Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
Portfolio Building, Part VB
In the last post, we discussed a reasonable (perhaps even great) investing strategy with little (no?) day-to-day effort on your part.
As a reminder, here is what was proposed:
25% S&P 500 Index Fund
25% Mid cap Fund
25% Small Cap Fund
25% Stocks
Let’s leave the stock behind for now and talk specifics on the funds.
As I’ve said many other times in other places, low fees is the key to outsized gains long term for index funds since they are more passive investing where they are matching (or, at least, attempting to match) the index they are designed to match.
Realize that there are several indexes that funds can follow at each level of market capitalization.
The S&P 500 and NASDAQ Composite Index are the two best known large cap indexes that are tracked. Another large cap index is the Russell 1000 (which is the compilation of the 1,000 largest publicly traded companies in the US).
The mid cap indexes are the S&P Mid-Cap 400, the Russell Midcap Index, and the Wilshire US Mid-Cap Index.
The best known small cap indexes are the Russell 2000 Index and the S&P 600.
Cheapest Index Funds
S&P 500 Index Funds:
Vanguard 500 Index Fund Investor Shares
Symbol: VFINX
Net Expense Ratio: 0.14%
Minimum Initial Investment: $3,000
But if you can reach the initial investment requirement of $10,000 for their “Admiral” share class (symbol: VFIAX), you can get the cheapest available S&P 500 index fund with an expense ratio of 0.05% which translates into a $5 fee for every $10,000 invested.
Schwab S&P 500 Index (SWPPX): The expense ratio is 0.09%, or $9 for every $10,000 invested. The minimum initial investment is $100.
There are many, many large cap index funds that do not track the S&P 500 index, but rather other large cap indexes such as the Russell 1000, so feel free to look for them if you would prefer those rather than the ones that track the S&P 500.
Mid cap Index Funds:
Northern Mid Cap Index (NOMIX):
The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.
Vanguard Mid Cap Index (VIMSX):
The expense ratio is 0.20%, or $20 for every $10,000 invested, and the minimum initial investment is $3,000.
Small Cap Index Funds:
SPDR S&P 600 Small Cap ETF (SLY):
The expense ratio is 0.15%, or $15 for every $10,000 invested.
Vanguard Russell 2000 ETF (VTWO):
The expense ratio is 0.15%, or $15 for every $10,000 invested.
Vanguard Small-Cap Index Fund Investor Shares (NAESX):
The expense ratio is 0.17%, or $17 for every $10,000 invested with a minimum initial investment of $3,000.
However you can pony up the minimum initial investment of $10,000, you too can be invested in the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) which charges a microscopic expense ratio of 0.05% or only a $5 fee for $10,000 invested.
How do they do it? Vanguard does it again!!
iShares Russell 2000 ETF (IWM):
The expense ratio is 0.20%, or $20 for every $10,000 invested.
Northern Small Cap Index (NSIDX):
The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.
Schwab Small Cap Index (SWSSX):
The expense ratio is 0.17%, or $17 for every $10,000 invested, and the minimum initial investment is $100.
And for those of you who want to look beyond the US borders…
International Stock Index Funds:
Vanguard Total International Stock Index (VGTSX):
The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $3,000.
Schwab International Index Fund (SWISX):
The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $100.
Let’s discuss two other types of funds that are less commonly invested in, but may be of interest to some, especially if you’re not going to invest in individual stocks and have a 25% void to fill (rather than making your S&P 500 fund, mid cap fund, and small cap fund 33% each which is a completely reasonable option).
You have never heard of micro cap companies/funds (if you don’t read all my posts—shame on you, reader—or have a faulty memory), but as hinted at they are smaller than small cap companies/funds.
A Quick review:
Mega caps>$200-$300 billion in market capitalization (remember that?) (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no significant growth in these companies given how big they already are)
Large caps>$10 billion
Mid caps=$2 billion-$10 billion
Small caps=$300 ($500) million-$2 billion
Micro caps=$50 million-$300 million (or $500 million depending on who you ask/use as a resource)
Nano caps<$50 million
There are no true micro cap indexes as the two best known (the Russell Micro Cap Index and the Dow Jones Wilshire US Micro Cap Index) also include small cap companies in them thus skewing what the performance of the micro cap market actually is which makes it difficult or even impossible to see how your micro cap fund is doing versus all micro cap companies en toto.
And just forget the tracking of nano caps.
Micro Cap Index Funds:
For a relative unknown group of companies, there are dozens upon dozens of choices in the micro cap index fund world. So, good luck in your search at this market capitalization level of funds since it’s likely you may not know any of the component companies in these funds.
Bond Index Funds*:
Vanguard Total Bond Index (VBMFX):
The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $3,000.
Northern Bond Index (NOBOX):
The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $2,500.
*I loathe bond index funds as mentioned earlier as they combine the downside of low returns of bonds with the relative higher risk of mutual funds. But for the sake of completeness, the above are some inexpensive bond funds.
As you can see, there are quite a few Vanguard funds here which is not surprising as they made their name and fortune on low cost index funds as others ridiculed them for it. Vanguard got the last laugh as it is now the largest fund family in the world with over a TRILLION dollars invested with them (AKA assets under management AKA AUM).
Certainly, there is no reason to invest in only the Vanguard funds alone as they are not always the cheapest as you can see from the above listings, but for the sake of convenience, Vanguard is as close as you can get to a one stop shop for all you low cost index fund shopping needs. Is that slightly increased cost on 1-2 funds worth less hassle than a few funds under Vanguard and then one under another fund family and yet one more under a third fund family? Only you can answer that question for yourself.
Well, that should about do it for this post.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Until next time…