Standard sector stocks (Vanguard/Fidelity) and expense ratios

[pb4uski]

...What is the point of all these sector funds? Just buy the market, those typically have the lowest ERs. ...

While I agree, I have done some backtesting in the past that suggests that using sector funds proportional to the market and rebalancing regularly slighly outperforms the market as a whole.... IIRC the benefit was only 10-15 bps... I ultimately concluded that it wasn't worth the bother.

 

[voidstar]

On the "Exposures" index card. Portfolio No. 1 (Total US Market) is a blend of Growth and Value. Portfolio No. 3 is 100% GROWTH.

In the period 2013-2018+, yes, Growth outperformed value. ...

Good point, I compared these in Morningstar X-Ray; maybe it's not absolutely 100% pure growth, but certainly moreso than the others. My intent was more of a spread across mid and small caps. The attachment below shows their current (Feb 2019) breakdown, which I suspect is relatively consistent for the past few years.



As to the other responses, I suppose a take away is that yes anyone can find a period of time that "validates" their argument (and as mentioned, the web is full of "advisers" making their case using credentials of past good luck).

I'm just trying to present a talking point here out of my own naïve curiosity - I'm an engineer and do get statistics; they may be boring and heartless, but (typically) numbers don't lie (unless they're cooked and all that, which there are statistics for that too!). I'm not a finance person, so thanks for the patience

I'm not sure if ER can be treated linearly - as in, a 1% ER of one fund is twice 0.5% ER of another fund. Aren't there other factors like turnover? (or ER by itself might be linear, but other cost factors may influence the "profitability" of a fund?)

Specifically, I was curious in these cases of comparing 0.03% ER with 0.3% ER -- 10X is a pretty wide spread (I think?), that should somehow be noticeable (assuming those backtests are properly accounting for it; which so far everyone seems to agree/assume they are? i.e. ER's change over time, right?).


I'll concede, there are too many other factors for these specific cases.

But I'm not just throwing darts and specific sectors or ETF funds. Actually I did for ARKK, but that's another story - it turned out well for me, but total luck and I'm out of it now. Point here might be that: if it's under 5-10% of your total portfolio, you don't have to stress about ER for relatively short-term "play money" -- if it profits at all, just consider yourself lucky and don't regret about "should have done that instead" possibilities.


To me, it seems there might not be a real standard definition of what "total" means -- "total" could be between 60 to 3000 funds, and is it including non-US? So in that case, a typical casual investor could end up "over-diversified" (if there is such a thing) or "under-diversified". Like anything, there is probably some in-between "sweet spot" (maybe it's the 200-300 spread?). [VUG or similar could be a good match to that -- if available]


So I'm wondering if augmenting "total" with a few (3-8) other options (be them slices of sector specific, or mid/small, or other combinations of "total") might (on the average) end up working out better. I'll call this "cascade", since I don't know how else to search or refer to it as a "strategy". Tentatively, it seems to fill gaps (by weight) that a "total" might have (where 401K's might force a limited spread). This might not be for a young/new investor. And opinions here is the effort isn't worth it (since time spent thinking or agonizing about it is a cost also, away from just enjoying your life).
EDIT: I suppose the industry might refer to these as "All-in-One" portfolios? (except those tend to also include bond portions, right?)


I just wanted to close, that I do think, yes: any investor could probably just pick any "total index" (US-only or total-world) of any ER, let it grow for 40 years, and be ok. Evidence is that there is no "fail" in that. But if the option is available, go for a lower ER and you might just need to sit for 30-35 years instead [ actually ER alone might not reduce 5 years of grind; point is, investing at all is a good thing towards retirement ]
EDIT: i.e. I don't think there is a case of any investor that profited (by making reasonable selections, not just a single specialized 10-fund ETF hail-mary), but failed to enjoy retirement because of high ER?

 

[OldShooter]

... I'm not sure if ER can be treated linearly - as in, a 1% ER of one fund is twice 0.5% ER of another fund. Aren't there other factors like turnover? (or ER by itself might be linear, but other cost factors may influence the "profitability" of a fund?)

Your instincts are good! Turnover is a huge factor in fund costs. Trading costs, always, but also it is typical for a fund to route orders to a broker charging higher prices but offering "free research." (I believe that the Europeans, with "MiFI II" or working on this little gouge.) But the elephant in the room is market reaction to orders. A fund taking or ditching a large position will find prices moving unfavorably due to rational market action but also due to "front running" traders. So turnover is a Very Bad Thing.

To me, it seems there might not be a real standard definition of what "total" means -- "total" could be between 60 to 3000 funds, and is it including non-US? So in that case, a typical casual investor could end up "over-diversified" (if there is such a thing) or "under-diversified". [

"Total" will be clearly defined in the fund's prospectus. Typically a US total market fund will attempt to duplicate the performance of a total market index like the Russel 3000, Wilshire 5000, etc. An international total market fund will attempt to duplicate the performance of a total international index like the ACWI.

Your instincts are right again, though. There are literally thousands of hucksters out there inventing and selling funds that have "index" in their names but which are very narrow sector funds. To be accurate, an S&P 500 fund is a sector fund, not a total market fund.

For trivially easy indices like the S&P 500, a fund will typically hold what's in the index. For total market funds of any flavor, though, this is a practical impossibility. So they hold a portfolio that they feel statistically matches the performance of the market. Hence the term "tracking error" -- which isn't a big deal AFIK.

... So I'm wondering if augmenting "total" with a few (3-8) other options (be them slices of sector specific, or mid/small, or other combinations of "total") might (on the average) end up working out better.

Right again, but for a slightly different reason than you think. Total market funds, selected with any care at all, really are total market funds. But there is a constituency that argues from academic research that small cap and value stocks are on average better performers, Many of these folks will suggest a portfolio "tilt" to overweight these sectors by adding sector funds to suit.

As an engineer you will probably like Nobel winner Dr. William Sharpe's analysis of this whole total market thing: https://web.stanford.edu/~wfsharpe/art/active/active.htm (Only 3 pages)

 

[voidstar]

Here is one specific ER related question we've had, which I didn't want to open a whole other thread for:

In her Vanguard RothIRA, my wife has a portion we've been mulling over exchanging. She won't need it till at least 10 years from now.

MGK $11k @ .07 121 holdings
VIGAX 20k @ .05 315 holdings


VUG seems to be the ETF equivalent of VIGAX. Should she bother doing an exchange of these?


Should she consider VTI (0.04% 1526 holdings) to replace both of these? Or something else, but along the same lines?


I realize it's hard to say without broader context of the portfolio. This is under 10% of the total portfolio (i.e. we have IUSG, ITOT,VINIX in other accounts -- the bulk is broad, with portions in bonds and emerging markets). But for this specific portion, we were open to suggestions to be being more efficient.

 

[voidstar]

To be accurate, an S&P 500 fund is a sector fund, not a total market fund.

Glad you said this, I'd been thinking it for awhile!


So, from all this I'm mostly thinking ER does matter in the sense that: if you can find the same thing for cheaper, go cheaper. Obviously. But you have to scrutinize that "same-ness" quite a bit. Also, in company sponsored 401Ks, you can't always find that cheaper equivalent option.


I guess here's a couple more specific examples:

(1)
MLRRX (0.85) vs VMENX (0.17). I don't think they're really equivalent composition, but IMO is seems hard to justify a Large Growth Anything at 0.85 here in 2019. This is a real case in my wifes' 401K, but what insight do I need to say VMENX is the better deal or MLRRX is worth its expense? [ note in this case, we decided to punt on either and just buy into VINIX when it became available ]



And in the following, I realize some will say "forget that headache, just go broad index, and go out and play some softball". But it's cold out, so humor me:

(2) (per etfrc.com; I haven't yet found an equivalent thing for mutual funds)
XLY (0.13) vs FDIS (0.084) [80% weight overlap, XLY 98% overlap of FDIS]
XBI (0.35) vs FHLC (0.084) [15% weight overlap, XBI 91% overlap of FHLC]
XNTK (0.35) vs FTEC (0.084) [35% weight overlap, XNTK 61% overlap of FTEC]

EDIT: I think these are all passive, and track some index, but slightly different indexes. And I'm not trying to advocate the worthiness of these specific funds.

My question here is, can we use "overlap" to judge "same-ness"? Casually, it looks here like XLY is largely redundant to FDIS - is this an obvious case of "you can get the same thing cheaper"?. But for XNTK, there *might* be a case of getting something worthwhile from the relative extra expense (if those different weights are in a favorable "tilt"?).

So IF you were compelled to shop for ETFs, is this a way to quickly compare them for redundancy?