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Expense ratio 0.16% vs 0.07% worthwhile?
Old 10-04-2019, 08:00 PM   #1
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Expense ratio 0.16% vs 0.07% worthwhile?

Happy Friday all!

I have all my and DW IRA accounts ~1M+ in VG in Wellesley Income Fund Admiral Shares (VWIAX)
It’s expense ratio 0.16%.

I’m considering replacing it with index funds with exp ration likely ~0.07 or so.

Wanna ask this forum - do you think it’s worthwhile? Would you do it ?

Thx
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Old 10-04-2019, 08:05 PM   #2
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If you believe that index funds are inherently better than actively managed funds, then yes.

The fund expense saving is $900/yr. But there's also savings in the trading costs since index funds trade infrequently. You may also see savings in taxes on capital gains distributions. (In my experience, none of my index funds distribute capital gains, but my active funds do)

You will have to do your own rebalancing.
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Old 10-04-2019, 08:10 PM   #3
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If you believe that index funds are inherently better than actively managed funds, then yes.

The fund expense saving is $900/yr. But there's also savings in the trading costs since index funds trade infrequently. You may also see savings in taxes on capital gains distributions. (In my experience, none of my index funds distribute capital gains, but my active funds do)

You will have to do your own rebalancing.
VG financial advisor actually proved to me with examples that yes, index funds will perform as good if not better then actively managed.

Capital gains is not a factor as all is in IRAs

Thx for your reply
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Old 10-04-2019, 08:28 PM   #4
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I probably wouldn’t do it just based on the already low expense ratio. There would have to be other compelling reasons.
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Old 10-04-2019, 08:31 PM   #5
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I probably wouldn’t do it just based on the already low expense ratio. There would have to be other compelling reasons.
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Old 10-04-2019, 08:34 PM   #6
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+1
Okey I hear you thx....

What would be compelling reason for you? Better performance ?
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Old 10-04-2019, 08:39 PM   #7
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Okey I hear you thx....

What would be compelling reason for you? Better performance ?
Ignoring the fact the two funds are apples and oranges when it comes to AA, I prefer Wellesley for the convenience factor. No need for me to concern myself with rebalancing, the fund does it for me.
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Old 10-04-2019, 08:52 PM   #8
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Originally Posted by walkinwood View Post
If you believe that index funds are inherently better than actively managed funds, then yes.

The fund expense saving is $900/yr. But there's also savings in the trading costs since index funds trade infrequently. You may also see savings in taxes on capital gains distributions. (In my experience, none of my index funds distribute capital gains, but my active funds do)

You will have to do your own rebalancing.
Trading costs are included in the fund expenses, they are not some additional cost. And, as others have said, "taxable" distributions are irrelevant in an IRA.

Wellesley is about 35/65 AA and I am of the opinion that active management is more valuable on the fixed income side than on the stock side. With fixed income (65% of Wellesley) the managers can avoid the trashier issues and have less volatility and less correlation with equities. IMO, that is why Wellesley (and Wellington) have performed so well over many years.

So, yes you save a few basis points on expenses with indexes, but you get professional management of your fixed income position which, again IMO, adds more value than it does on the stock side.
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Old 10-04-2019, 08:58 PM   #9
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Trading costs are included in the fund expenses, they are not some additional cost. And, as others have said, "taxable" distributions are irrelevant in an IRA.

Wellesley is about 35/65 AA and I am of the opinion that active management is more valuable on the fixed income side than on the stock side. With fixed income (65% of Wellesley) the managers can avoid the trashier issues and have less volatility and less correlation with equities. IMO, that is why Wellesley (and Wellington) have performed so well over many years.

So, yes you save a few basis points on expenses with indexes, but you get professional management of your fixed income position which, again IMO, adds more value than it does on the stock side.

That’s an interesting point.
One additional reason for me is that I’m considering to increase bond position to improve my AA target.

What’s if change the question a bit and ask - if you want to use bond position. Would you use managed of index bond fund?

Say Vanguard Core Bond Fund Admiral vs BND
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Old 10-04-2019, 09:40 PM   #10
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Originally Posted by wanaberetiree View Post
VG financial advisor actually proved to me with examples that yes, index funds will perform as good if not better then actively managed.

Capital gains is not a factor as all is in IRAs

Thx for your reply
Can you share what the financial advisor recommended in place of Wellesley and Wellington?

I do not have a lot in the above two funds, but have thought when I get tired of active investing, would put 50/50 in these two funds and call it quit.

I checked, and from 2004 till now (date range limited by data availability), the above 50/50 mix beat the 50/50 mix of VTSAX (Total Stock Market) and AGG (Bond Index), with a bit higher return and a bit lower volatility.

Tax on cap gains due to trading inside the MFs of course should also be considered, but for a retirement account I would go with Wellesley/Wellington.

Note that I used AGG instead of BND because the former's inception was in 2004, while BND came into being in 2008.

https://www.portfoliovisualizer.com/...2=100&total3=0
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Old 10-04-2019, 09:49 PM   #11
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Can you share what the financial advisor recommended in place of Wellesley and Wellington?

I do not have a lot in the above two funds, but have thought when I get tired of active investing, would put 50/50 in these two funds and call it quit.

I checked, and from 2004 till now (date range limited by data availability), the above 50/50 mix beat the 50/50 mix of VTSAX (Total Stock Market) and AGG (Bond Index), with a bit higher return and a bit lower volatility.

Tax on cap gains due to trading inside the MFs of course should also be considered, but for a retirement account I would go with Wellesley/Wellington.

Note that I used AGG instead of BND because the former's inception was in 2004, while BND came into being in 2008.

https://www.portfoliovisualizer.com/...2=100&total3=0
I don’t have exact notes for all, but for Wellington it was something like this:


Sell VWENX 100% Vanguard Wellington™ Fund Admiral™ Shares
Buy VVIAX 30% Vanguard Value Index Fund Admiral Shares
VFIDX 40% Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
VTIAX 30% Vanguard Total International Stock Index Fund Admiral Shares
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Old 10-04-2019, 10:01 PM   #12
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That’s an interesting point.
One additional reason for me is that I’m considering to increase bond position to improve my AA target.

What’s if change the question a bit and ask - if you want to use bond position. Would you use managed of index bond fund?

Say Vanguard Core Bond Fund Admiral vs BND
I would not as I prefer active management of bond portfolios.
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Old 10-04-2019, 10:06 PM   #13
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I don’t have exact notes for all, but for Wellington it was something like this:


Sell VWENX 100% Vanguard Wellington™ Fund Admiral™ Shares
Buy VVIAX 30% Vanguard Value Index Fund Admiral Shares
VFIDX 40% Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
VTIAX 30% Vanguard Total International Stock Index Fund Admiral Shares
I just checked, and the above mixture does not look that good compared to Wellington or a mixture of Wellington/Wellesley. It had higher volatility, yet lower long-term return. On the other hand, a mixture of 65/35 Total Market/Total Bond runs neck-to-neck with Wellington.

See comparison of 1) Wellington, 2) 65/35 Total Market/Total Bond , 3) the above mixture.

https://www.portfoliovisualizer.com/...100&total3=100

PS. Above link had an error, and was edited.
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Old 10-04-2019, 10:51 PM   #14
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They really love to push that international exposure. My international exposure is 10% of equities, which amounts to about 4.5% of total portfolio and that is plenty for me. I just don't have that much trust in foreign market regulation and oversight.
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Old 10-04-2019, 11:28 PM   #15
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Yes, having 1/2 of the equity portion in international is awfully high.

So, I change the advisor recommended portfolio of 30 value stock/30 international/40 bond to 65 value stock/35 bond and rerun it. This time, there's data going back to 2004, and Wellington still beats them all slightly, in terms of returns and volatility.

https://www.portfoliovisualizer.com/...100&total3=100
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Old 10-05-2019, 12:17 AM   #16
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VG financial advisor actually proved to me with examples that yes, index funds will perform as good if not better then actively managed.
Unless he/she has a functioning crystal ball, I don't believe it could be proven for what happens in the future. Although as a whole index funds have a very good track record against actively managed funds, it does not mean that every index fund outperforms every actively managed fund.

I agree with Montecfo's view on this.
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Old 10-05-2019, 05:52 AM   #17
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Vanguard guy is working from a sales script, it sounds like.
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Old 10-05-2019, 06:13 AM   #18
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Originally Posted by wanaberetiree View Post
I don’t have exact notes for all, but for Wellington it was something like this:


Sell VWENX 100% Vanguard Wellington™ Fund Admiral™ Shares
Buy VVIAX 30% Vanguard Value Index Fund Admiral Shares
VFIDX 40% Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
VTIAX 30% Vanguard Total International Stock Index Fund Admiral Shares
Now I'm confused. In the OP you mention Wellesley, and now suddenly it is Wellington.... which is it? Or do you currently own both?

In any event, both Wellesley and Wellington are fine managed funds and you get the benefit of a good history of stewardship... the benefit of active management for fixed income is a draw for me... in fact for a while in the past I held Wellesley to fill out my fixed income allocation and the equities therein came along for the ride.

If you play around with Portfolio Visualizer a bit you'll see that Wellesley has historically outperformed a 35/65 blend of stock/bond index funds for 3, 5, 10, max and 2019 YTD periods:

 35% VTSMX 65% VBMFXVWINX
3 years… 2016-20184.46%5.08%
5 years… 2013-20185.28%5.60%
10 years… 2009-20186.89%7.94%
Max… 1993-20186.84%7.90%
YTD 201912.56%13.66%

https://www.portfoliovisualizer.com/...2=100&total3=0

Wellesley and Wellington don't work for me now because of tax efficiency constraints, but if they did I would not hesitate to use them at all.
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Old 10-05-2019, 08:35 AM   #19
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Once you get the e/r down to a certain level, it doesn't make much difference. One thing I do on my tracking spreadsheet is to calculate the exact dollar amount that the e/r represents for my total portfolio. I then compare that to how many weeks per year of living expenses that represents. I'm at approx. 1.5 weeks. Hard to justify doing a lot of work to try to knock a few 1's of days off of that given the types of funds I like to invest in or have available. Sure, if my portfolio was a 2 or 3-fund type of portfolio, the Fidelity ZERO funds would be attractive - but that's not me.
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Old 10-05-2019, 08:48 AM   #20
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...With fixed income (65% of Wellesley) the managers can avoid the trashier issues and have less volatility and less correlation with equities. IMO, that is why Wellesley (and Wellington) have performed so well over many years.
...
I was very surprised to see 18-20% of the bonds in Wellesley are rated BBB or lower.
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