Both Vanguard and Dimensional Fund Advisors offer quality index funds with low expense ratios which can be used to build an asset allocation portfolio. There has been a recurring debate over which family of index funds performs better. Using data from Google showing returns for comparable DFA and Vanguard funds, you can answer that question for yourself. The table below shows trailing one, three, and five-year returns, YTD return, and the expense ratios for Vanguard and DFA index funds in comparable asset classes.
The fund offerings are not identical. Vanguard offers both U.S. mid-cap blend and U.S. mid-cap value funds, while DFA does not. Conversely, in the international emerging markets category, DFA offers large-cap value and small-cap funds, as wells as, a large-cap fund. DFA also offers a U.S. micro-cap fund, although it has underperformed both Vanguard and DFA’s small-cap blend funds. Vanguard has no corresponding micro-cap fund.
According to the Google data, the trailing total returns for one, three and five years are fairly similar for Vanguard and DFA in each asset class. Looking at the data on the Vanguard and DFA websites, 10-year performance shows some differences with a slight advantage going to to DFA, particularly in the international asset classes.
Here is a link to the same spreadsheet with some additional data, one and four week return and yield (dividends and distributed capital gains).
If you have spent any time studying ETFs, you probably noticed that Ryder’s Equal Weight S&P 500 ETF (RSP) has consistently outperformed indices based on the S&P 500 such as the SPDR S&P 500 ETF (SPY). However, there seems to be a relatively simple explanation for this.
The S&P 500 index includes 500 of the most widely held U.S. companies. The index uses market capitalization to determine the relative weighting of its holdings. The largest companies dominate the index. For example, at the time of this writing, the top 10 holdings in the S&P 500 index accounted for 18.73% of the index.
Equal weighting of the S&P 500 has the effect of changing its asset class mix from predominantly large-cap to a mixture of large and mid-cap stocks. Here are Morningstar x-ray views of SPY and RSP.
SPY is 88% large-cap and 12% mid-cap. In contrast, RSP is 54% large-cap, 44% mid-cap, and 2% small-cap. RSP’s mid-cap weighting impacts performance. During periods when mid-cap stocks out perform large-cap stocks, RSP will out perform the S&P 500 index.
The above chart shows the differences in return in 2010 for the equal weight S&P 500 (RSP), Vanguard’s mid-cap ETF (VO), and S&P 500 index. (Note: The returns shown do not include dividends.)
There is no magic to RSP’s return. The equal weighting shifts the asset class composition of the ETF and according changes the total return.
Two model ETF portfolios have been added.
ETF Asset Allocation I
This portfolio started with $10,000 on December 31, 2010. It provides asset class diversification using 14 ETFs (8 Vanguard and 4 non-Vanguard ETFs). The portfolio includes an equal weighting of US and foreign equities; large, medium, and small capitalization stocks; and U.S. and international REIT ETFs. The portfolio has a value tilt.
Vanguard ETFs offer particularly good value. It is mutual company (meaning it is member owned and has no shareholders) and its ETFs have low expense ratios. Unfortunately, Vanguard has some gaps in its coverage of international ETFs. So this model portfolio has included 4 non-Vanguard ETFs.
Under Vanguard’s new ETF pricing, the total cost for setting up this portfolio would be $28, (4x$7) in commissions for the non-Vanguard IRAs, and an annual brokerage account fee of $20. The use of ETFs allows broad diversification with a relatively small amount of money. Most index mutual funds have a $3,000 minimum cash requirement.
ETF Asset Allocation II
This ETF portfolio also started with $10,000 on December 31, 2010. It consists of five Vanguard funds. It achieves simple but good asset allocation with equal weight of US and foreign equities. It includes large and small cap stocks with a value bias and a US REIT ETF.
Under Vanguard’s new ETF pricing, there would be no commission charges for setting up this portfolio since all of the ETFs belong to Vanguard. There would be an annual brokerage account fee of $20.
Both portfolios are updated daily on Stockherd.com and can be viewed using the links on the menu bar.
The Computer Investing Special Interest Group of the Metro DC Chapter of AAII hosted a program in McLean, Virginia on Saturday, August 28, 2010. It included a presentation on Using Index Funds and Index-based ETFs in a Core portfolio. Here are the materials from that presentation and some related materials on index investing. (more…)
Here are some of the ETFs that we will discuss at our meeting on Wednesday. The question is whether we should park our cash in an ETF, and if so, which of these ETFs, or combination of two ETFs, should we use.
Generally, index funds are mutual finds that try to replicate the movements of an index of a specific financial market. For our purposes, we are most interested in index funds that reflect the market movement of different equity asset classes, such as large cap, mid cap, or small cap.
Some index funds are further characterized as growth, value, or blend within their market capitalization. Index funds can include real estate investment trusts or REITs. Different types of fixed income assets can be purchased through index funds, such as short term, intermediate term, or long term bonds.
ETFs are simply index funds that can be traded during the day on an exchange. In comparison, orders to buy or sell index funds are executed at the end of the day. (more…)