&P argues that "an ongoing domestic economic recovery will continue to fuel cyclical outperformance at the expense of this counter-cyclical sector" which is certainly a valid stance. Utilities tend to perform best in the middle of a stock market bear, certainly not after a large upswing in the market. However, going by this same logic one would be inclined to snatch up consumer discretionary names, and I think our economic experiences in the past two years and the continued poor employment market are going to lead to a scared consumers. They certainly can sacrifice luxuries, but will continue to live and pay utility costs. Similar to S&P, NDR has a list of sector negatives such as "long-term overbought conditions," "excess capacity," "low beta," and "weaker pricing becoming a concern." However, they still have it at marketweight based on shrinking credit spreads despite the fact that valuations suggest they're not at bargain prices anymore. From a technical perspective, the signals and money flow are in a bearish phase. This sector, along with tech, are my two riskier picks.

(Source: StockCharts.com)

Energy

Commodities, and oil in particular, have had a rough couple weeks, but since I believe the global bull market will continue, I have to think that oil has some upside. Crude oil supplies are relatively high from a historical perspective, but it appears that energy is going to prove vital in many of the infrastructure projects being targeted by various governments. Emerging markets certainly will have increased demand for energy in the upcoming years (and demand in the US should have an uptick with the improved economy) and as a group, the names in the energy field are trading a bit under their valuation. The MA indicators are in the bullish phase, while the MACD is bearing as is the 3-day cash flow. XLE's largest holdings include ExxonMobil (XOM), Chevron (CVX), Schlumberger (SLB), ConocoPhillips (COP), and Occidental (OXY).

(Update 4/27/10: I would no longer own the energy sector as a result of the BP oil spill that was reported in the last few days.  As new information comes and situations change, it's important to be flexible with your investments.  You can't marry any particular position and when something disastrous like an oil spill occurs, that certainly makes the sector a huge question mark in the short-term.  I personally don't feel that the risk is appropriate to take on and would close my position.   This could be bad...really bad.  So, I'd get out personally.)

(Source: StockCharts.com)

Conclusion

In the end, we'll see at the end of this year if these were good picks or not. Certainly, I re-assess as market conditions and macroeconomic factors at play change (as they undoubtedly will), but I think these four are a good starting point and I will happily admit it if I am off-base. It will be interesting to see how these perform. On a separate note, what would I avoid in 2010? Treasuries. Gold also seems set for a pull-back after a monstrous 2009, even if that's contradictory to my above statements regarding inflation.

As I have said in previous posts, I don't think market/sector speculation and investing in non-diversified offerings is the way to go for the vast majority of investors. However, I think it's reasonable to make some gambles (and yes, they're educated gambles) with 5-10% of your assets if you have the necessary time and knowledge, and enjoy performing such trades.

Here are the closing prices as of 2/4/10 for the four aforementioned ETFs as well as a S&P 500 Index Fund. Performance will be updated sporadically and compared to the return of the S&P at large:

XLK: 20.84

XLV: 30.88

XLU: 28.99

XLE: 54.29

SPY: 106.44

Updated Performance:

 

Sector	Start Price	Current Price	Change	Through
XLK	20.84	25.19	+20.9%	Year end
XLV	30.88	31.50	+2.0%	Year end
XLU	28.99	31.34	+8.1%	Year end
XLE	54.29	68.25	+25.7%	Year end
S&P 500	106.44	125.75	+18.1%	Year end

This further illustrates how hard it is to predict sectors.  The cumulative average of the four sectors was +14.2%.  However, this doesn't include dividends.  I really should like them up to make the comparison truly valid but don't have time right now.

Fidelity Strikes Back! Reduces Commisions to $7.95 and Offering Free Trading on 25 iShares ETFs

Well, that didn't take long. Fidelity Investments slashed its commissions for trading to $7.95 for all customers and is now offering 25 extremely popular iShares ETFs without trading fees. This is clearly in response to Schwab's similar announcements in December. The increased competition and offerings are really a positive occurrence for investors and I certainly welcome the changes.

The free ETF portfolio spans all the necessary asset classes to create a low-cost diversified portfolio - from small-cap value in US equities to international emerging markets to many fixed income such as the aggregate bond index, TIPS, muni bonds, and investment grade bonds. The ETFs are much more extensive than the commission-free ones from Schwab. Not only that, but since they are the BlackRock iShares products instead of the brokerage's own product (as Schwab did), they have very high volumes and a much larger pool of assets, which typically leads to smaller bid-ask spreads. On the other hand, many of the iShares ETFs' expense ratios are higher than the Vanguard and Schwab equivalents. For example, the Emerging Markets ETF clocks in at 0.72%, while VWO is 0.27% for essentially the same product. In the end, though, the difference is fairly negligible for most of the ETFs so shouldn't be a grave concern.

Here's a screenshot from Fidelity's website of the various ETFs offered sorted by category:


It doesn't say how long the offer is going to last, but I'd expect the reduced commissions will be for quite some time or else there would be some serious backlash. Another website is reporting the free trading for the iShares ETFs will be for "at least three years."

This is great news for the owners of more than 12 million Fidelity brokerage accounts. Kathleen A. Murphy, president of Personal Investing at Fidelity, released a statement:

Fidelity has partnered with the leading ETF provider in the market to bring investors the best brokerage offering in the industry today. Simply put, we’re offering the broadest selection of commission-free ETFs from the undisputed ETF leader, and it’s only available through Fidelity. When you combine this new initiative with the fact that Fidelity offers the largest funds supermarket in the industry, sophisticated online investment planning tools and extensive, institutional-grade stock research, you can see our relentless focus on providing every advantage to Fidelity customers so they can be more successful investors in today’s fast-paced and fluid market environment.

Michael Latham, Head of US iShares, BlackRock, expressed his excitement about the agreement:

We’re very excited that Fidelity, a proven leader in the retail brokerage industry, is promoting ETFs and furthering iShares availability to investors. The 25 iShares Funds that Fidelity chose to include in this offering represent leading indices in each asset class and can be used as the foundation for building an investor’s portfolio. Fidelity is strongly committed to investors, and their decision to offer iShares is a great validation of ETFs as a mainstream investment.

In any event, now it's even easier to create a great portfolio with Fidelity and these ETFs are great indexed, low-cost, high-volume ones to choose. My post that I wrote 10 days ago, "Comparison of Vanguard, Schwab, and Fidelity Fund and ETF Offerings," needs an update already! I used many iShares ETFs for the "alternate" column, though, so clearly you can tell I hold them in high esteem. In the end, there is really no excuse to pay exorbitant fees with any broker. They all have ample offerings with low-costs such that investors can easily create a complete portfolio with an appropriate asset allocation for their age, risk, and objectives. The increased competitive, low-cost, diversified offers from various brokerage houses is certainly a welcome development in the brokerage landscape.

Comparison of Vanguard, Schwab, and Fidelity Fund and ETF Offerings

Vanguard historically has been the flagship low-cost index provider and offers nearly every imaginable index fund possible, but others are now giving Vanguard a run for its money. So, I thought it would be a good time to list fairly equivalent funds from three of the largest 401k and IRA providers: Vanguard, Schwab, and Fidelity. Note that I am attempting to pick the lowest-cost index fund with no loads and no transaction fees that appear most frequently in lazy portfolios. Schwab, along with their own funds, offers 2,000 choices without any loads or transactions from the OneSource list. (An easier place to navigate a sub-set of those funds is their OneSource Select list). Similarly, Fidelity has No Transaction Fee Funds (NTF) to choose from as well as their low-cost Spartan line of funds.

Comparison of Mutual Funds

Following is a list of fund offerings in table form for easy comparison, listing the ticker symbol, net expense ratio, and minimum investment. (I used the lower share class, but those with a large amount of assets are typically charged a lower expense.) Update 10/6/2010.  Vanguard has reduced the minimum amount required to invest in its Admiral Shares from $100,000 to $10,000, making this share class more available to the majority of individual investors.  Due to this change, I have updated the chart with applicable expense ratios.  I will go in general order from the most commonly held funds to the least, but all are fairly common. Also, I'm choosing the fund I personally would choose to fulfill that particular asset class based on the offerings, but your opinion may differ. If there is an "OR," the first one listed is slightly preferred, in my mind.  Note that due to the competitive pressures, these three brokerage firms now offer a varying degree of commission free ETFs.  These cover a wider array of asset classes, so if you're interested instead in investing in ETFs, skip to the next section.

Note I used Vanguard's admiral share class expense ratio when making this determination, which requires a $10,000 minimum investment.  On the other hand, I used Fidelity's investor class which also requires a $10,000 minimum. Their Advantage class has lower expense ratios, but requires a minimum of $100,000 which is out of range for most investors so I thought I would make it a more fair comparison. While costs and expenses are important, note that all three firms offer some of the best expense ratios available on the market.  One should not fixate or stress out about a tiny difference in expense ratio as long as what you are paying is minimal and near the market leader.

For example, the 0.02% difference between VTSAX (Vanguard Total US Stock Market Admiral) and SWTSX amounts to $2 a year in expenses for every $10,000 invested.  $2/year?!  The tracking error would most likely be a much more significant variable than the $2 difference.  If I had money with Schwab already, I wouldn't hesitate at all to invest in SWTSX.  And many of these track a slightly different index, so that would be of graver concern.  As another example, the fact that VGTSX contains emerging markets, while SWISX is only developed (as indicated in the footnotes) will prove to be more of a predictor of after tax performance than the tiny difference in expenses.  It's certainly not worth the effort to add another brokerage firm in that case.  While previously I've stressed that seemingly small differences in expense ratios compound to significant amounts over the course of several years, that's typically when comparing index funds to active funds, which often have 1%+ expense ratios.   In any event, here's the comparison chart:

"Equivalent" Mutual Funds Offered by Vanguard, Schwab, and Fidelity

Asset Class and Category	Vanguard	Schwab	Fidelity$
Total US Stock Market	VTSMX 0.18%@  0.07%+ $3,000	SWTSX 0.09% $100	FSTMX 0.10% $10,000
International Index Fund	VGTSX* 0.34% 0.20%` $3,000	SWISX 0.19% $100	FSGUX 0.24% $10,000
Total Bond Market	VBMFX 0.22% 0.12% $3,000	RidgeWorth Intermediate Bond I - SAMIX# 0.32% $2,500	FBIDX 0.22% $10,000
REIT	VGSIX 0.26% 0.13% $3,000	Cohen & Steers Realty Shares - CSRSX 1.00% $10,000 ------- OR SWASX 1.05% $100	FRXIX 0.26% $10,000
Inflation-Protected Bond	VIPSX 0.25% 0.12% $3,000	ACITX 0.49% $2,500 -------  OR SWRSX 0.50% $100	FINPX 0.45% $2,500
Small-Cap	NAESX 0.28% 0.14% $3,000	SWSSX 0.19% $100	FSSPX 0.31% $10,000
Small-Cap Value	VISVX 0.28% $3,000	No good equivalent; use small blend	No good equivalent; use small blend
Emerging Markets	VEIEX 0.35% 0.22% $3,000	SFENX 0.61% $100	FPEMX 0.33% $10,000

Information is accurate as of 1/21/2010
Updated Fidelity funds 2/12/2012

Notes: 
$ Fidelity Investor Share class (<$10,000 investment) expense ratio is listed; Advantage Share Class (<$100,000 investment)has lower expense ratios is not included.
@Vanguard investor share class (<$10,000 investment) expense ratio is listed first for each asset category
+Vanguard Admiral Share class (>$10,000 investment) expense ratio is listed second for each asset category, if available (note: the ticker symbol for this share class is different than the one listed.  See this page for details.)

*Vanguard's International Fund is the only one the includes Emerging Markets (22%). Schwab and Fidelity's index funds are only developed nations. Thus, a more appropriate comparison would be Developed Markets Index, VDMIX (0.29% ER). However, VGTSX is recommended over VDMIX for a Lazy Portfolio, so it is included instead.

`The Admiral Share Class of Vanguard's Total International Fund is supposed to be available in Q1 2011, unveiled with other changes to the fund, including tracking an index that includes international small-caps as well as Canada and Israel.
#Schwab's own Total Bond Market Index, SWLBX, is not used here for a couple reasons. First, it has a fairly high 0.55% net expense ratio (Schwab's weakness is definitely bond funds). Secondly, looking at the past performance, it clearly wasn't tracking the index it was supposed to (Barclays Capital U.S. Aggregate Bond index.) Take a look at the comparison of SAMIX, VBMFX, and SWLBX in 2008 here. There is certainly some variation between SAMIX and VBMFX, but SWLBX isn't even closely correlated with those two. For the year of 2008, the Schwab bond fund was down nearly 9%, while the other two were up just over 1%. Investigating it further, apparently a law firm is investigating the fund and its managers for "possible misrepresentations, omissions and/or breaches of fiduciary duties" as it was investing in high risk CMOs as opposed to the stated objectives. Certainly, past performance is not indicative of future results, but any fund manager that made that mistake (whether purposefully or not) should not be trusted with your money. Fidelity's diversified total bond fund, FTBFX (ER = 0.45%) also had a disastrous 2008 (for a bond fund), down a whopping 15% at one point (even worse than the Schwab fund!). Thus, it looks like Schwab is in good company and I'd avoid the Fidelity fund as well.

Fund and ETF Comparison

Here's a list of the same funds listed above (investor status; admiral status is cheaper) next to the ETF offerings from Vanguard, Schwab, and Fidelity/iShares with the net expense ratios listed.  I have listed an alternative ETF as well where the choices are slimmer; these will be subject to your standard trading fee.  (Update 5/5/2010: Vanguard Brokerage Service clients can now trade all 43 Vanguard ETFs commission free. This is in addition to the news that Fidelity customers can trade 25 popular iShares ETFs commission free, so your choices are much more widespread now for commission free ETF trading. And Schwab has its own 11 funds to choose from.)  Note that the Schwab ETFs are newer so haven't had the time to acquire as many assets as the others. But for the typical investor, they will serve you well if you have a Schwab account and plan to dollar cost average.  Just be sure to make the purchase with a limit order instead of a market order.  Other firms are more well-established and have historically been popular with traders.  Again, lowest expense offering in yellow.

NOTE: These expenses are only accurate as to when they were last updated and are no longer current as the firms continue to change their expense ratios. Schwab has even further reduced their costs. At this point, the expenses for most of these funds are so low that the tracking error as well as bid/ask spread are of greater concern than any expense ratio. For example, a Schwab fund that has an expense ratio of 0.06% vs. a Vanguard fund that has an expense ratio of 0.09% may not actually be "cheaper" due to a lower trading volume leading to inflated bid/ask spreads. Also, a fund with smaller assets under management or a non-ideal procedure may lag the index they are attempting to match. A total stock market index can have a tracking error of 0.1% or more which dwarfs a 0.03% difference in expense ratio. If the Schwab fund has a historical tracking error that is 0.1% greater than the corresponding Vanguard fund, for example, it may not actually be a better option. I recommend researching historical tracking errors, current bid/ask spreads and trading volumes when making a decision. All three firms have low cost offerings, though, so I wouldn't worry all that much about small differences. The competition on expense ratios has gotten so fierce that they are probably less of concern than the other aforementioned factors.

Index Funds/Commission-Free ETFs Commonly Used in Portfolios

Asset Class	Vangrd Mutual Fund	Vangrd ETF	Schwab ETF	Fidelity/ iShares  ETF	Altrnate ETF
Total US Stock Market	VTSMX .18/.07%	VTI 0.07%	SCHB 0.06%	IWV 0.21%	-
Extended Market	VEXMX .30/.13%	VXF 0.15%	SCHM (Mid-Cap) 0.13%	IJH 0.22%	-
Small-Cap	NAESX .28/.14%	VB 0.17%	SCHA 0.13%	IWM 0.20%	-
Small-Cap Growth	VISGX 0.28%	VBK 0.15%	N/A	IWO 0.25%	-
Small-Cap Value	VISVX 0.28%	VBR 0.15%	SFNFX& (Small-Mid Mutual Fund) 0.35%	IWN 0.25%	-
Value	VIVAX .26/.14%	VTV 0.12%	SCHV 0.13%	IWD 0.20%	-
REIT Index	VGSIX .26/.13%	VNQ 0.12%	SCHH 0.13%	IYR 0.47%	RWR 0.25%
International Index	VGTSX@ .32/.2%	VXUS@ 0.20%	75% SCHF/ 25% SCHE combo .16%	ACWX 0.34%	-
Developed Markets	VDMIX 0.29%	VEA 0.12%	SCHF 0.13%	EFA 0.35%	-
Emerging Markets	VEIEX .35/.22%	VWO 0.22%	SCHE 0.25%	EEM 0.69%	-
Pacific Stock	VPACX .26/.14%	VPL 0.18%	N/A	N/A	EPP& 0.50%
European Stock	VEURX .26/.14%	VGK 0.18%	N/A	N/A	IEV 0.60%
International Value	VTRIX 0.47%	N/A	SFNNX& Mutual Fund 0.35%	IDV 0.50%	EFV/DWX .40/.48%
International Small-Cap	VFSVX 0.55%	VSS 0.33%	SCHC 0.35%	SCZ 0.40%	-
Total Bond	VBMFX 0.22%	BND 0.11%	SCHZ 0.10%	AGG 0.22%	-
Inflation-Prot Securities	VIPSX .25/.12%	N/A	SCHP 0.14%	TIP 0.20%	IPE 0.19%
High-Yield Corporate	VWEHX .32/.15%	N/A	N/A	HYG 0.50%	JNK 0.40%
Long-Term Treasury	VUSTX .25/.12%	N/A	N/A	N/A	TLT/TLH .15/.15%
Interm-Term Treasury	VFITX .25/.12%	N/A	SCHR 0.12%	N/A	FIVZ/IEF .15/.15%
Short-Term Treasury	VFISX .22/.12%	N/A	SCHO 0.12%	N/A	TUZ/SHY .09/.15%
Short-Term Index	VBISX 22/.12%	BSV 0.14%	N/A	N/A	CSJ# 0.20%

Information first gathered on 1/21/2010 

Updated 2/2/2010 after Fidelity's introduction of 25 commission-free iShares

Updated 5/2/2010 since Vanguard's 43 ETFs now trade commission-free
Updated 6/22/10 after Schwab reduced the expense ratio for its ETFs

Updated 9/20/10 after Schwab released its bond ETFs
Updated 1/31/11 for Schwab Mid-Cap and REIT ETFs as well as new Vanguard International Admiral Class fund and ETF Share Class 
Updated 2/25/11 after Vanguard reduced ERs on EM, Euro, Pacific, Foreign Small (Announcement)
Updated 7/14/11 for Schwab's Aggregate Bond ETF and updated ERs on BND and AG; updated other Vanguard and iShares ETF ERs 
Updated 2/12/12 for Fidelity's IYR, ACWX, IDV, and HYG.

Note 1: Commission-free only if you have your brokerage account with the provider (certain iShares are listed under "alternate" since not part of the commission-free list) 

Note 2: Vanguard investor share class (<$10,000 investment) expense ratio is listed first for each asset category.  Vanguard Admiral Share class (>$10,000 investment) expense ratio is listed second for each asset category, if available (note: the ticker symbol for this share class is different than the one listed.  See this page for details.)
Important Note 3: As of 5/4/2011, it appears Vanguard increased ER on some of their funds, including VISVX from 0.28% to 0.37%.  However, Vanguard explains: "The expense ratios of some Vanguard funds appear to have increased recently, but appearances can be deceiving. Fund expense ratios now reflect guidance from the Securities and Exchange Commission (SEC) about reporting requirements for funds that hold business development companies (BDCs), not any change in the costs incurred by fund shareholders."  https://personal.vanguard.com/us/insights/article/bdc-expense-ratios-04292011 This applies to 15 of their funds.  Thus, the fees investors pay to the fund hasn't changed at all in actuality.  As I understand it, a new accounting rule by the SEC makes Vanguard state the expenses that are charged by the underlying securities held by the fund and add them to the management expenses.   As of now, I have not adjusted the above, but I will monitor it.  I'm not sure if other fund families have also already adhered to the new SEC standard and are reporting increased expense ratios for some of their funds.

@The Vanguard International fund and ETF are the only ones that also contain small-cap international exposure at the market weight.  The Schwab and Fidelity counterparts are simply large-cap international holdings.  Thus, the Vanguard funds do not need to be supplemented with International Small-Cap, while it would be advisable for the others to do so.  

#Only includes corporates 
&Schwab's Fundamental Index Funds are mutual funds that follow the RAFI index.  While their net expense ratios are competitive, they are subsidized and their gross expense ratios are larger.  SFSNX = 0.53%, SFNNX = 0.61%.  Thus, if you choose to invest, keep an eye out that the expense ratios don't increase as Schwab could pull a bait and switch (keep expenses low to get investors in and then jack them up).  For this reason and the fact that they don't tend to be very tax-efficient, I would be reluctant to invest in these funds in taxable accounts.  In retirement accounts, tax-efficiency doesn't matter and if they pull the bait and switch, you can transfer your shares to another fund without any tax ramifications.  So, it wouldn't be much of a concern in those cases.

Note that Vanguard has a patented fund/ETF structure such that they are simply share classes of one another.  This makes the funds slightly more tax efficient than other fund alternatives since they benefit from the ETF presence.  Additionally, this unique structure allows investors to convert their mutual funds shares to ETFs for free without realizing any capital gains or losses.  The reverse (converting ETF shares to a mutual fund shares) is not possible, though.  This is quite a nice setup for those who prefer the automatic investing schedules or NAV pricing of mutual funds. After a certain amount is accumulated, one can simply convert the shares to ETFs to take advantage of the smaller expense ratio.  And not worry about any taxable event.

If you have a Fidelity account, there are five fixed income funds that have free trading: Barclays Aggregate (AGG), Barclays TIPS (TIP), iBoxx $ Investment Grade Corporate (LQD), JP Morgan USD Emerging Markets (EMB), and S&P National AMT-Free Municipal (MUB). AGG should be the backbone of your bond portfolio with a nice mix of TIP in there, if desired (a 2:1 ratio of these two funds is a common bond portfolio in its entirety). If you really want HY bonds (which rival equities in their volatility), then EMB is a decent proxy for HYG and VWEHX. LQD is a good fund to avoid treasuries, but it also quite risky for a bond fund. MUB is a good choice in taxable accounts for high-income investors.

Schwab and Fidelity Lazy Portfolios

As you can see, there are some good choices and some not so decent ones. Personally, if I were to set up a Lazy Portfolio with Schwab or Fidelity, I'd avoid the expensive funds in favor of the cheaper ones even if it didn't slice and dice as much as I intended. Even better, I'd invest in a cheaper equivalent ETF for those expensive funds (update: especially now with free trades). For example, instead of purchasing Cohen & Steers Realty Shares (CSRSX; 1.00% ER), it'd be a much wiser decision to go with the equivalent ETF, iShares Cohen & Steers Realty Majors (ICF) with its 0.35% ER or Vanguard REIT Index ETF (VNQ) with its 0.11% ER.

Here's a good mutual fund Schwab Lazy Portfolio in my mind (somewhat modeled off of Dr. Bernstein's No Brainer):

US Total Stock (SWTSX) - 25%

International Index (SWISX) - 25%

Intermediate Bond (SAMIX) - 25%

Small-Cap (SWSSX) -25%

And here's an approved Fidelity Lazy Portfolio using only funds:

US Total Stock (FSTMX) - 25%

International Index (FSIIX) - 25%

US Bond Index (FBIDX) - 25%

US Extended Market (FSEMX) - 25%

Again, if you want to add REIT, TIPS, emerging markets, or small-cap value, I'd recommend using ETFs. (Although the Schwab funds aren't terrible if you're investing a small amount since they have only a $100 minimum.) In fact, a lot of investors these days prefer to create the entirety Lazy Portfolio with ETFs. This can make sense depending on your personal circumstances. See this post for more explanation of funds vs. ETFs and consult this Vanguard calculator to compare costs of equivalent funds/ETFs. If you go the ETF route, you clearly cannot invest $100 at a time repeatedly as those commissions that typically range from $7-20 would be prohibitively expensive. ETFs do offer a lot of other advantages over mutual funds, though, such as better tax efficiency, dynamic prices, easier to tax loss harvest, and lower costs in general. Essentially, ETFs are cheaper to own, but they have transaction costs each time you make a purchase.  Update: Again, there are now several ETFs to choose from that have no transaction fees, so this barrier for ETF investing has essentially been struck down.  There still are valid reasons to choose mutual funds over ETFs, though, such as ease of automatic investing, ability to purchase partial shares such that investments are round amounts, buying at the NAV at the end of the day, not having to place a limit order in the middle of the workday, etc.  For those investors with accounts at Vanguard, it might make sense to purchase mutual funds and convert to lower-cost ETFs at a later time if the above reasons make mutual funds more appealing at the onset for you (again, this is due to their patented structure and will not cause you to realize any capital gains).

Update 5/5/2010: For an even more complete picture of these brokerage firms, I thought it might be helpful to add a chart comparing the commission structure, account fees, and minimum amounts. Vanguard joined in on the price war and is now offerings its ETFs commission fee, while also slashing its commission structure, making the brokerage service a viable alternative to Schwab and Fidelity for those who trade more frequently. This clearly is in response to similar moves by Schwab and Fidelity in the past several months.

In summary, it's free for Schwab customers to trade their 11 ETFs (3 bond ETFs were released August 2010), free for Fidelity customers to trade 25 iShares ETFs, and now free for Vanguard customers to trade their 43 ETFs. Also note that I'm purposefully excluding non-transaction free mutual fund purchases as it simply makes no sense to pay a larger transaction fee for a mutual fund when you can most likely get a similar ETF for less. For that matter, there are plenty of transaction free mutual funds to choose from as seen from the above links. (In case you were curious, though, Schwab charges $49.95, Fidelity charges $75, and Vanguard will set you back $35, $20, or $8 depending on your total assets.) While I'm including phone and broker assisted trade fees, you should only be trading online as doing otherwise will cost you unnecessarily (although not with VBS anymore). Vanguard Brokerage Services (VBS) is actually a different account than the Vanguard mutual fund account; that is, you don't need it if you're simply going to invest directly in Vanguard's own mutual funds. In any event, here's a basic chart comparing the commissions as well as account fees and minimums.

Commission Schedule, Account Fees, and Minimums
Vanguard vs. Schwab vs. Fidelity

	VBS^	Schwab	Fidelity
Online Trades (<$50,000 in assets)	$7 for first 25; subsequent trades $20	$8.95	$7.95
Online Trades ($50k - $500k in assets)	$7	$8.95	$7.95
Online Trades ($500k- $1M in asssets)	$2	$8.95	$7.95
Online Trades (>$1M in assets)	First 25 trades free; subsequent trades $2	$8.95	$7.95
Automated Phone	Same as online price structure	$13.95	$12.95
Broker Assisted	Same as online price structure	$33.95	$32.95
Account service fee	$20 per account if <$50k; No charge if >$50k	No charge*	No charge#
Account minimum%	$3000	$1000	$2500
Options Trades Online (<$1 M)	$30 + $1.50 per options contract	$8.95, plus $0.75 per contract	$7.95, plus $0.75 per contract
Options Trades Online (>$1 M)	$8 + $1.50 per contract	$8.95, plus $0.75 per contract	$7.95, plus $0.75 per contract
Treasuries	$10 or free &	No charge	No charge
Other Secondary Trades (CDs, Muni Bonds, MBS, etc.)	$50 (Mortgage-backed, munis) or free (US gov't agency, corporate, CDs)	$1/bond	$1/bond

Information is accurate as of 5/05/2010

^ Again, this is specific to Vanguard Brokerage Service. If you simply want to purchase Vanguard mutual funds, this is a different account and has no annual service fee assuming you sign up for e-delivery of documents.
* One exception - Schwab's Personal Defined Benefit Plan account has opening costs

# Fidelity charges a $12 annual mutual fund low balance fee for each noncore Fidelity fund under $2,000

% For most accounts. There may be a few exceptions.

& $10 if total assets are <$100,000. $0 if total assets are >$100,000.

For more information and up-to-date commission schedules, see Vanguard's, Schwab's, and Fidelity's (pdf) own pages.