Evaluating FundsPart I: Indexing the Indexes
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.
Everyone who is everyone states you should be invested in index funds. (In fact, the great Warren Buffett said the average investor should have 90% of their savings in a S&P 500 index fund (hello, SPY!) and 10% in short term bonds.. They capture vast swaths of the stock market for a very low fee and require no work or ongoing monitoring/tracking on your part.
No fuss, no muss.
Hard to beat that.
I know you know what an index fund is since…ahem…we discussed it earlier (and, if you don’t know, you were either not following the blog at the time [you’re forgiven] or you’re just a jerk with a bum memory.)
But what exact index fund will you be piling your money into?
There are actually dozens as most every fund family has one or several.
Realize that the point of an index fund is that it is not actively managed (ie, a fund manager, analysts, etc.) and is designed to follow whatever index it is supposed to (ie, S& P 500, etc)—no better, no worse—all for a low fee.
And the last part is the one to focus on—the fee.
The sainted Jeremy Siegel researched which funds did best from 1926-2010 (this was looked at since 2010 and still held true) and found only one thing mattered in terms of best returns: the fee you’re paying in exchange of holding the fund. In short, the best returns are from the funds with the lowest fees. It’s truly that simple when comparing apples to apples (eg, index fund vs index fund, actively managed fund vs actively managed fund, etc).
So, ALWAYS, keep that in mind when shopping for funds.
(It makes sense right? When you shop, you don’t look at two exactly identical items and think “Yeah, i should definitely buy the more expensive one.” Only in the stock market do people often pay for the more expensive item…and it’s the exact same people who brag how great they are at finding a bargain.)
One more thing before we dive into which exact index fund we should buy into. .
What index are you exactly hoping to track?
The S&P 500 or the entire stock market?
Though the S&P 500 comprises 90% of the capitalization of the entire stock market, there are thousands of other stocks that may be worth investing in that are not in the S&P 500.
So…index investing…a little more complicated than advertised, huh?
The difference in any given year between the S&P 500 and the total stock market could be significant, but in the long term (particularly 20 years or beyond which is likely everyone’s retirement horizon) there is no difference other than in down years where the total market could be more negative than the S&P 500.
Realize that being more negative in any down year leads to worse long term returns as time is wasted trying to gain back what you lost in subsequent years rather than make actual gains. Diversification is designed not to maximize gains, but rather minimize losses.
So, most of us will likely pick a low fee (lowest fee, ideally) S&P 500 index fund.
Which ones are those?
Here we go…
SPY: The SPDR S&P 500 ETF started on 1/22/1993 at $45 =/share and is now trading at 258.98 as of close on 1/11/19. It has a dividend yield of 1.97% and an expense ratio of 0.09%.
VOO: The Vanguard S&P 500 ETF started on 9/9/2010. It opened at inception at $101.78 and is now trading at $237.84 (as of close on 1/11/19). The dividend yield is 1.99% and the expense ratio is 0.04%.
IVV: The iShares Core S&P 500 ETF started on 5/15/2000 at $142.78 and closed on 1/11/19 at $260.38. The dividend yield is 2.21% and the expense ratio is 0.04%.
These are by far the three best known and largest S&P 500 index funds. The hold all of the 500 stocks in the S&P 500 and precisely track it.
Then there are three others worth noting from three of the biggest mutual fund companies that closely mimic the S&P 500, but do not necessarily exactly mirror the S&P 500 as they may not have all the stocks there within and may even actually have stock in them that are not in the S&P 500. (Ergo I am not a big fan. If I’m buying an index fund, then I want an index fund and one that actually tightly tracks what it is supposed to and does it on the cheap.)
SWPPX: The Schwab S&P 500 Index Fund began on 5/19/1997 debuting at $13.07 and closed at $39.70 on 1/11/19. The dividend yield is 2.21% with an expense ratio of 0.03%.
PREIX: The T. Rowe Price Equity Index 500 Fund began on 3/30/1990 debuting at $10 and closed at $69.23 on 1/11/19. The dividend yield is 1.93% with an expense ratio of 0.23%.
(Yikes! Isn’t this supposed to be an index fund—cheap, right? Wrong in this case.).
FXAIX: The Fidelity 500 Index Fund began on 5/4/2011 (the baby of the group) debuting at $47.50 and closed at $90.26 on 1/11/19. The dividend yield is 2.21% with an expense ratio of 0.03%.
There are numerous others that are even newer or smaller, but on any of them focus on two things:
- Is it truly an index fund or just mostly one with some other stocks thrown in for good measure?
- What is the expense ratio (fee) for this fund you’re looking at? All the returns should essentially be the same, so paying more for an index fund is stupid.
So there you have it…
These are the index funds in a nutshell.
Based on just the expense ratio of the “pure” index funds, the best options are VOO and IVV. If you own Vanguard funds of other kind, then go with VOO. IF you own iShares funds of other kinds, then go with IVV. Do this just for the sake of simplicity if nothing else. Plus there may be advantages with keeping it all in one fund family such as your own broker/concierge-like services once you reach a certain threshold of money with that fund family.
But, wait—is that it?
Just pile all your money in a S&P 500 index fund and move on with the rest of your life?
Maybe.
It could be that simple if you’d like and your risk tolerance is OK with it. You’re as diversified as anyone with owning tiny pieces of 500 companies, so that’s not an issue.
But, let me suggest something else for you as an index fund investor wanting to fuel great returns over the next 10, 20, or 30 years for you and your family…next time.
Sarcastic Reader: This guy has really gotten good with the tease. Kudos, PWT guy.
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…