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I’ve long argued that most investors should own
actively and passively managed funds. Both have
merits, and you actually can apply many of the
same criteria in choosing them. Either way, you want
low costs, a good strategy, and good stewardship.
So, it probably won’t surprise you that I own four
passively managed funds. They help to lower the costs
of my portfolio overall, provide diversification, and
serve as low-maintenance vehicles that I don’t have to
worry over. My three passive funds were the best
available at the time, though there are some very good
substitutes available. I bought the two from Fidelity
in
2009
and the
DFA
fund last year when it was added
to our
401
(k).
Vanguard Tax-Managed Capital Appreciation
VTCLX
is a good choice for your taxable account. Maybe
I’m just a belt-and-suspenders guy, but I appreciate
Vanguard’s effort to make index investing even
more tax-efficient. This fund starts with the Russell
1000
Index and then makes tweaks to improve tax
efficiency. It realizes losses to offset gains, and it tilts
slightly away from dividend-paying stocks in order
to avoid the dividends tax. It’s done a fine job on both
fronts, producing aftertax returns in the top decile
of large-blend funds.
Fidelity Spartan Total Market Index Advantage
FSTVX
is one heck of a fund, costing just
0
.
05%
a year.
Total market funds are slightly more appealing than
S
&
P
500
funds for two reasons. First, they cover the
whole market. Second, they don’t have the awkward
rebalancing that the S
&
P
500
does, which can lead
to stocks jumping into the index at a high weighting in
such a way that arbitragers can take some money
out of the pockets of index investors. For example, big
stocks like
Yahoo
YHOO
entered the index at a high
weighting and everyone knew they were going in and
could bid up the prices before index funds bought in.
I don’t own
Vanguard Total Stock Market Index
VTSAX
, but it is just as good. It has the same
minimum investment of
$10
,
000
and the same
expense ratio of
0
.
05%
. All of that logic applies
overseas, even though some people are wary of
indexing overseas.
My next-largest passive investment is
Fidelity
Spartan International Index Advantage
FSIVX
,
which charges
0
.
12%
. The fund has outperformed
its peers over the past three-, five-, and
10
-year
periods, so I wouldn’t say overseas indexing is all
that bad.
If you want to avoid emerging markets, then the
exchange-traded fund
Vanguard FTSE Developed
Markets
VEA
is a good alternative for
0
.
09%
. In
open-end form, the fund is
Vanguard FTSE All-World
Ex-US Index
VFWAX
, which charges
0
.
14%
for
a
$10
,
000
minimum. If you want emerging markets
folded in,
Vanguard Total International Stock
Index
VTIAX
charges
0
.
14%
for a
$10
,
000
investment
and
0
.
22%
for a
$3
,
000
minimum.
Finally, we come to
DFA International Small Company
DFISX
, which is a much smaller position for me.
Foreign small caps are useful diversifiers, but most
people wouldn’t make them a big weighting.
DFA
is quite good at navigating small-cap markets in a
way that limits trading costs. For small-cap indexes,
trading costs are a huge hurdle: Bid-ask spreads can
be wide, and index funds tend to trade in small
amounts so they don’t get a good deal on share prices.
DFA
takes a more opportunistic approach by making
bulk purchases of a variety of small caps that will help
it track the small-cap market.
DFA
doesn’t strictly
follow an index but makes sure that its portfolio
behaves very much like a small-cap index.
The fund charges
0
.
53%
, which is cheap for a foreign
small-cap fund, but not so cheap for an index fund.
You may prefer to go with
Vanguard FTSE All-World
ex-US Small-Cap Index
VFSVX
. This fund charges
0
.
37%
for those investing at least
$3
,
000
. The five-
year-old fund figures to give the
DFA
fund a run
for its money, although so far it has lagged the
DFA
fund a bit.
K
My Passive Holdings
Tracking Morningstar Analyst Ratings
|
Russel Kinnel
What Are Morningstar
Analyst Ratings?
Our ratings are chosen for long-
term success. Analysts assess
a fund’s competitive advantages
by analyzing people, process,
parent, performance, and price.
They do rigorous analysis and
then submit their ratings to a
committee that vets their work
for thoroughness and consistency.