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Are the Vanguard offerings actually better?
Old 05-10-2008, 09:13 PM   #1
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Are the Vanguard offerings actually better?

I understand that Vanguard's Index funds and ETF's are usually less expensive than their competitor's offerings. But, for some reason, I'm under the vague impression that Vanguard's Index funds and ETF's are actually a bit better? smarter? safer? more wisely put together? Anybody have any idea about this?
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Old 05-10-2008, 09:52 PM   #2
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They don't taste any better, but they are less filling.....
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Old 05-11-2008, 03:40 AM   #3
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Originally Posted by redduck View Post
I understand that Vanguard's Index funds and ETF's are usually less expensive than their competitor's offerings. But, for some reason, I'm under the vague impression that Vanguard's Index funds and ETF's are actually a bit better? smarter? safer? more wisely put together? Anybody have any idea about this?

yes and no. in an up market index funds are great, in a down or sideways market you stand no chance of making money or cushioning the damages. i use both , active and index. long term my active have beaten my index portfolio even with slightly higher expenses.

its nice having the tax efficiancy of the index funds and etf's but watch out for the tax torpedo. sometimes they are soooo tax efficiant that when held in a taxable account you end up with a massive tax bill when sold because very little taxes have been paid along the way and that may be enough to cause you to loose certain tax write offs or trigger the amt tax on all your income....... we lost both the stimulous check and triggered the amt by heavy capital gains..... as well as loosing the college deduction for my wife. in this case a less efficiant fund would have been better for us over all. the amt penalty was an additional 12,000 bucks by itself plus all the other stuff we couldnt take.



like everything in this world things always look great and a no brainer, like paying less taxes along the way , until they arent. then you realize there are pitfalls you didnt even think about
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Old 05-11-2008, 05:32 AM   #4
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Originally Posted by redduck View Post
I understand that Vanguard's Index funds and ETF's are usually less expensive than their competitor's offerings. But, for some reason, I'm under the vague impression that Vanguard's Index funds and ETF's are actually a bit better? smarter? safer? more wisely put together? Anybody have any idea about this?
According to the Vanguard diehards they are.
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Old 05-11-2008, 06:09 AM   #5
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I like Vanguard because the are cheap and the firm is a mutual (owned by its customers), which tends to remove the profit motive and entrench the idea of serving customers.

Having said that, you have to look very carefully at any investment product, no matter how plain vanilla. A few years ago, I read through the annual list of holdings in my iShares EAFE index ETF. Imagine my surprise to see credit default swaps written on single junk rated names. I'm pretty sure that's not part of the index, but I bet I am .0001% of owners of that fund that read that and understoos what it meant.
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Old 05-11-2008, 12:40 PM   #6
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It seems to me that most funds have a blurb in the prospectus that lets them use swaps, foreign currency and other contraptions where they see opportunities. Seems an institutional thing where one fund family will find something particularly tasty in arb or leverage and then all the funds use it for some part of their ready cash from inflows and expected outflows. Janus was really fond of that stuff but I dont think I've noticed any run of the mill vanguard funds putting huge amounts into them.

As far as some indexes being "better" than others, some indexes like DFA selectively leave out stuff they dont feel improves the indexes. Many others do similar "sampling" to reduce trading costs and attempt to improve returns. Some swap the equities for futures if theres an arb opportunity that makes the futures more appealing than holding the actual equities. Some time their buys and sells during index changes for price optimization.

Star Trackers Seek to Beat the Indexes - International Herald Tribune

"Broadly speaking there are three ways to track an index. The first, called "complete replication", involves buying every stock in an index, while the second two involve just buying a sample of those stocks. Thesimpler of these is "stratified sampling" which involves dividing up the stocks in the index by size and sector and just buying samples of each group. "Optimization, on the other hand, divides index stocks into yet smaller groups using extra classification like low or high income yield and again takes samples.

Gus Sauter, a vice president of Vanguard Core Management, said he used all three different systems. Portfolios using complete replication virtually matched the index, he said, but it could only be used on the very biggest portfolios. Of the two sampling techniques used for smaller portfolios he preferred optimization.

"Originally we used stratified sampling but optimization is much more sophisticated and precise." We will probably be converting our one fund that is using stratified sampling to optimization."

Judging from performance figures produced by Lipper Analytical the Vanguard 500 Portfolio only underperformed the S&P 500 Index by 0.1 per cent in 1991. Its sister fund in the Vanguard Index Trust, the Extended Market Portfolio, underperformed its target, the Wilshire 4500 Index by 1.7 per cent. That greater tracking error is partly down to the stratified sampling technique used in the Extended Market Portfolio but the Wilshire 4500 is also difficult to track because it contains so many different stocks.

In addition to these basic techniques, futures and options contracts, loosely described as bets on price movements, are sometimes used to track indexes and increasingly to beat them. David Hager, a senior partner of the U.K. consulting actuaries Bacon & Woodrow, is an expert on the use of index funds by big investors like pension funds. He said: "I think there will be some very interesting products coming."

"It is because we are getting much more skilled in the use of futures and options.""

BTW, this is an extremely old article, about 17 years old...so your homework assignment is to see whether he was right and "we" did get more skilled in the use of futures and options and produced interesting products as a result...
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Old 05-11-2008, 01:47 PM   #7
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better? smarter? safer? more wisely put together? Anybody have any idea about this?
There are thousands of index funds on the market. Vanguard has about 100 of them. If one believes that the content of simular index funds does not vary that much, it all boils down to expenses. Vanguard has traditionally (over 30 years) been the among the least expensive funds available to the general public. Probably why Vanguard is among the most popular fund families today.
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Old 05-12-2008, 09:23 AM   #8
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its nice having the tax efficiancy of the index funds and etf's but watch out for the tax torpedo. sometimes they are soooo tax efficiant that when held in a taxable account you end up with a massive tax bill when sold because very little taxes have been paid along the way...

Tell me why that's a bad thing. People go through a lot of hoops to get extra tax deferral mechanisms.
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Old 05-12-2008, 12:36 PM   #9
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BTW, this is an extremely old article, about 17 years old...so your homework assignment is to see whether he was right and "we" did get more skilled in the use of futures and options and produced interesting products as a result...
12/31/1991 - 12/31/2007

VFINX: 10.21%
S&P 500 index: 10.31%

difference: 0.10%

Vanguard shaved about half of the expense ratio [which was around 0.20% for most of the period] off in execution.

- Alec
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Old 05-12-2008, 01:09 PM   #10
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It's the Execution, Stupid

yeah this is an old article from bernstein about how Vanguard executes the Indices better than ishares.

-h
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Old 05-12-2008, 01:33 PM   #11
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Tell me why that's a bad thing. People go through a lot of hoops to get extra tax deferral mechanisms.
I was wondering the same thing. For a couple like my wife and I who are still working, live in a high-tax state (CA), and who have been smacked the last couple of years by the AMT, avoiding extra income at this time and deferring as much of the gains as possible (in a taxable account) until retirement would seem to be a good plan. Is there a flaw in my thinking?
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Old 05-12-2008, 03:17 PM   #12
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Is there a flaw in my thinking?
No
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Old 05-12-2008, 05:41 PM   #13
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I was wondering the same thing. For a couple like my wife and I who are still working, live in a high-tax state (CA), and who have been smacked the last couple of years by the AMT, avoiding extra income at this time and deferring as much of the gains as possible (in a taxable account) until retirement would seem to be a good plan. Is there a flaw in my thinking?


yeah, what if you decide to change funds now, or go to another style etf before you retire..... those large accumulated gains can really hammer you now. the real problem is when it puts you over the line for the amt.
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