(PUB) Investing 2015

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My Passive Holdings Tracking Morningstar Analyst Ratings | Russel Kinnel

I don’t own Vanguard Total Stock Market Index VTSAX , but it is just as good. It has the same minimum investment of $10 , 000 and the same expense ratio of 0 . 05% . All of that logic applies overseas, even though some people are wary of indexing overseas. My next-largest passive investment is Fidelity Spartan International Index Advantage FSIVX , which charges 0 . 12% . The fund has outperformed its peers over the past three-, five-, and 10 -year periods, so I wouldn’t say overseas indexing is all that bad. If you want to avoid emerging markets, then the exchange-traded fund Vanguard FTSE Developed Markets VEA is a good alternative for 0 . 09% . In open-end form, the fund is Vanguard FTSE All-World Ex-US Index VFWAX , which charges 0 . 14% for a $10 , 000 minimum. If you want emerging markets folded in, Vanguard Total International Stock Index VTIAX charges 0 . 14% for a $10 , 000 investment and 0 . 22% for a $3 , 000 minimum. Finally, we come to DFA International Small Company DFISX , which is a much smaller position for me. Foreign small caps are useful diversifiers, but most people wouldn’t make them a big weighting. DFA is quite good at navigating small-cap markets in a way that limits trading costs. For small-cap indexes, trading costs are a huge hurdle: Bid-ask spreads can be wide, and index funds tend to trade in small amounts so they don’t get a good deal on share prices. DFA takes a more opportunistic approach by making bulk purchases of a variety of small caps that will help it track the small-cap market. DFA doesn’t strictly follow an index but makes sure that its portfolio behaves very much like a small-cap index. The fund charges 0 . 53% , which is cheap for a foreign small-cap fund, but not so cheap for an index fund. You may prefer to go with Vanguard FTSE All-World ex-US Small-Cap Index VFSVX . This fund charges 0 . 37% for those investing at least $3 , 000 . The five- year-old fund figures to give the DFA fund a run for its money, although so far it has lagged the DFA fund a bit. K

I’ve long argued that most investors should own actively and passively managed funds. Both have merits, and you actually can apply many of the same criteria in choosing them. Either way, you want low costs, a good strategy, and good stewardship. So, it probably won’t surprise you that I own four passively managed funds. They help to lower the costs of my portfolio overall, provide diversification, and serve as low-maintenance vehicles that I don’t have to worry over. My three passive funds were the best available at the time, though there are some very good substitutes available. I bought the two from Fidelity in 2009 and the DFA fund last year when it was added to our 401 (k). Vanguard Tax-Managed Capital Appreciation VTCLX is a good choice for your taxable account. Maybe I’m just a belt-and-suspenders guy, but I appreciate Vanguard’s effort to make index investing even more tax-efficient. This fund starts with the Russell 1000 Index and then makes tweaks to improve tax efficiency. It realizes losses to offset gains, and it tilts slightly away from dividend-paying stocks in order to avoid the dividends tax. It’s done a fine job on both fronts, producing aftertax returns in the top decile of large-blend funds. Fidelity Spartan Total Market Index Advantage FSTVX is one heck of a fund, costing just 0 . 05% a year. Total market funds are slightly more appealing than S & P 500 funds for two reasons. First, they cover the whole market. Second, they don’t have the awkward rebalancing that the S & P 500 does, which can lead to stocks jumping into the index at a high weighting in such a way that arbitragers can take some money out of the pockets of index investors. For example, big stocks like Yahoo YHOO entered the index at a high weighting and everyone knew they were going in and could bid up the prices before index funds bought in.

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.