Today we’ll explore some alternatives
In Part VI of this Stock Series, and in other posts on the blog, I recommend two specific mutual funds:
These are the funds I own myself. In each case they are the “Admiral Shares” version. As such they have rock bottom expense ratios, but also require a minimum investment of $10,000.
While these “Admiral Shares” versions best fit my needs, they might not fit yours. Perhaps you are just starting out and the 10k minimum is still too steep. Or maybe they are not offered in your 401k plan.
Vanguard is also the only investment company I recommend, or use. But maybe Vanguard itself is hard to access in the country where you live or in the 401k you are offered.
Not to worry. Today we’ll explore some alternatives.
Variations on the Funds
Each of these funds come in other flavors. For example, VTSAX is a Vanguard Total Stock Market Index Fund and that exact same portfolio can be found in five other funds, or what Vanguard calls “classes.” Below I list them with links to Vanguard and followed by their expense ratios and required minimum investment.
The first three are for us individual investors:
- Admiral Shares: VTSAX .04%/$3,000
- Investor Shares: VTSMX .17%/$3000 (This fund is closed. See note below)*
- an ETF: VTI .03% (ETF=exchange traded fund) Note: For most practical purposes you can consider ETFs and Funds as interchangeable. Especially for long-term investors like ourselves.ETFs were created to make it easier and faster to trade mutual funds. Where with a fund when you buy or sell you get the price as of the trading day’s end, with an ETF you can buy or sell instantly just like a stock. And, just like a stock, commissions and/or spreads are frequently involved, adding to your costs.For more check out this FAQ from Vanguard on ETFs
These next three are “Institutional Shares” and you might find them in your 401k or other employer-sponsored retirement plan:
So, when I recommend VTSAX you can substitute any of these if that’s what is available and/or if one of these others better meets your needs. The important thing is that you are buying the Vanguard Total Stock Market Index Portfolio.
Similar variations can be found for VBTLX (Vanguard Total Bond Market Index Fund). If you click on those links you’ll go to the Vanguard page describing them. At the very top, under the fund name, you’ll find links to the ETF version.
Vanguard has a very active institutional business serving 401k programs and the like. If you are curious, this is the link to the list of their institutional funds. (Mmm. Seems this link didn’t hold the list. But if you paste “institutional funds” in the search box it will bring it up.)
What if Vanguard isn’t available in my 401k (or similar) plan?
Even if your tax-advantaged, employer-offered plan doesn’t offer Vanguard you should still participate, certainly at least up to the amount needed to capture any employer match. Once you leave that employer you can easily roll your investments into an IRA with Vanguard.
The good news is that, due to the competitive pressure from Vanguard, nearly every other mutual fund company now offers low-cost index funds. Just like the variations you can find in Vanguard of VTSAX, you can in all probability find a reasonable alternative in your 401k. Here’s what you are looking for:
- A low-cost Index Fund
- For tax-advantaged funds you’ll be holding for decades, I prefer a Total Stock Market Index Fund, but one tracking the S&P 500 index is just fine too. See Addendum #1.
- You can also look for a Total Bond Market Index Fund. Most plans will also offer these.
- Target Retirement Funds are frequently offered in 401k plans and these can be an excellent choice. But look closely at the fees. They are always higher than those for index funds, sometimes by a lot depending on the company offering them.
For my international readers:
If you live outside the USA, Vanguard and its funds may or may not be available. Vanguard is growing rapidly and now is available in many countries outside the USA. You can check the list out here: Vanguard Global
If Vanguard simply is not an option, in your fund search you’ll want to follow the same guidelines as described above for 401k plans.
Also, when I talk about VTSAX or a Total Stock Market Index Fund, both these are indexes that mirror the US stock market. As I explain in my post on International Funds, this is all those of us in the USA really need. But you might find it difficult to access such a USA-centric fund.
No worries. Take a look at a Global Fund like VTWAX. This is an index fund that invests all over the globe. In some ways I like it even better than my beloved VTSAX. In fact the only reason I don’t recommend it instead, is because of it’s relatively steep expense ratio (.35%) (as of 2018, the ER for this fund has dropped to .19% making it steadily more attractive) and because VTSAX covers international pretty well for the reasons I describe in that International Funds post linked to above.
If you are inclined to go this route, you might consider the lower cost ETF version: VT Ordinarily, I tend to avoid ETFs (exchange traded funds) because with them you have the possibility of sales commissions and/or spreads to consider. But since the expense ratio on VT is .07%, it is worth exploring. Just be careful what you pay to buy it.
One final caution. Be sure that whatever global fund you choose includes the US market. It is a huge chunk of the world economy and you can’t afford not to own a part of it. Many ‘international” funds, especially those offered by US-based firms like Vanguard, are “ex-US stocks.” The reason is that they are designed to supplement the holdings of investors already in the US market with VTSAX and the like. Makes sense, but likely doesn’t suit your needs as an investor outside the USA.
The Bottom Line:
Since I no longer work or have access to 401k plans (Rats!), my portfolio looks like this:
- VTSAX (Vanguard Total Stock Market Index Fund) 75%
- VBTLX (Vanguard Total Bond Market Index Fund) 25%
I also hold some cash, about 4% at the moment.
I target about 5%. (Yes I know all those add up to 105%. These are targets that vary with market swings.)
If for whatever reason I didn’t have access to those specific funds (or if I had access to the even lower expense ratio Institutional versions) I’d look for the Vanguard variations that delivered the same Vanguard stock and bond index portfolios.
If for whatever reason I didn’t have access to Vanguard, I’d look for similar low-cost funds from whatever sound investment company was available:
- A Total Stock Market Index Fund for about 75% of my money
- A Total Bond Market Index Fund for about 25% of my money
And if the future offered me the chance, I’d roll on in to Vanguard when I could.
If you’ve found similar solutions in your 401k, or as an international investor, please share them in the comments. I’d love to hear about them and my guess is so would the other jlcollinsnh readers sorting thru these concerns. Thanks!
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When to roll an old employer based 401(k)-type plan to your IRA
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*Important note on VTSMX
Vanguard has closed VTSMX ($3000 minimum initial investment & .14% ER) and it will phase out over time.
The minimum for investing in VTSAX drops from 10k to 3k and its .04% ER remains the same. Basically, VTSMX investors now have access to VTSAX and its lower costs.
Vanguard has a long history of improving investment options and lowering costs for investors. It is their core value, and the reason they are the only investment firm I recommend.
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Addendum I:
Throughout this blog I express a preference for investing in the total stock market index, as represented by VTSAX. But my preference for it over the S&P 500 index, as represented by VFIAX, is slight. VFAIX also comes in multiple variations, just like VTSAX.
Over on the Bogleheads forum, in response to a question, a guy called Nisiprius gives a great overview as to why this is so, right down to why the total market is preferable if available:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=114954&p=1671962
In short, when available, go with a total stock market index fund. When only an S&P 500 index fund is available, as is often the case in 401(k)/403(b) plans, you can chose it with confidence. In my view, tying to replicate a total stock market index fund with multiple funds, while possible, is not worth the effort.
Addendum II:
If you do want to duplicate the total stock market index as held in VTSAX, here’s the formula…
- ~81% Large cap (an S&P 500 fund)
- ~6% Mid cap
- ~13% Small cap
Be sure you use low-cost index funds.
This usually comes up when a 401(k)-type plan offers an S&P 500 fund but not a total stock market fund. Personally, I wouldn’t bother. VFIAX (S&P 500 index fund) will perform within a hair of VTSAX so I’d keep it simple and just go with that.
Addendum IIa:
From reader Probley and Addendum #2 in this post:
Personal Capital currently categorized VTSAX as
- 69% large
- 18% mid
- 8% small
- 4% real estate
- 1% international
Looking at the composition of the CRSP U.S. Total Market Index (the current VTSAX benchmark), the top 500 holdings are roughly 83% of the total. So if you consider the top 500 as large cap, there’s your 80%.
Addendum III:
For my Canadian readers, over on MMM Mr. Frugal Torque has a fine discussion outlining some of the investment considerations unique to your country: Part I and Part II.
Addendum IV:
For my European readers, check out this cool post where Mrs. EW provides great map visuals of some index funds available to you.
Addendum V:
Also from Mrs. EW — Index Investing with Dollars for Europeans
And her guest post here: Investing with Vanguard for Europeans
Addendum VI: From the Escape Artist — An International Portfolio
Addendum VII: Reader Jonathan provides an excellent review of ETFs
Addendum VIII: In this comment thread, reader Greg provides a nice comparison of funds vs. ETFs