S&P 500 Fund Question

[DenverCraig]

First, I love this forum. I can't tell you how much I've learned.

Anyway, I'm about a year away from retirement and trying to simplify things. We've had several 401K's over the years that, as we changed jobs, turned into IRA's. As a result we have two S&P500 Funds and I'd like to combine them. I'm trying to figure out which one is "better".

• IVW (ETF): 0.18% management fee
• SWPPX (Index Fund): 0.02 management fee

I've read in a few places that ETF's have lower fees than equivalent mutual funds but not here. Any idea why?

Thanks, and Happy Holidays!

 

[RunningBum]

One is run by Blackrock, the other by Schwab. Through volume, lower administrative costs or whatever else, Schwab can keep expenses lower.

Good for you to look at the actual fees and not just accept that ETFs will always be lower.

 

[VanWinkle]

I think either is fine, but you may want to look at further diversification with a US Total stock market fund with over 3500 stocks instead of 500(actually a little less than 500). An example link below:

https://investor.vanguard.com/mutual-funds/profile/vtsax

Both Schwab and Fidelity have similar funds.

 

[OldShooter]

I vote neither. S&P 500 is a sector bet on large cap US stocks. You miss small caps, REITs, value, Shell, Nestle, Volkswagen, Inbev, etc. ...

Pick out instead two funds, one total US market stock, and one total international market stock. Blend as you like; 70/30 seems to be popular around here. Vanguard's take on international is here: https://www.vanguard.com/pdf/ISGGEB.pdf

Alternatively, we hold one fund: VTWAX total world equities. This one is about 55% international, a level which many people here seem to be afraid of. Here are eight minutes of thoughts from a bonafide guru: https://famafrench.dimensional.com/videos/home-bias.aspx

Re ETFs vs conventional mutual funds, both are mutual funds and for a long term investor they are pretty much the same. The ER is the important thing, all other factors being equal. IMO ETFs were designed primarily to suck people into trading them instead of being investors. You are an investor.

 

[DenverCraig]

Thank you for the replies!

The S&P 500 funds are not the only things in my portfolio. I have, or will have, 70% stock funds (mix of large cap growth--includes the S&P fund above, large cap value, small cap value, international), 30% intermediate term bond funds, 3 years of cash in CD ladders. I'd like to get down to one or two funds in each asset class.

The mix is based on a book I read last year, "The All Weather Retirement Portfolio". Seemed like a reasonable approach, but your comments above merit consideration. I really want to simplify as much as possible.

Thanks again!

 

[OldShooter]

... stock funds (mix of large cap growth--includes the S&P fund above, large cap value, small cap value, international) ... I really want to simplify as much as possible. ...

With that mix all you have done is to set up a portfolio that is distorted, highly favoring large cap US stocks. Large gap growth + large cap value = most large cap = approximately the S&P 500. In general, more passive funds is not better and it does not produce any diversification.

People often misunderstand diversification IMO. The goal of diversification is to hold enough different assets (stocks, for example) so that the effect of any single asset on the portfolio value is minimal. This is one of the basics of Modern Portfolio Theory that eventually leads to things like the Efficient Frontier.

Holding two different mutual funds that each hold basically the same assets provides no diversification. "Tilting" a portfolio by, for example, buying a total market fund and an S&P 500 fund is actually antithetical to diversification because it overweights large cap US stocks. Same story adding small caps to a total market fund. If that's what you want, fine, but it un-diversification.

So .. "as simple as possible" leads you to VTWAX or to a pair of US/Intl funds.

 

[gwraigty]

As to your original question as to which is better, here is a comparison, with dividends reinvested, from Portfolio Visualizer:

IVW vs. SWPPX

A major difference is that SWPPX throws off more income, which may or may not be what you want. It's also more evenly split between growth and value, whereas IVW is growth.

 

[DenverCraig]

That's a lot to think about, thanks!

Forgetting the S&P 500 question for a second, the book I mentioned above states that the following AA:

• 12% Large Cap Growth
• 23% Large Cap Value
• 14% Small Cap Value
• 21% International
• 30% Intermediate Term Bonds

with 4% withdraw per year will last 40 years. My goal has been to have one or two mutual funds per asset class (I can't get down to one because our current 401K's obviously have restrictions on what funds are available). Is the author smoking dope? Based on surfing this forum, it doesn't seem unreasonable.

But it also sounds like I can get the same thing with a total market fund, an international fund and a bond fund--I'll look at that.

I still have a year or so to get everything where it needs to be before I pull the trigger, so now's the time.

Thanks again!

 

[OldShooter]

Forgetting the S&P 500 question for a second, the book I mentioned above states that the following AA:

• 12% Large Cap Growth
• 23% Large Cap Value
• 14% Small Cap Value
• 21% International
• 30% Intermediate Term Bonds

with 4% withdraw per year will last 40 years. My goal has been to have one or two mutual funds per asset class (I can't get down to one because our current 401K's obviously have restrictions on what funds are available). Is the author smoking dope? Based on surfing this forum, it doesn't seem unreasonable.

Nope. Not unreasonable. There is an almost-infinite number of "not unreasonable" suggestions on the internet and no analytical way to choose between them.

1) The less diversified a portfolio the more volatility you will see as sectors wax and wane. If you have not seen the Callan "quilt chart" (https://www.callan.com/periodic-table-explained/) it merits some study and thought. The portfolio you list emphasizes large caps, omits mid-caps, and underweights international but it does not go completely nuts in any direction. Is that a winning recipe versus a somewhat more diversified approach? Maybe. Maybe not. Time will tell.

2) There is no "will last 40 years." The future is not the past and we cannot be sure that the past will predict the future. Do you think the 2020s will be similar to the 1980s? Of course not. But inductive reasoning is all we have and we use it every day, forgetting its risks. Here is a favorite quotation of mine:

“ ... in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”
​

I think you can guess who said that.

Here are a couple from William Bernstein, a very well respected investment writer:

(on investing for retirement) “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

(on a non-diversified portfolio) “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”

​

 

[pb4uski]

That's a lot to think about, thanks!

Forgetting the S&P 500 question for a second, the book I mentioned above states that the following AA:

1. 12% Large Cap Growth
2. 23% Large Cap Value
3. 14% Small Cap Value
4. 21% International
5. 30% Intermediate Term Bonds

with 4% withdraw per year will last 40 years. My goal has been to have one or two mutual funds per asset class (I can't get down to one because our current 401K's obviously have restrictions on what funds are available). Is the author smoking dope? Based on surfing this forum, it doesn't seem unreasonable.

But it also sounds like I can get the same thing with a total market fund, an international fund and a bond fund--I'll look at that.

I still have a year or so to get everything where it needs to be before I pull the trigger, so now's the time.

Thanks again!

That is a fine AA if you want, but a straight S&P 500 index fund doesn't fit into those categories, though you could replace the 12% large cap growth and 23% large cap value with 24% S&P 500 and 11% large cap value.

 

[walkinwood]

That's a lot to think about, thanks!

Forgetting the S&P 500 question for a second, the book I mentioned above states that the following AA:

• 12% Large Cap Growth
• 23% Large Cap Value
• 14% Small Cap Value
• 21% International
• 30% Intermediate Term Bonds

with 4% withdraw per year will last 40 years. My goal has been to have one or two mutual funds per asset class (I can't get down to one because our current 401K's obviously have restrictions on what funds are available). Is the author smoking dope? Based on surfing this forum, it doesn't seem unreasonable.

But it also sounds like I can get the same thing with a total market fund, an international fund and a bond fund--I'll look at that.

I still have a year or so to get everything where it needs to be before I pull the trigger, so now's the time.

Thanks again!

I have nothing against the allocation suggested above since no one knows what allocation will perform best in the future.

From a practical standpoint though, fewer fundsare much easier to manage - mainly with fewer rebalancing transactions and possibly, associated cap gain taxes. Also, easier to handle as you age and/or have to hand off management to someone not as interested/knowledgeable as you are.

I wish I had done that at the start of my investing since I'm paying a lot of cap gains taxes to get to that model now. At some point I'd like to get down to a Total stock market fund (VTSAX), a total international market fund (vTIAX) and a bond index fund. On Vanguard's home page, they're currently talking about a 4 mutual fund or ETF portfolio. Take a look.

 

[DenverCraig]

That is a fine AA if you want, but a straight S&P 500 index fund doesn't fit into those categories, though you could replace the 12% large cap growth and 23% large cap value with 24% S&P 500 and 11% large cap value.

So I've always assumed S&P 500 consisted of large cap growth stocks. Having done a fair amount of Googling today, I'm now more confused. It seems like S&P 500 is "large cap" and that's about all you can really say about it.

Is there something I couldn't find that says what the breakdown of growth vs value is in the S&P 500?

 

[braumeister]

So I've always assumed S&P 500 consisted of large cap growth stocks. Having done a fair amount of Googling today, I'm now more confused. It seems like S&P 500 is "large cap" and that's about all you can really say about it.

Is there something I couldn't find that says what the breakdown of growth vs value is in the S&P 500?

Look at these two indexes:
SVX (S&P 500 Value)
Biggest constituents AAPL, JPM, BAC, T, UNH, BRK.B, CVX, WFC, C, WMT

SGX (S&P 500 Growth)
Biggest constituents MSFT, AMZN, FB, GOOG, GOOGL, V, MA, VZ, MRK, JNJ

Then it's up to you to decide whether their methodology of separating the index into Growth and Value companies makes any sense or not.

 

[OldShooter]

... It seems like S&P 500 is "large cap" and that's about all you can really say about it.

Yup.

Is there something I couldn't find that says what the breakdown of growth vs value is in the S&P 500?

That will vary with time, though not fast, because companies are not added or removed by those criteria and a company's growth or value status can change as the business evolves.

 

[sengsational]

Interesting how selecting one full year in portfolio analyzer (2018) puts the one with the higher expense ratio (IVW) ahead. There's a bunch of significant looking differences when looking at the backtester....more than I thought there would be.