Target Retirement Funds Future Expectations: Vanguard vs Fidelity vs T Rowe Price

This is the last and perhaps most important post in the series on comparing and contrasting target retirement funds from what are in my opinion three of the top mutual fund companies: Vanguard, Fidelity, and T Rowe Price. Since we’ve already done the analysis, I’ll keep it short and sweet.

And The Award For Best Target Retirement Fund Goes To…

Vanguard. By a hair.

Due to its rock-bottom expenses and indexing strategy, I expect Vanguard to outperform the competition over the long haul. This is for two reasons.

1. Study after study has shown that expenses are by far the most reliable indicator of a fund’s future performance relative to its peers.
2. Over time, index funds must by definition achieve above-average returns, all else being equal.

Of course, all else is never equal. As we saw on Monday, T Rowe Price opts for a more aggressive asset allocation initially and keeps more money in stocks for longer than its Vanguard equivalent. It’s not a huge amount, but it’s enough to make a difference over long periods of time. So long as stocks yield higher returns in the future as they have in the past, T Rowe Price has a shot. Unfortunately, Vanguard’s expense advantage is large enough to make it reasonably certain it to hang onto the lead even with a less aggressive portfolio. T Rowe Price’s managers will have to beat the market consistently over the next several decades to overcome Vanguard’s expense advantage, and that’s not likely. In the end, I predict Vanguard will beat T Rowe Price by between 0.1-0.4% per year over the long haul. Fidelity’s Freedom Funds, with its sub-par investment options and high expenses, will likely lag behind even further, making Vanguard the clear winner.

Of course, there is no guarantee Vanguard will out-perform, but I think it’s wise to make your bets where the odds are best.

For past articles this series: