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Vanguard's VLCAX, VTSAX or VFIAX for Large Cap Asset Allocation?
Old 04-06-2014, 07:38 AM   #1
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Vanguard's VLCAX, VTSAX or VFIAX for Large Cap Asset Allocation?

Hi:

I currently have a sizeable amount of Vanguard S&P Index Fund (VFIAX) which makes up a good portion of my Large Cap asset allocation.

I read that something like 13 companies make up 25% of the weighted average of the S&P, and that an S&P index fund is not as diversified as you might expect across large cap stocks.

So, I am considering two alternative Vanguard Large Cap Funds. One is VTSAX and the other is VFIAX. I included some of their information below. Do you think, if part of my goal is to increase the diversification within my Large Cap asset allocation, that VTSAX or VLCAX would be a better choice? The expenses ratios are similar and the average returns for all three funds are not dramatically different. The VLCAX holds about 657 separate company stocks and the VTSAX holds about 3269 separate company stocks. Is there any reason I should stay with the S&P Index Fund?

Large-Cap Index Admiral Shares
VLCAX Stock - Large-Cap Blend 0.10%

Total Stock Market Index Admiral Shares
VTSAX Stock - Large-Cap Blend 0.05%

500 Index Admiral Shares
VFIAX Stock - Large-Cap Blend 0.05%
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Old 04-06-2014, 08:30 AM   #2
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If you go to the vanguard website and look up these funds (or morningstar, etc.) you can see the holdings, percent held by the top 10 stocks etc. There's not much difference between them. Vanguard total stock has the least concentration at the top but that's because it's holding non large cap stops.
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Old 04-06-2014, 08:37 AM   #3
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I own the equivalent of each of these funds. Specifically, I own shares of VLCAX, VTI, and FUSVX.

I think which one you might own will depend on what else is in your portfolio and how you manage your portfolio. I will give you reasons why I own the 3 funds I own:

0. I prefer to own total us stock market index fund which is VTSAX.

1. Back in 2009, in a tax-loss harvesting move, I sold VTSAX and bought VLCAX (large-cap) because it had more holdings than VFIAX (S&P500). Since VLCAX only went up from there, I will not sell and pay taxes to get back to VTSAX.

2. I own FUSVX (S&P500) because it is available in my 401(k) and FSTVX is not. I have FSEVX in this account to help fill the void of mid/small caps left by owning FUSVX.

3. I own VTI (total US stock market index) in a brokerage account with free trades. I also own separate small-cap ETFs.

So my recommendation for you is to use Total US Stock Market index fund VTSAX because it is broad market index and includes mid and small cap stocks, too. It is more diversified and in a small way captures the small-cap premium. I suppose if the rest of your portfolio is all small-cap funds, then I would not use VTSAX, but would use VLCAX.

VTSAX is part of the "3-fund portfolio" that is all over the internet. See, e.g., the WSJ article: http://online.wsj.com/news/articles/...77442649398388
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Old 04-06-2014, 08:45 AM   #4
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Quote:
Originally Posted by nico08 View Post
Hi:

I currently have a sizeable amount of Vanguard S&P Index Fund (VFIAX) which makes up a good portion of my Large Cap asset allocation.

I read that something like 13 companies make up 25% of the weighted average of the S&P, and that an S&P index fund is not as diversified as you might expect across large cap stocks.

So, I am considering two alternative Vanguard Large Cap Funds. One is VTSAX and the other is VFIAX. I included some of their information below. Do you think, if part of my goal is to increase the diversification within my Large Cap asset allocation, that VTSAX or VLCAX would be a better choice? The expenses ratios are similar and the average returns for all three funds are not dramatically different. The VLCAX holds about 657 separate company stocks and the VTSAX holds about 3269 separate company stocks. Is there any reason I should stay with the S&P Index Fund?

Large-Cap Index Admiral Shares
VLCAX Stock - Large-Cap Blend 0.10%

Total Stock Market Index Admiral Shares
VTSAX Stock - Large-Cap Blend 0.05%

500 Index Admiral Shares
VFIAX Stock - Large-Cap Blend 0.05%
What you have discovered is that the S&P 500 is weighed by market value, i.e. you sum the value of the 500 companies and for each company divide its value by the index total market value to get the percentage. Those 13 companies are the big enchilada companies of the index. A total market fund that is market value weighed will exhibit a similar pattern all be it a bit less pronounced i.e. large cap stocks make up about 3/4 of the total stock market fund. So the 13 companies would make about 20% of the total stock market fund.
You could balance between sizes at your own choice of ratio with VEXAX, it should and choose your percentage. (Note the because more effort is required, the expense ratio is higher.
Note that the weight of individual stocks on the S&P varies from 2.85 for apple and 2.51 for ExxonMobil down to .02 for the companies at the bottom.
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Old 04-06-2014, 09:02 AM   #5
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You might consider an equal-weighted ETF in order to avoid the overweighting of a few big stocks:
http://finance.yahoo.com/news/equal-...165700431.html
The article warns that over time it will shift to value stacks and that might not be to some investor's taste. Value outperforms large cap. What is his problem? More significant is the higher annual maintenance fee, 0.40% vs 0.10% for SPDR S&P 500.

I don't like big stocks at all, so I have been avoiding the S&P lately.
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Old 04-06-2014, 11:28 AM   #6
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Quote:
Originally Posted by nico08 View Post
Hi:

I currently have a sizeable amount of Vanguard S&P Index Fund (VFIAX) which makes up a good portion of my Large Cap asset allocation.

I read that something like 13 companies make up 25% of the weighted average of the S&P, and that an S&P index fund is not as diversified as you might expect across large cap stocks.

So, I am considering two alternative Vanguard Large Cap Funds. One is VTSAX and the other is VFIAX. I included some of their information below. Do you think, if part of my goal is to increase the diversification within my Large Cap asset allocation, that VTSAX or VLCAX would be a better choice? The expenses ratios are similar and the average returns for all three funds are not dramatically different. The VLCAX holds about 657 separate company stocks and the VTSAX holds about 3269 separate company stocks. Is there any reason I should stay with the S&P Index Fund?

Large-Cap Index Admiral Shares
VLCAX Stock - Large-Cap Blend 0.10%

Total Stock Market Index Admiral Shares
VTSAX Stock - Large-Cap Blend 0.05%

500 Index Admiral Shares
VFIAX Stock - Large-Cap Blend 0.05%
Plug them into Vanguard's compare to see their performance. I'd go with VTSAX as that's done a tad better. But they are very similar. But if the amount is outside of an IRA, might be better to just leave as is to avoid taxable event. I did the comparison for you:
Attached Images
File Type: jpg vg compare2.jpg (72.8 KB, 29 views)
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Old 04-06-2014, 11:43 AM   #7
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thanks easysurfer. helpful chart.
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Old 04-06-2014, 12:26 PM   #8
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thanks easysurfer. helpful chart.
Glad you found the chart helpful. Years ago, I was in a somewhat similar situation in that an IRA was 100% in the SP500 Index but I decided to switch to the total index. I started before Vanguard had the total index. But since that was all within an IRA, no taxable event.
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Old 04-06-2014, 03:05 PM   #9
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Originally Posted by easysurfer View Post
Plug them into Vanguard's compare to see their performance. I'd go with VTSAX as that's done a tad better.
Performance is not the way to compare these funds since they are all index funds with low expense ratios from a reputable index-fund shop.

VTSAX has some riskier stocks in it, namely the mid- and small-cap stocks. if these do better, then VTSAX will do better than the other two which are 100% large-cap and have no small-caps in them. If mid- and small-cap stocks do worse, then VTSAX will do worse.

If the OP's portfolio has lots of small-caps already, then VTSAX just adds more to the small caps already in the portfolio along with the large-caps that are in VTSAX. If the OP's portfolio is all large-caps already, then VTSAX is better than the other 2 choices because it adds the diversification benefits of mid and small cap stocks, but not a lot of them.
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Old 04-06-2014, 07:53 PM   #10
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Hi- Yes, I have other funds that make up my small and medium cap allocations. If I want to keep those funds alone, that would favor an investment in VLCAX or VFIAX.
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