Mutual Fund Alternatives to VSS (Vanguard Interna Small Cap)

[chipmaker]

International Small Cap forms a sizable portion (~10%) of my portfolio. I have been using VSS (Vanguard FTSE All-World ex-US Small-Cap ETF) to fill this asset class. However, over the past 12 months I have found myself lacking discipline to DCA into this ETF. I set reminders to buy, but other priorities (my laziness, if you will) tend to foil my plans. I simply miss the simplicity of a mutual fund, where I can schedule weekly/monthly investments several months into the future.

I am looking for a mutual fund alternative to VSS. Any suggestions? Vanguard’s corresponding mutual fund (VFSVX) doesn’t cut it due to high purchase and redemption fees. What do you use in your portfolio? This asset class is held at Wells Fargo if that matters.

I had a similar concern with Vanguard FTSE Emerging Market ETF (VWO), but thanks to Vanguard, I was able to switch to Admiral share class (VEMAX).

[KyleAAA]

I just use the mutual fund equivalent. If you have access to DFA, they are a better option. If not, and you don't like VSS, I'm not aware of a better option than the Vanguard MF version of VSS.

[BBL]

Do you have the (flex)ability to make larger, less frequent purchases of VSS?

Quarterly could work...

[nydad]

what about sharebuilder? with the basic plan you pay $4 per transaction, so you'd pay $48/year if you invested 12 times.

Note: I've never used it myself.

[DSInvestor]

If you'd be comfortable with market weight of foreign small cap, consider Total International Stock Market Index VGTSX Investor, VTIAX Admiral, VTSGX Signal. Signal shares may be available to you at Wells Fargo.

[livesoft]

This automatic investment thing is a problem with ETFs. We have some shares of VSS in an IRA at TDAmeritrade and just have the dividends automatically re-invested. That doesn't help folks like you who want to keep adding periodically (DCA) over time.

You won't like my solution, but I try to buy things once or twice a year on a ReallyBadDay. In 2012, there were really only a couple of RBDs the whole year though.

As for using VFSVX, the purchase fee seems to paid by VSS purchasers as well. Isn't the premium to NAV for VSS also about 0.25%?

[SteelyEyed]

Get your employer to offer Institutional shares (VFSNX). The ER is only 0.25% (half of the investor shares' ER). Some employers cover "loads" as well. Maybe you can get them to cover the 0.50% purchase fee.

I've had some success in the past affecting our fund lineup. This fund is on my wish list right now.

[chipmaker]

Thanks, to all of those who responded.

I just use the mutual fund equivalent. If you have access to DFA, they are a better option. If not, and you don't like VSS, I'm not aware of a better option than the Vanguard MF version of VSS.

Unfortunately I don't have access to DFAs. Beside, I think the expense ratio of DFA funds is on the higher side.

what about sharebuilder? with the basic plan you pay $4 per transaction, so you'd pay $48/year if you invested 12 times.

I did not know that sharebuilder allowed DCA of ETFs/Stocks. Do you know what price they give you? Is it the average daily price or the max? Do they guarantee this?

You won't like my solution, but I try to buy things once or twice a year on a ReallyBadDay. In 2012, there were really only a couple of RBDs the whole year though.

I have followed your posts, so do know about your RBD strategy. However, I often go many weeks/months without watching what the market is doing. So this may not work for me.

As for using VFSVX, the purchase fee seems to paid by VSS purchasers as well. Isn't the premium to NAV for VSS also about 0.25%?

As per Vanguard (https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/bidaskspread), the average Bid-Ask spread for VSS is 0.13%.[EDIT: This is not relevant. As livesoft pointed out, Bid-Ask spread is not the same as Premium/Discount]. In contrast, the purchase/redemption fee for VFSVX in 0.5% each in addition to higher expense ratio.

Looks like a standout alternative does not exit. Let me look at the absolute dollar impact of switching to VFSVX -- if this is small enough I will just swallow it as cost of allowing me to be disciplined.
If you have any other suggestions I am open to those.

[livesoft]

Just a note: The bid/ask spread is not the same as premium/discount to NAV.

[chipmaker]

Just a note: The bid/ask spread is not the same as premium/discount to NAV.

You are right. I stand corrected. The premium is indeed closer to 0.5%.

[nydad]

I did not know that sharebuilder allowed DCA of ETFs/Stocks. Do you know what price they give you? Is it the average daily price or the max? Do they guarantee this?

No - I looked on their website and didn't find an answer. It does suggest that all automatic trades are scheduled on tuesdays, and you must complete the order instructions by Monday 5pm. I assume it just places a market order, but you may be able to place a limit order as well. Since you could be buying fractional shares, I'd ask them the question directly.

[Aptenodytes]

I keep some of each. I keep VSS in the set-and-forget accounts and the mutual fund in the 403b to which I make semi-monthly contributions. If you wanted to you could accumulate new shares of the mutual fund, and then once a year convert to the ETF. Leave a buffer of mutual fund shares to simplify rebalancing if you don't like dealing with ETFs.

[fundtalk]

It seems like everytime I check the ETF VSS has a premium to NAV around 0.5%. It only seems to drop close to NAV and occasionally below NAV during major market selloffs/panics. Therefore, the majority of the time, it is pretty close to a wash between the ETF and mutual fund when you buy. I would also assume that the 0.5% mutual fund purchase fee decreases your cost basis if you're buying in your taxable account (can anyone confirm this?)

I would think that the best strategy (especially if you're DCA) would be to make regular purchases of the mutual fund and occasionally convert to the ETF shares during times of market distress when the premium shrinks (though, were not talking big differences between any of the options.)

[Ketawa]

I would think that the best strategy (especially if you're DCA) would be to make regular purchases of the mutual fund and occasionally convert to the ETF shares during times of market distress when the premium shrinks (though, were not talking big differences between any of the options.)

It actually doesn't matter when you convert since conversions are done at NAV. Theoretically, this would be an arbitrage opportunity if the ETF's premium to NAV persists (buy mutual fund, convert to ETF, sell ETF at a premium, repeat). I guess bid/ask spreads, frequent trading rules, and the purchase fee on mutual fund shares keep the premium from disappearing.

[midareff]

However, over the past 12 months I have found myself lacking discipline to DCA into this ETF. I set reminders to buy, but other priorities (my laziness, if you will) tend to foil my plans.

Perhaps you should work on your disipline? I seem to recall something about that being the hallmark of a successful investor.

[BornInCA]

I don't have a Wells Fargo/WellsTrade brokerage account. If one has an account there, are all Vanguard funds and ETFs commission-free/transaction-fee-free? Assuming the answer is "yes", I would pick one of these four funds for dollar cost averaging:

1.) Vanguard Total International Stock Index (VGTSX/VTIAX) (holds all non-US stocks including equities held by VSS)
2.) Vanguard Small Cap Value Index (VISVX/VSIAX) (a fund I would use to DCA in on the US-equity side)
3.) Vanguard Emerging Markets Index (VEIEX/VEMAX) (I believe of all the Vanguard index funds that don't charge purchase fees or redemption fees, this is the fund that experiences the highest price swings)
4.) Vanguard International Explorer (VINEX) (the Vanguard fund with no purchase or redemption fees whose asset class is closest to VSS although it owns only a few hundred stocks)

Which of the four you should pick? It depends on what matters most to you:
1.) Are you skittish/have low risk tolerance? Perhaps it would be VISVX.
2.) Are you skittish and want to stick with non-US? Perhaps it would be VGTSX.
3.) If you like experience to wild swings and don't care about which asset class you're DCA'ing in, perhaps it would be VEIEX.
4.) If you want to stick with international small-cap stocks, perhaps it would be VINEX.

[William4u]

I use Vanguard International Explorer (VINEX), since it is relatively small (really small and mid cap) and has a strong value orientation. VSS is smaller, but is a growth/value blend fund and not a value fund. Also, my 401k offers VINEX but not VSS, and I save my more limited Roth space for VBR.

So the actively managed VINEX works okay for me, even though I would prefer a more diversified, passive, smaller, value international index fund. But Vanguard does not offer a small value index fund in international, and even if they did it would likely never make it to my 401k.

[chipmaker]

1.) Vanguard Total International Stock Index (VGTSX/VTIAX) (holds all non-US stocks including equities held by VSS)
2.) Vanguard Small Cap Value Index (VISVX/VSIAX) (a fund I would use to DCA in on the US-equity side)
3.) Vanguard Emerging Markets Index (VEIEX/VEMAX) (I believe of all the Vanguard index funds that don't charge purchase fees or redemption fees, this is the fund that experiences the highest price swings)
4.) Vanguard International Explorer (VINEX) (the Vanguard fund with no purchase or redemption fees whose asset class is closest to VSS although it owns only a few hundred stocks)

Thanks for your suggestion, BornInCA. I already have positions in VTIAX, VISVX, and VEMAX. I primarily use VSS to tilt. Perhaps, I could look into whether I really need this tilt. VINEX is also available to me, let me also research that.

[chipmaker]

Perhaps you should work on your disipline?

Valid point midareff.

[rkhusky]

One plus for the few Vanguard funds with purchase/sales charges is that the fees go directly back into the fund rather than into the company's pocket. So, your return is juiced slightly by others buying/selling the fund. And frankly, a one-time hit of 0.5% is not that bad.

[Karl]

Presumably that 0.5% fee in & out will go away as the fund get older & larger such that new purchases are largely offset by existing investors redeeming shares. Vanguard over time has removed such fees on every fund except for this one and their new short-term TIPS fund.