Author Topic: T Rowe Price vs. Vanguard?  (Read 44337 times)

LuckyMe

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T Rowe Price vs. Vanguard?
« on: February 21, 2014, 02:23:48 PM »
Hello all,

I need a little help with a dilemma I'm facing with my Roth IRA account.  I currently have about $28k invested into T Rowe Price target date funds (TRRDX).  Overall the fund has performed well, but what bothers me is the fund's 0.78 expense ratio.  This is relatively high considering a comparable Vanguard fund, VFORX, has only a 0.18 ratio. 

Yet when I compare the two side by side, the T Rowe Price appears to be more diversified (10 underlying funds vs. 4 Vanguard funds) and average annual returns are a few percentage points higher.  The TRP fund has a good mix of growth and value stocks, REITs, international and domestic stocks, bonds, and some other funds.  The Vanguard one is just the total international and domestic stock and bond funds.  With this in mind, is it worth is to continue investing with TRP or would the expense ratio savings at Vanguard make it a better option in the long run?  How does Vanguard's lack of diversification bode for market volatility?

Another idea I've been floating in my head is to roll over most of my TRP target date funds into similar Vanguard target date funds and then use the rest to purchase other Vanguard funds like VEIEX and VGSIX to diversify my portfolio.  Any thoughts on this strategy? 

Any suggestions or comments are welcome. Thanks in advance.

skyrefuge

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Re: T Rowe Price vs. Vanguard?
« Reply #1 on: February 21, 2014, 03:17:04 PM »
Yet when I compare the two side by side, the T Rowe Price appears to be more diversified (10 underlying funds vs. 4 Vanguard funds)

Diversification of a fund-of-funds cannot be measured by the number of funds it contains. It can only be measured by the total number of unique securities that the those underlying funds contain. The 10 underlying funds of the TRP fund could contain only 1000 unique securities, while the 4 underlying funds of the Vanguard fund could contain a total of 5000 unique securities. I don't know the real numbers, but it seems likely to me that the Vanguard fund could have more underlying securities, since it makes a conscious effort to cover the "total market", whereas the TRP fund does not.

It looks like the TRP fund actually contains 19(!!) funds, which seems insane to me. There is surely overlap between those funds. At a brief look, the only thing the TRP fund might contain that the Vanguard fund does not would be some Real Estate exposure, via PRAFX (which doesn't exactly seem to be a REIT anyway).

You should first independently decide what you want your asset allocation to look like, and how you want that allocation to change over time. If either of those funds matches that, then go with it. But don't let the TRP decide your asset allocation for you going forward just because that's what you already have. If neither matches, you can then build your own, which would likely have lower expenses than even Vanguard's 2040 fund. If all you care about is "a 2040 fund that someone else is managing" (which is perfectly fine), then go with the cheaper one, at Vanguard.

jfer_rose

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Re: T Rowe Price vs. Vanguard?
« Reply #2 on: February 21, 2014, 03:27:51 PM »
Good for you for noticing that high expense ratio! But from the rest of what you say, you would benefit from doing some reading on the difference between actively managed funds vs. index funds.

Despite having only four funds, the Vanguard Target Retirement funds are actually much more diversified than the T. Rowe Price Target Date funds. That's because the four Vanguard funds are index funds which have a piece of EVERY company in the index each of the four funds follows. So, for example, the Vanguard Target Retirement funds include the Vanguard Total Stock Market Index-- that fund owns stock in EVERY company in the US Stock Market. The other three funds are similarly diversified.

The T. Rowe Price fund is actively managed, so your fees are paying for someone to choose which particular stocks to include and you are getting just a slice of the total market (whichever stocks the manager picks) versus the entire market which is what you get in an index fund. Actively managed funds can outperform the market some of the time but you're investing for a long time horizon and odds are infinitesimally small that a given actively managed fund will outperform the total market (i.e. index funds).

I recommend reading the following stock series to learn more: http://jlcollinsnh.com/stock-series/

Other important points: past performance does not indicate future returns. Vanguard is the cream of the crop in terms of companies-- it is owned by its clients. If you have a Vanguard account, you own a piece of Vanguard. You won't get that with T Rowe Price.

Another Reader

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Re: T Rowe Price vs. Vanguard?
« Reply #3 on: February 21, 2014, 04:03:17 PM »
Active management can be justified by superior returns.  Most actively managed funds are not superior performers, hence the Vanguard fanatics here.  T Rowe Price has a number of actively managed funds that have consistently outperformed their respective indexes for at least a decade.  Multiple decades, in a couple of cases.  I own several and would not trade them for lesser performing Vanguard funds. 

On most broker websites you can compare funds.  I'm not sure you can do it on Yahoo Finance.  I'm a Fidelity customer, and their fund comparison tool is helpful.  If the fund has been around long enough, you should be able to compare the hypothetical growth of $10,000 over the last 10 years.  Some of those T Rowe Price funds put their competitors, and their respective indexes, to shame.  If you cannot compare the target date funds for 10 years, compare the funds of which the target date funds are comprised.

Vanguard is not a superior company in my opinion.  The website is very weak.  Customer service is so-so.  Their actively managed funds are generally cheap but not top performers.  In your shoes, if the T Rowe Price target date fund is comprised of better performing funds, I would stick with that one.  If you want to hedge, put some of your future contributions in the Vanguard fund.

Nords

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Re: T Rowe Price vs. Vanguard?
« Reply #4 on: February 22, 2014, 08:19:46 PM »
Vanguard is the cream of the crop in terms of companies-- it is owned by its clients. If you have a Vanguard account, you own a piece of Vanguard. You won't get that with T Rowe Price.
I've never understood this marketing point.  As near as I can tell, it means that the penalties & fees go back to the fund assets (which are owned by the shareholders) instead of into the pockets of the companies which have the management contract. In other words it helps lower the cost of the investment fund-- just like this practice does for the TSP.

I think trumpeting that marketing actually backfires on Vanguard.  It's tempting to use the client-owned logic as snarky justification for a user-hostile website and rock-bottom customer service.  Those features aren't necessarily bad, but they seem to be an unintended consequence of "client-owned".

Another Reader

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Re: T Rowe Price vs. Vanguard?
« Reply #5 on: February 22, 2014, 09:29:55 PM »
That marketing point has made Vanguard very successful with the retail customers.  People are willing to overlook stuff when they think they are getting a deal and are voting against the big mutual fund companies and brokers, who are all (in their minds) taking advantage of them.

Back in the day, there was a Coop supermarket in Berkeley.  It was member owned, so IIRC, you got a dividend or something if you belonged.  As a kid, I was in there with friends occasionally, but no one in my family shopped there.  The store was always dirty and needed repairs.  It consistently had the worst produce and poorest quality meats of any supermarket in the entire city.  But it was very popular for years, because it was "community" owned. 

GlassStash

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Re: T Rowe Price vs. Vanguard?
« Reply #6 on: February 22, 2014, 10:08:16 PM »
That marketing point has made Vanguard very successful with the retail customers.  People are willing to overlook stuff when they think they are getting a deal and are voting against the big mutual fund companies and brokers, who are all (in their minds) taking advantage of them.

Back in the day, there was a Coop supermarket in Berkeley.  It was member owned, so IIRC, you got a dividend or something if you belonged.  As a kid, I was in there with friends occasionally, but no one in my family shopped there.  The store was always dirty and needed repairs.  It consistently had the worst produce and poorest quality meats of any supermarket in the entire city.  But it was very popular for years, because it was "community" owned.

Did you really just compare Vanguard to a dirty supermarket?

I think the real allure of "member owned" is that it is seen as putting customers first, and not the private inurement of a few investment company owners. The fee driven investment industry has scared a lot of investors into only trusting Vanguard, the pioneer of index funds and very low expense ratios. Vanguard is not the only good choice, e.g. I hear great things about Fidelity, but it is still a good choice.

Additionally, I personally have had great experiences with Vanguard's customer service, but obviously that can vary.

kyleaaa

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Re: T Rowe Price vs. Vanguard?
« Reply #7 on: February 23, 2014, 11:40:49 AM »
Vanguard's funds are probably more diversified than their T Rowe Price competitors, but both are extremely diversified so that's a very minor point. I'm not sure I understand why you think Vanguard lacks diversification so I won't address it.

T Rowe Price's funds invest more heavily in large-cap growth stocks than Vanguard. Since large growth stocks have outperformed over the last 5 years, TRP has done better. There's no reason to think this will continue, though.

The data suggests Vanguard's funds are a smarter bet. Use that information however you want.

Another Reader

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Re: T Rowe Price vs. Vanguard?
« Reply #8 on: February 23, 2014, 01:02:00 PM »
I have money at both, and my 30 plus years of investing experience has shown me there is a place in the portfolio for well managed, relatively low cost managed funds from good companies.  Most of my T Rowe Price finds are sector or small and mid cap funds, so your statement about large cap performance is not relevant (never mind if it is correct).  What "data" suggests that Vanguard's offerings in these areas are a better bet?

mandies

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Re: T Rowe Price vs. Vanguard?
« Reply #9 on: February 24, 2014, 07:29:24 AM »
I just wanted to chime in with the experience that both me and my parents had switching over to Vanguard. The website was very easy to use, customer service has always been excellent, and we've had a great experience. YMMV, but I have been seeing more negative Vanguard reviews lately, and wanted to chime in as a very happy customer.

We moved as much of our money over to Vanguard last year for the lower expense ratios, which can add up to a lot as your account grows.

nyxst

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Re: T Rowe Price vs. Vanguard?
« Reply #10 on: February 24, 2014, 12:31:51 PM »
I have a question... maybe this isn't the right thread, but it seemed relatively on topic... If not, please move it to the right place.
Anyway, I see all the pro-Vanguard posts on here all the time.  I can't afford Vanguard yet, so I went with Schwab.  Just for shits and giggles, I plugged the S&P 500 Index into the price comparison thingy someone posted on this forum and..... the Schwab one had lower fees than the two Vanguard ones that seemed like the obvious comparisons for it.  Maybe this is a one off thing, but I thought it was kinda cool to see I might come out a little ahead just for being broke :)  Or, I picked some that aren't truly comparable.. In which case, let me know, because I thing I am converting my SIMPLE IRA soon and will be able to afford Vanguard at that time if it is actually better...
(I tried to attach a photo of the comparison, but it doesn't want to let me... the site for the comparison is http://apps.finra.org/fundanalyzer/1/fa.aspx and the funds I used were Schwab-SWPPX and Vanuguard-VOOG and VOOV)

GlassStash

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Re: T Rowe Price vs. Vanguard?
« Reply #11 on: February 24, 2014, 01:02:24 PM »
SWPPX - has an ER of .09% (pretty low)
VFIAX - has an ER of .05% (lower, but requires a $10k minimum)

I think most retirement funds will end up have > $10k, so in my mind the Vanguard fund is better for fees long term. Performance is another matter, one which I didn't investigate.

markstache

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Re: T Rowe Price vs. Vanguard?
« Reply #12 on: February 24, 2014, 01:28:32 PM »
Or, I picked some that aren't truly comparable.

This. You are comparing a S&P 500 fund against two funds that are each only a portion of the S&P 500. The correct comparison would have been against VOO, Vanguard's (complete) S&P 500 ETF.

Also, consider buying a total market (VTI) over an S&P 500 fund. Frankly, there is not a huge difference, given that the S&P 500 forms the majority of total market, but you get a little more diversification. To put it another way, at least have a reason why you are choosing only large firms over a total market index.

Finally, on the topic of "Vanguard is too expensive", you can get started with Vanguard ETFs immediately with no minimum purchase amount. This is not to say you shouldn't use Schwab, but just to correct an inaccuracy. If you absolutely have to use mutual funds instead of ETFs, you are more constrained in your choices.

nyxst

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Re: T Rowe Price vs. Vanguard?
« Reply #13 on: February 24, 2014, 01:49:30 PM »
Great! Thanks for the info!  I looked at the ETF's.. they charge like your are buying stocks if I remember correctly... I mean, I buy shares and I get a charge per share through whomever.. I was trying to avoid that, since I have to buy small chunks at a time for now, and that way gets pretty expensive.

markstache

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Re: T Rowe Price vs. Vanguard?
« Reply #14 on: February 24, 2014, 02:02:23 PM »
Most places these day offer commission free trades for certain ETFs. For example, with a Vanguard brokerage account you can trade Vanguard ETFs at no additional cost. I think Schwab offers at least some Vanguard ETFs commission free as well (it is quite possible that I could be wrong about this), and probably their own index ETFs as well.

nyxst

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Re: T Rowe Price vs. Vanguard?
« Reply #15 on: February 24, 2014, 02:15:22 PM »
I will do research again!  That definitely sounds like an option that I overlooked.... Thanks!

LuckyMe

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Re: T Rowe Price vs. Vanguard?
« Reply #16 on: March 07, 2014, 01:13:23 PM »
Thank you all for the informative responses!  Looks like I have some research to do in order to better understand how both funds work and what they're comprised of. 

For the time being, I'm directing my monthly Roth contributions to Vanguard and letting my TRP account stay as is until I work out my AA.  Also while TRP returns are slightly higher when comparing similar Target date funds, it seems you could achieve the same rate of return by picking a Vanguard fund with a longer time horizon.