ER Impact: Low vs. Lower

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ER Impact: Low vs. Lower

Postby lumos » Sat Jul 27, 2013 2:59 pm

I understand the general importance of having a low ER, and I'm sure it is likely a "simple" matter of math, but what might all the considerations be when comparing the ER and historic rate of return between different index funds? An example:

401K Small Cap Index (tracking Russell 2000)
ER: 0.02
YTD: 12.43
1 YR: 16.57
3 YR: 13.66
5 YR: 8.50
10 YR 11.55

Vanguard Small Cap Admiral (VSMAX)
ER: 0.10
YTD: 23.14
1 YR: 25.72
3 YR: 20.03
5 YR: 10.14
10 Yr: 10.89

There is a convenience factor involved with maintaining everything inside my 401K's base offerings and I don't want to be moving things around needlessly, but the difference in return seems to suggest venturing into the brokerage window in this case. Am I missing something? Are there any "rules of thumb" relating to this type of decision? Thanks so much for any thoughts or advice!
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Re: ER Impact: Low vs. Lower

Postby livesoft » Sat Jul 27, 2013 3:06 pm

I suspect you have quoted two different date ranges for your stats. Can you check? In particular, did one end May 30th and another June 30th?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: ER Impact: Low vs. Lower

Postby lumos » Sat Jul 27, 2013 3:10 pm

Hmm, good point. I will check. Thanks!
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Re: ER Impact: Low vs. Lower

Postby ruralavalon » Sat Jul 27, 2013 3:19 pm

1) Consider also the gross amount invested in small cap. The difference in the expense ratios is small, 0.08%. A small number multiplied by a small number equals a small number. if the investment in small cap is $3k, then the savings per year from the expense ratio difference is $2.40. If the amount invested in small cap is $10k, then the savings per year from the expense ratio difference is $8.00.

2) Also, consider the fees for using the brokerge window. The fees for using the brokerage window may well eat up all expected gains from its use, if the ER difference is small and the amount invested is not very large, especially if there is an annual fee in addition to a per transaction fee.

3) Also, consider the percent of the portfolio in small caps. If that percentage is small, then the impact of this difference in expense ratio on overall portfolio performance will be very low.

As you mentioned conveniece, in not having to bother with the brokerage window, is its own benefit.


EDIT: I am not against using a brokerge window, sometimes they are very useful. I used a brokerage window. My experience taught me that for a brokerage window to make sense, you need a combination of: (1) large difference in expense ratio; (2) relatively large transactions; and (3) low fees for use. For a time I used our brokerage window to buy Treasury STRIPS: (1) no ongoing expense, so zero "expense ratio"; (2) in larger transactions, my initial purchase using the window was about $210k, and later purchases were not every pay period but saved up cash for larger purchases every 6-9 months; and (3) for a time with no transaction fee (no idea how we ever got that deal), later increased to $25 per transaction.
Last edited by ruralavalon on Sat Jul 27, 2013 3:50 pm, edited 3 times in total.
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Re: ER Impact: Low vs. Lower

Postby pkcrafter » Sat Jul 27, 2013 3:25 pm

Looks like your returns for the R2000 are way off, at least ytd. IWM, which tracks the R2000, is up 24.38% ytd. Your ytd number looks more like past 3 months. Vanguard's sm cap blend doesn't track the R2000 any longer, so be careful of comparison.

From Vanguard, *Russell 2000 Index through May 16, 2003; MSCI US Small Cap 1750 Index through January 30, 2013; CRSP US Small Cap Index thereafter.

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Re: ER Impact: Low vs. Lower

Postby lumos » Sat Jul 27, 2013 3:36 pm

Your'e right. Sorry, old 401K data! The numbers for both as of 6/30 are:

401K Small Cap Index
ER: 0.04
1 YR: 24.39
3 YR: 18.85
5 YR: 9.00
10 YR: 9.64

Vanguard Small Cap Admiral (VSMAX)
ER: 0.10
1 YR: 25.72
3 YR: 20.03
5 YR: 10.14
10 Yr: 10.89

No fees for the brokerage window, but good point about amounts involved and relative allocation. Relatively low % in small caps at about $10K. I assume the differences in this case are now are less significant, but would you suppose they still warrant a change?
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Re: ER Impact: Low vs. Lower

Postby JoMoney » Sat Jul 27, 2013 5:39 pm

lumos wrote:...
There is a convenience factor involved with maintaining everything inside my 401K's base offerings and I don't want to be moving things around needlessly, but the difference in return seems to suggest venturing into the brokerage window in this case. Am I missing something? Are there any "rules of thumb" relating to this type of decision? Thanks so much for any thoughts or advice!


Slicing/dicing/tilting seems to be popular with a lot of folks. Because you brought up not wanting to move things around, and seem concerned about expenses, I'm going to chime in with my 2cents:
I don't believe there is any advantage to be had by complicating things. Some people get very caught up in stock sector allocation (beyond basic diversification), I believe it leads to higher expenses and effectively active management. The evidence that any particular sector consistently out-performs over long periods of time is not very convincing. If you cherry-pick dates, you'll find points in time that any given sector is higher then another. Over time they tend to revert to the mean.
The temptation to constantly be tweaking and changing things is high. The expenses in these specialized sector funds are also higher then the basic core funds.

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Re: ER Impact: Low vs. Lower

Postby lumos » Sat Jul 27, 2013 6:37 pm

Thanks, JoMoney. In my case I'm not really tilting using small caps, I'm attempting to replicate TSM using the small, med and large caps in the core offerings of my 401K, mostly because of the super low fees therein. So the original question has to do with swapping out the small cap 401K fund for a possibly better return in an "equivalent" Vanguard fund, or not, based on fees and historical return. Or for that matter, to swap out all three core funds for Vanguard Total Stock Market. So far I have not deemed it worth doing all things considered, but I also just want to be comfortable that the 401K funds are performing in a competitive fashion. They seem to be close at least.
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Re: ER Impact: Low vs. Lower

Postby grabiner » Sun Jul 28, 2013 10:29 am

lumos wrote:Your'e right. Sorry, old 401K data! The numbers for both as of 6/30 are:

401K Small Cap Index
ER: 0.04
1 YR: 24.39
3 YR: 18.85
5 YR: 9.00
10 YR: 9.64

Vanguard Small Cap Admiral (VSMAX)
ER: 0.10
1 YR: 25.72
3 YR: 20.03
5 YR: 10.14
10 Yr: 10.89


You still have different indexes, which explains the small differences. Vanguard Small-Cap Index now tracks the CRSP Small-Cap Index, and used to track the MSCI 1750; both of these have higher cap ranges than the Russell 2000. VTWO is Vanguard's ETF which tracks the Russell 2000.

In my case I'm not really tilting using small caps, I'm attempting to replicate TSM using the small, med and large caps in the core offerings of my 401K, mostly because of the super low fees therein.


The Russell 2000 is about the smallest 10% of the market (versus 15% for Vanguard's fund), so it should be 10% of a TSM-equivalent portfolio.
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Re: ER Impact: Low vs. Lower

Postby ruralavalon » Sun Jul 28, 2013 10:45 am

lumos wrote:Your'e right. Sorry, old 401K data! The numbers for both as of 6/30 are:

401K Small Cap Index
ER: 0.04
1 YR: 24.39
3 YR: 18.85
5 YR: 9.00
10 YR: 9.64

Vanguard Small Cap Admiral (VSMAX)
ER: 0.10
1 YR: 25.72
3 YR: 20.03
5 YR: 10.14
10 Yr: 10.89

No fees for the brokerage window, but good point about amounts involved and relative allocation. Relatively low % in small caps at about $10K. I assume the differences in this case are now are less significant, but would you suppose they still warrant a change?

So by making the switch: (1) you increase the expense ratio, only slightly but still a move in the wrong direction (not the large move in the right direction that I would require for myself); (2) have only a small hoped-for effect on portfolio growth because of small relative size of the investment; (3) but at least have no-fee use of the brokerage window.

You have to decide how much the hope and the convenience weigh in your scales. For me, the convenience.
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Re: ER Impact: Low vs. Lower

Postby Default User BR » Sun Jul 28, 2013 4:04 pm

JoMoney wrote:I don't believe there is any advantage to be had by complicating things. Some people get very caught up in stock sector allocation (beyond basic diversification), I believe it leads to higher expenses and effectively active management. The evidence that any particular sector consistently out-performs over long periods of time is not very convincing.

I'm sorry, but the academic evidence for small and value outperforming is actually very solid. I also strongly disagree that tilting is active management. I can certainly understand someone wanting to favor simplicity. However, one can pick up both factor tilts quite easily by adding an overweight to small-value with little impact to simplicity.

I really think that even true slice and dice doesn't add that much complexity anyway. With modern tools for tracking and managing portfolios, three funds or ten doesn't really matter very much.

That being said, Trev H's work has me at least half-convinced that 25% each of large blend, small value, international large value, and international small blend would be a very solid approach. For me it's too late, the capital gains situation makes it difficult to fully divest the S&D portfolio that I have.


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Re: ER Impact: Low vs. Lower

Postby JoMoney » Sun Jul 28, 2013 5:04 pm

Default User BR wrote:
JoMoney wrote:I don't believe there is any advantage to be had by complicating things. Some people get very caught up in stock sector allocation (beyond basic diversification), I believe it leads to higher expenses and effectively active management. The evidence that any particular sector consistently out-performs over long periods of time is not very convincing.

I'm sorry, but the academic evidence for small and value outperforming is actually very solid. I also strongly disagree that tilting is active management. I can certainly understand someone wanting to favor simplicity. However, one can pick up both factor tilts quite easily by adding an overweight to small-value with little impact to simplicity.

I really think that even true slice and dice doesn't add that much complexity anyway. With modern tools for tracking and managing portfolios, three funds or ten doesn't really matter very much.

That being said, Trev H's work has me at least half-convinced that 25% each of large blend, small value, international large value, and international small blend would be a very solid approach. For me it's too late, the capital gains situation makes it difficult to fully divest the S&D portfolio that I have.


Brian


I completely agree that changing your portfolio would be a mistake, my point was that in the long-term it probably wouldn't make a difference .
We can agree to disagree on how solid the evidence is that one sector will long-term consistently outperform another.
I believe as long as you're diversified in other sectors as well, it will mute a lot of the volatility, and there's always the possibility it does outperform - but the higher expenses is guaranteed.
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