Expense ratio 0.16% vs 0.07% worthwhile?

[wanaberetiree]

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

 

[walkinwood]

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.

 

[wanaberetiree]

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

 

[audreyh1]

I probably wouldn’t do it just based on the already low expense ratio. There would have to be other compelling reasons.

 

[REWahoo]

I probably wouldn’t do it just based on the already low expense ratio. There would have to be other compelling reasons.

+1

 

[wanaberetiree]

+1

Okey I hear you thx....

What would be compelling reason for you? Better performance ?

 

[REWahoo]

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.

 

[USGrant1962]

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.

 

[wanaberetiree]

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

 

[NW-Bound]

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...location4_2=50&total1=100&total2=100&total3=0

 

[wanaberetiree]

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...location4_2=50&total1=100&total2=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

 

[Montecfo]

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.

 

[NW-Bound]

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...cation7_3=30&total1=100&total2=100&total3=100

PS. Above link had an error, and was edited.

 

[coveredbridge]

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.

 

[NW-Bound]

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...ymbol7=VTIAX&total1=100&total2=100&total3=100

 

[njhowie]

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.

 

[target2019]

Vanguard guy is working from a sales script, it sounds like.

 

[pb4uski]

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% VBMFX	VWINX
3 years… 2016-2018	4.46%	5.08%
5 years… 2013-2018	5.28%	5.60%
10 years… 2009-2018	6.89%	7.94%
Max… 1993-2018	6.84%	7.90%
YTD 2019	12.56%	13.66%

https://www.portfoliovisualizer.com...ocation3_2=100&total1=100&total2=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.

 

[big-papa]

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.

 

[Spock]

...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.

 

[OldShooter]

Yes, having 1/2 of the equity portion in international is awfully high. ...

"Awfully?!!?" I would agree that it is unusually high for US investors. The fact is that investors worldwide have a strong home country bias in their investments. The US is no different.

But that doesn't mean home country bias is good. Roughly, the US is 45% of the world market cap. So to own the world, diversifying away geographic risk, requires roughly 50/50. We just buy VT and/or VTWAX and thus own the world without worrying about what the ratio is or trying to rebalance our ratio..

I have posted this video link multiple times, but here again is Dr. Kenneth French on the subject: https://famafrench.dimensional.com/videos/home-bias.aspx

Re the OP's question, IMO expense ratio is always something to be considered but in these days of tiny, tiny ERs it is not the dominant factor in my decisions.

 

[OldShooter]

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. ...

No one has a crystal ball, but we can all look at history. At least 50 years of history beginning with Michael Jensen's paper in 1967 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153) and including eighteen years of biannual S&P SPIVA reports says that the average actively managed fund does not come close to matching the return of its benchmark. Further, the statistical and academic research during the period also says that the "winner" funds cannot be predicted ahead of time.

So yes, there are always a few actively managed funds that outperform but that is useless information because no one can predict the winners ahead of time.

Without a crystal ball, we can only go with inductive reasoning -- using past experience to steer into the future. For anyone familiar with the statistics and the reasearch, the decision to buy total market funds is a no-brainer.

 

[walkinwood]

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.

Trading costs are not included in the stated management fees (the expense ratio)

 

[walkinwood]

Capital gains is not a factor as all is in IRAs

Thx for your reply

duh! Sorry - I missed that these funds were in an IRA.

 

[OldShooter]

Trading costs are not included in the stated management fees (the expense ratio)

Worse yet, one of the biggest costs is totally invisible.

When a fund wants to take or abandon a large stock position its activities inevitably drive the stocks price up or down. Some of this is due to front running and program trading but at the bottom is simply supply and demand. Bid and ask prices are based on what quantity the counterparty wants buy or sell. When the fund comes in with a large quantity, it may partially "fill" initially at the current bid or ask price but from that point the price starts to react to the whale's presence. This is a major reason why high portfolio turnover hurts performance.

This market cost is especially important for funds that track narrow indices like the S&P 500. Whenever a stock joins or leaves the index, all of the index funds have to move very quickly to minimize their tracking error. So they pretty much have to take what the market gives them.

In contrast, when Buffett dumped IBM last year I am sure his traders worked themselves out of the position over days or weeks, maybe even months.