Author Topic: Factors Comparing Index Funds  (Read 980 times)

PaiMeiStash

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Factors Comparing Index Funds
« on: August 10, 2018, 05:32:13 AM »
What are deciding factors that some of you look at when comparing different index funds?

I'm certain that low ER is one of them as that school of thought rules the roost in this community. What about funds that have difference of 1-2 BP, but with a significant difference in YTD returns?

For example:

Fund-X
ER: 0.02%
YTD: 7.93%
Price: $260

Vs.

Fund-Y
ER: 0.04%
YTD: 12.12%
Price: $80

Wouldn't most be more inclined to go for Fund-Y given the difference in ER & YTD return?
Also, does the price per share help some of you decide which one to go for?


Thanks for your time. Your input and patience with such a newb is appreciated.
« Last Edit: August 31, 2018, 12:39:13 PM by PaiMeiStash »

Asalted_Nut

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Re: Factors Comparing Index Funds
« Reply #1 on: August 10, 2018, 09:00:12 AM »
At such low ERs there will be a negligible difference in cost (depending on the portfolio size, of course), just under 40 dollars difference assuming 10k invested for 10 years at 7% gains.

But there must surely be other factors at play with such a difference in YTD returns.

What are these two funds you are comparing? I can't imagine they are tracking the same index given the difference in YTD, so it seems like an apples or oranges comparison, with other factors rather than just expense ratio.

Price per share is pretty meaningless IMO unless you are looking at ETFs with a small portfolio, since they must be purchased in whole shares, instead of by dollar amount like in mutual funds.

I'm sure others could chime in with more convincing posts, but as is often repeated you can't predict future performance based on past performance.

FINate

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Re: Factors Comparing Index Funds
« Reply #2 on: August 10, 2018, 10:15:11 AM »
You're doing it wrong. Sorry if that's too blunt, but figure you'd rather hear it straight up instead of getting yourself into a financial mess.

Step one: What is your investment horizon? In other words, when do you expect to start drawing on these funds? A 5 year horizon means going much less risk and less reward, whereas 30 year horizon should be invested more aggressively.

Step two: What is your risk tolerance? This is only really a problem if you're super risk adverse, in which case I'd recommend counseling/therapy to address the underlying problem first.

Step three: Pick an asset allocation that's appropriate for your risk tolerance and investment horizon. For example, let's say you're about average on risk tolerance with a 30 year horizon, then you want to be 100% in total stock market. Whereas if you're more risk sensitive with a 10 year horizon then you may want to be a bit more heavyweight on bonds.

Step four: Select funds to implement your asset allocation. Expense ratio is the main selection criteria here. You want no load passive index funds in each asset class with the lowest possible ER. So if your asset allocation calls for 100% total stock market, then you want something like VTSAX with just 0.04% ER. If these funds are outside of a deferred tax account (e.g. 401k, 403b, IRA, etc), then tax treatment may possible be a consideration (funds that minimize churn to limit tax liability), though this is likely on any issue if you're extremely high income.

Price per share and YTD returns are both meaningless. Be a principled investor, don't chase returns or prices, and you'll avoid most of the mistakes investors make.

Proud Foot

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Re: Factors Comparing Index Funds
« Reply #3 on: August 10, 2018, 10:15:58 AM »
Ignore the difference in the ER. A 2 basis point difference is not a decision maker for me.

The only time the share price matters would be if you are purchasing ETF's rather than mutual funds as ETF's must be purchased in whole shares.

To the returns, the first thing would be if these funds are based upon the same index. If they are the same you would want to look into the makeup of the holdings in the two funds. If they are both S&P500 do they follow the S&P market cap weighting? Do they do an equal weight? Do they have another weighting method but only hold stocks from the S&P500?  Are either one leveraged? How do they compare to each other regarding the turnover ratio?

If they do not follow the same index, then don't look at the returns and look at how the individual fund fits within your investment strategy.

talltexan

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Re: Factors Comparing Index Funds
« Reply #4 on: August 10, 2018, 11:30:43 AM »
Picking index funds is really about picking Asset Classes. See: https://paulmerriman.com/10-things-every-investor-should-know-about-asset-classes/

Tyler

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Re: Factors Comparing Index Funds
« Reply #5 on: August 10, 2018, 11:51:01 AM »
What are deciding factors what that some of you look at when comparing different index funds?

Good question.

The absolute last thing I would look at is the YTD performance.  One should choose a index fund to serve a specific purpose in a portfolio, not to chase recent returns.  If you need help with that, try browsing these popular portfolios.

But assuming you're trying to choose a fund to track a particular index, here's what I would consider:

First, I like to look at the rules for the index that the index fund is tracking.  Not every index is created the same, so make sure you know what you're buying. 

Next, you should look at whether it's a mutual fund or an ETF.  Mutual funds allow you to simply put in however much money you want and trade after hours, while ETFs require you to purchase set numbers of shares during normal trading hours.  Personally I prefer ETFs because I like the control and they tend to be a little more tax efficient than mutual funds due to how they manage capital gains. 

Beyond that, the other two things I look for are the expense ratio and the trading volume.  Obviously lower fees are better.  The trading volume is important for ETFs because funds with low volumes 1) may take a while to execute trades, and 2) have higher spreads between the bid and ask price.  Low spreads are better and save you money.  Personally, I wouldn't invest in an ETF that doesn't have a trading volume of at least a few hundred thousand shares per day. 

And finally, be sure to look at the transaction costs for a particular fund at your brokerage.  Many brokerages have normal fees of about $5 per trade, which (as little as I trade) does not stop me from investing in funds I prefer over less desirable no-transaction-fee alternatives.  However, some brokerages charge large fees for investing in mutual funds not run by the same brokerage.  For example, I invest through Fidelity but like Vanguard's stock funds.  It would cost me $5 to purchase VTI but $75 to purchase VTSMX.  Note that they track the exact same index, but the first is an ETF and the second is a mutual fund.  So obviously I go with VTI. 

I hope that helps!
« Last Edit: August 10, 2018, 12:20:08 PM by Tyler »

Retire-Canada

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Re: Factors Comparing Index Funds
« Reply #6 on: August 10, 2018, 12:16:41 PM »
What are deciding factors what that some of you look at when comparing different index funds?

First I would construct my planned asset allocation:

- US = 50%
- Canada = 20%
- International Developed = 15%
- Emerging Markets = 15%

This is mine. Not saying it's right for you. Just providing an example.

Then I would look at potential funds that would provide this set of assets in the proportions I'd want. My criteria would be:

- MER
- other fees
- value of funds under management
- how well are they tracking the index
- how do I feel about the company
- tax optimization potential

Based on these factors I would select my funds.

YTD returns are meaningless beyond how well they are tracking their index. I'm buying VUN or VTI because I want to hold US stocks for the next 50 years+. I don't care how they did last year or YTD and I can't tell how they'll do next year or 5 years from now either.

If a new fund popped up that had a really low MER, but I didn't trust the company and they had a low level of funds under management I'd skip them despite the lower fees.
« Last Edit: August 10, 2018, 12:18:34 PM by Retire-Canada »

MustacheAndaHalf

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Re: Factors Comparing Index Funds
« Reply #7 on: August 11, 2018, 08:47:55 AM »
Look in any mutual fund prospectus, and you'll see:
"the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results."
https://www.sec.gov/fast-answers/answersmperfhtm.html

I look for diversification - but you need to know what's in a fund, and what you already have.  If you have no U.S. index funds in your portfolio, adding the S&P 500 could make sense.  But if you already have a large allocation to Vanguard Total Stock Market, then the S&P 500 does not add diversification - it overlaps ~75% or more with Total Stock Market.

You might want to start with understanding the "3 fund portfolio": a US index fund, an international index fund, and a total bond fund.  Those 3 cover the most well established sources of diversification: US vs international, and stocks vs bonds.

PaiMeiStash

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Re: Factors Comparing Index Funds
« Reply #8 on: August 26, 2018, 05:50:02 AM »

What are these two funds you are comparing? I can't imagine they are tracking the same index given the difference in YTD, so it seems like an apples or oranges comparison, with other factors rather than just expense ratio.


Thanks for chiming in!

To be exact I'm comparing
 
VIIIX (VANGUARD INSTITUTIONAL INDEX INSTL PL)

http://www.schwab.wallst.com/Prospect/Research/MutualFunds/Summary.asp?YYY101_z7WXf2Es8/wVo5XU/zMzxTL90tmW4+28jUq0gsAlD10F4jZH8Vev/9M7OU8u46Wr5L/yPOs48IY=&symbol=VIIIX&division=

vs.

VIGIX (VANGUARD GROWTH INDEX INSTITUTIONAL)

http://www.schwab.wallst.com/Prospect/Research/MutualFunds/Summary.asp?YYY101_z7WXf2Es8/wVo5XU/zMzxTL90tmW4+28jUq0gsAlD10F4jZH8Vev/9M7OU8u46Wr5L/yPOs48IY=&symbol=VIGIX&division=

I'm currently working on the recommended investment order, and these are some of the lowest ER options offered through my HSA (Health Equity).

PaiMeiStash

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Re: Factors Comparing Index Funds
« Reply #9 on: August 26, 2018, 06:01:36 AM »
You're doing it wrong. Sorry if that's too blunt, but figure you'd rather hear it straight up instead of getting yourself into a financial mess.

Step one: What is your investment horizon? In other words, when do you expect to start drawing on these funds? A 5 year horizon means going much less risk and less reward, whereas 30 year horizon should be invested more aggressively.

Step two: What is your risk tolerance? This is only really a problem if you're super risk adverse, in which case I'd recommend counseling/therapy to address the underlying problem first.

Step three: Pick an asset allocation that's appropriate for your risk tolerance and investment horizon. For example, let's say you're about average on risk tolerance with a 30 year horizon, then you want to be 100% in total stock market. Whereas if you're more risk sensitive with a 10 year horizon then you may want to be a bit more heavyweight on bonds.

Step four: Select funds to implement your asset allocation. Expense ratio is the main selection criteria here. You want no load passive index funds in each asset class with the lowest possible ER. So if your asset allocation calls for 100% total stock market, then you want something like VTSAX with just 0.04% ER. If these funds are outside of a deferred tax account (e.g. 401k, 403b, IRA, etc), then tax treatment may possible be a consideration (funds that minimize churn to limit tax liability), though this is likely on any issue if you're extremely high income.

Price per share and YTD returns are both meaningless. Be a principled investor, don't chase returns or prices, and you'll avoid most of the mistakes investors make.

The blunt comment is appreciated!

Step 1: Horizon 20-30years

Step 2: High risk tolerance

Step 3: jlcollinsnh "Stock Series' has convinced me to go balls-to-the-wall 100% stocks.

Step 4: I maxed out my Trad. IRA for 2017 & 2018 with VTSAX I've recently started my career and hence my journey to FI.


FINate

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Re: Factors Comparing Index Funds
« Reply #10 on: August 26, 2018, 08:56:20 AM »
You're doing it wrong. Sorry if that's too blunt, but figure you'd rather hear it straight up instead of getting yourself into a financial mess.

Step one: What is your investment horizon? In other words, when do you expect to start drawing on these funds? A 5 year horizon means going much less risk and less reward, whereas 30 year horizon should be invested more aggressively.

Step two: What is your risk tolerance? This is only really a problem if you're super risk adverse, in which case I'd recommend counseling/therapy to address the underlying problem first.

Step three: Pick an asset allocation that's appropriate for your risk tolerance and investment horizon. For example, let's say you're about average on risk tolerance with a 30 year horizon, then you want to be 100% in total stock market. Whereas if you're more risk sensitive with a 10 year horizon then you may want to be a bit more heavyweight on bonds.

Step four: Select funds to implement your asset allocation. Expense ratio is the main selection criteria here. You want no load passive index funds in each asset class with the lowest possible ER. So if your asset allocation calls for 100% total stock market, then you want something like VTSAX with just 0.04% ER. If these funds are outside of a deferred tax account (e.g. 401k, 403b, IRA, etc), then tax treatment may possible be a consideration (funds that minimize churn to limit tax liability), though this is likely on any issue if you're extremely high income.

Price per share and YTD returns are both meaningless. Be a principled investor, don't chase returns or prices, and you'll avoid most of the mistakes investors make.

The blunt comment is appreciated!

Step 1: Horizon 20-30years

Step 2: High risk tolerance

Step 3: jlcollinsnh "Stock Series' has convinced me to go balls-to-the-wall 100% stocks.

Step 4: I maxed out my Trad. IRA for 2017 & 2018 with VTSAX I've recently started my career and hence my journey to FI.

Awesome, good for you!

For some this is difficult to do, but resist the urge to look at it. I don't mean you should never log in and check on things, but that should be like 1-2x/year (or to confirm transactions, read account messages, etc.), not every day or every week. Just let it ride.

Avoid the investment "news" cycle and outlets. It may seem like the responsible (or adult) thing to do now that you have investments, but it's absolutely pointless. Worse than just a waste of time, it has a tendency to get people emotionally worked up which leads them to make bad investment decisions. Their only goal is to sell ads, not make better investors.

Finally, systematically add to your holdings over the long term. Make it a habit, second nature, and you won't notice it. Before you know it you'll have a significant account balance.

Welcome to the journey to FI!

PizzaSteve

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Re: Factors Comparing Index Funds
« Reply #11 on: August 26, 2018, 08:58:07 AM »
Low turnover is a very good sign to look for.

Means less hidden transaction costs from churning portfolio, less distributions which means stable, long term investors.

I dont agree YTD performance is important.  I would look more at what the stock is investing in and how well it is managed.  One of the best indicators for diversified, low cost index funds are that the funds track the index or asset class they are supposed to follow.  For example, an S&P index that dramatically varied from the index, even if over performing, is not doing what it claims to be invested in. 

Performance varies and todays ytd winner is likely next years loser, especially if actively managed.

[edit:  I see Tyler already covered most of these points.  Turnover Ration is basically trading volume, though normalized for the size of the fund over a specific time period.]
« Last Edit: August 27, 2018, 09:12:17 AM by PizzaSteve »

MDM

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Re: Factors Comparing Index Funds
« Reply #12 on: August 26, 2018, 09:27:59 AM »
The absolute last thing I would look at is the YTD performance.
+1

See Callan periodic table of investment returns - Bogleheads for some reasons why.

MustacheAndaHalf

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Re: Factors Comparing Index Funds
« Reply #13 on: August 26, 2018, 11:56:21 PM »
Tech stocks have beaten every other sector of the market recently, so anything with more tech stocks happens to look good right now.  When you look at the growth index, you're capturing those stocks and ignoring half of the market.

A "growth" fund doesn't mean future growth.  It means those stocks with the highest price/earnings ratio, or those with the highest stock price divided by book value.  The market also has "value" stocks which you won't own when buying a growth index.  The market is essentially divided into two parts: "growth" and "value".

Do you have any international choices?

hendrickj

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Re: Factors Comparing Index Funds
« Reply #14 on: August 27, 2018, 11:55:35 AM »
As others have noted above, asset allocation and security selection are two different parts of constructing a portfolio.
Asset allocation decides on broad asset classes and their proportion in the portfolio based on historical statistics and future expectations.
Security selection matches those broad asset classes to specific securities.

In your example, the broad asset class of US stocks would match to VIIIX, while the broad asset class of US growth stocks would match to VIGIX.

For asset allocation, it is okay to leave more specific asset classes such as value and growth stocks out of the equation and tend more towards broader asset classes.

For security selection, I look at expense ratio, the index it tracks and how well it corresponds to the asset class, and the liquidity/total net assets of the index fund. VIIIX tracks the S&P 500, while I would prefer index funds that track a broader index, such as VTSMX that tracks CRSP US Total Market Index.

PaiMeiStash

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Re: Factors Comparing Index Funds
« Reply #15 on: August 31, 2018, 01:48:40 PM »
Do you have any international choices?

Iím not sure if Iím quite convinced yet on international investments after reading this part in the Stock Series again.

https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

Whatís your thoughts on the article and your overall opinion on international investments?

Again, thanks for your input!