Archives for April 2019

Updated with more examples. Up until recently, Vanguard has had a long history of keeping the expense ratios of their corresponding ETFs and Admiral Shares mutual funds the same. As of 2019, this is no longer the case. Inside a Vanguard notice, this was quietly added:

The growing size and scale of our funds have helped fuel operational efficiencies that lower our costs to serve clients, particularly ETF shareholders. As a result, the ETF share class of these ten funds is now lower than their Admiral™ share class counterparts.

Initially, I figured it was just a matter of the reporting dates being staggered and the Admiral Shares expense ratio would soon be updated back to being identical. But Allan Roth at ETF.com interviewed a Vanguard spokesperson who confirmed that the expense ratios of ETFs and Admiral Shares will no longer automatically be matched up:

What’s largely driving these changes is the increasing adoption of ETFs by Vanguard investors as their index vehicle of choice, which has enabled us to pass along the cost savings of scale,” Woerth said. “To put some numbers around it, even though ETFs make up only about 20% of our assets, they’ve garnered more than 35% of Vanguard’s net cash flow over the past three years.”

Another reason given is that the mutual fund structure requires more administrative paperwork than ETFs and thus inherently cost more to run.

The most recent expense ratio update as of 4/26/19 is further evidence of this new stance. The expense ratios of 21 different ETFs were dropped, yet the corresponding mutual fund expense ratios all remained the same.

Expense ratio comparison, ETF vs. Admiral Shares (4/30/19):

Should I convert my Admiral Shares to ETFs? Vanguard lets you convert most Vanguard mutual funds held at Vanguard to their ETF version (if it exists) on a tax-free basis. Allan Roth goes on to discuss this question as well. You should first set your tax lot tracking to “SpecID” if you want the cost basis to carry over to every specific share (otherwise they would use average cost basis on all of them).

I always liked the “slow food” feel of mutual fund investing. Your trade doesn’t execute until the end of the day. You just enter your trade whenever, and it gets filled at the end of the next market day. The price is set exactly at net asset value (NAV). There are no high frequency traders involved.

Now, a single basis point (0.01%) is a difference of $1 annually per $10,000 invested. In many cases, the difference may not be worth much attention. However, if you have $1,000,000, that becomes $100 every year. Two basis points is $200 every year. Will the gap widen further?

Sometime this year, I will probably convert my Admiral Shares to ETFs. Vanguard is basically telling me that mutual funds are old technology, and they won’t be spending any more resources on future updates. In the last few years, Vanguard has been aggressively converting people with old mutual fund-only accounts into brokerage accounts.

I’ve kept my primary brokerage account at Vanguard because they offer commission-free trading of mutual funds. However, if I am switching to ETFs, then I can have commission-free trades at many different brokerage firms. I recently opened a new IRA account at M1 Finance because they will give me back free dollar-based transactions of mutual funds (i.e. I can buy exactly $500 via fractional shares) while also adding a free rebalancing service that has Vanguard never offered.

Vanguard announced in a press release that it is creating a new actively-managed mutual fund using the Bloomberg Commodity Total Return Index as a benchmark. The Vanguard Commodity Strategy Fund will have an estimated 0.20% expense ratio and June 2019 launch date.

The fund will at least initially not be directly targeted at retail investors, as it will only be available as Admiral Shares with a $50,000 investment minimum. Considering that commodities are usually only included in portfolio as a hedge at around 5% allocation, you would need a $1 million portfolio to justify putting $50,000 into commodities.

The direct competition is the PIMCO Commodity Real Return Strategy Fund (PCRIX) which has a 1.24% expense ratio and about $5 billion in assets. GraniteShares also released some low-cost commodity ETFs in 2017, including the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) with a 0.25% expense ratio. This means that the new Vanguard fund will become the lowest-cost commodity fund available by a small margin.

Here’s a quick summary of the Bloomberg Commodity Total Return index:

The Bloomberg Commodity Total Return index is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13 week (3 Month) U.S. Treasury Bills.

BCOM is the Bloomberg Commodity Index, which incudes aluminum, coffee, copper, corn, cotton, crude oil, gold, diesel, lean hogs, live cattle, natural gas, nickel, silver, soybeans, sugar, unleaded gas, wheat, and zinc (image source).

There is active debate as to whether commodities should be included in your portfolio. My take is that commodities futures may offer the draw of being a diversification and/or inflation hedge, but I don’t want to pay the price of possibly lower returns, higher volatility, and higher complexity. As in other areas of life, sometimes the “insurance” is worth the cost, and sometimes it isn’t.

Bottom line. Vanguard is launching a commodities fund. If you like low-cost access to the commodities asset class, this looks to be a positive development even though right now it has a $50,000 investment minimum. Where will Vanguard expand to next with its growing appetite for assets?

Vanguard has a new research paper on How to increase the odds of owning the few stocks that drive returns [pdf], found via How Concentration Affects Portfolio Performance by Michael Batnick. Inside, there is a chart that sorts the individual returns of the US stock market (Rusell 3000) over the last 30 years (1987-2017) into total performance buckets. What happens to the stock prices of individual companies over 30 years? Lots of big losers. A few huge winners.

The whitepaper has a lot of math and investment jargon that you can read for yourself. Let’s skip to the conclusion here:

Historical cumulative returns of individual stocks are skewed whereby overall market returns are determined by a small minority of stocks. Therefore, all else being equal, a more diversified portfolio is more likely to hold these outperforming stocks while displaying a lower dispersion of portfolio returns. We conducted simulations of various portfolio sizes and showed that those portfolios with fewer holdings underperformed those with more holdings, leading to a higher return hurdle to overcome.

As the late Jack Bogle told us: “Don’t look for the needle in the haystack. Just buy the haystack.”

I don’t know which will be the most successful US companies in the future, but I know that I will own them via the total US index fund in my portfolio. I will own the next Amazon, Google, Facebook, Apple, or Visa. I’ll also own whoever disrupts them after that. Since I own a big chunk of global stocks inside the Vanguard Total International Stock Index fund, I’ll be covered if they come from the other side of the world.

Now, when you own the entire haystack, you will get the losers as well as the winners. Also, I won’t be as rich as if I invested in them when operated out of a dorm room. It just turns out that in this capitalist structure, owning them all still works out pretty darn well. I will own shares of all these businesses in proportion to their market value, and by extension a share of their profits. Some of those profits will be reinvested for future growth, and some will be sent to me as cash dividends every three months. I’ll happily spend those dividends, and the let rest grow into more dividends in the future.