SPX Index Fund vs US Market Sector ETFs and Rebalance

[Goofba11]

Hi,
I'm new here, but reading the posts, I can see there are a lot of wise investors frequenting the forum.

I have a "substantial" amount of money to invest in S&P 500 stocks.
I am looking for a strategy that gives a return comparable to SPX, and is easy to maintain.

My thoughts were:
A) I could just dump it all into SPY?
Or
B) I could compose a portfolio of Market Sector ETFs. I would re-balance the ETFs periodically to keep the relative sector weighting constant.

Any thoughts. Or "better" suggestions?

Thanks!

[Johm221122]

Try Boglehead philosophy
" Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market . This guarantees they will receive the average return of all investors. Being average sounds bad, but it is actually a great thing."
http://www.bogleheads.org/wiki/Boglehea ... philosophy
It is a lot simpler to buy the whole market
Welcome to forum
John

[nisiprius]

I assume that by SPX you mean "the S&P 500 index?"

GIven the stated goal of "a return comparable to SPX," I am baffled as to why one would even consider doing anything other than "dumping it all into SPY." Or, for that matter, VFIAX. (I'm not seriously suggesting that VFIAX, expense ratio 0.05% is really better than SPY, ER 0.09%, just saying displaying my Vanguard brand loyalty and saying it's at least a potential candidate).

But either of them would give a return not just comparable to SPX, but virtually identical, and could hardly be any easier to maintain. The green line is SPY. The orange line is the S&P 500 itself. The blue line is VFIAX. You practically need a magnifying glass to see that there's more than one line there, and if you'd invested $10,000 in any of them twelve years ago, the spread in the outcome twelve years later is less than a hundred bucks.



Why would you even consider fussing with anything else?

I think I need to add that it may not make all that much difference but why would you want the S&P 500 rather than a total stock market index fund, such as Vanguard Total Stock Market Index (VTSMX or VTI), or iShares Russell 3000 (IWV), or any of a number of others.

[Goofba11]

Thanks for the helpful comments. I'm definitely in the right forum for some sound advice.
I've made so many mistakes over the past years.

Interestingly I was in Vanguard funds previously until I was lured away by well meaning advisers.

VFIAX is a good suggestion. It would be nice to automatically reinvest dividends.

why would you want the S&P 500 rather than a total stock market index fund...

I am open to choosing either one. Since you mentioned VTSMX, I assume you see it has an advantage over VFIAX?
The expense ratio is higher. My plan was to hold small caps (IWM) separately.

[YDNAL]

Thanks for the helpful comments. I'm definitely in the right forum for some sound advice.
I've made so many mistakes over the past years.

I vote for some reading (link).

[Johm221122]

Thanks for the helpful comments. I'm definitely in the right forum for some sound advice.
I've made so many mistakes over the past years.

Interestingly I was in Vanguard funds previously until I was lured away by well meaning advisers.

VFIAX is a good suggestion. It would be nice to automatically reinvest dividends.

why would you want the S&P 500 rather than a total stock market index fund...

I am open to choosing either one. Since you mentioned VTSMX, I assume you see it has an advantage over VFIAX?
The expense ratio is higher. My plan was to hold small caps (IWM) separately.

If you want some good advice, try link
viewtopic.php?t=6212
John

[YDNAL]

If you want some good advice, try link
viewtopic.php?t=6212
John

This is the best advise right now, IMO.

I vote for some reading (link).

Then, this would be next in line (link). Alex Frakt's bump in this link here should add perspective.

Finally, link 6212 would be useful.

[nisiprius]

why would you want the S&P 500 rather than a total stock market index fund...

I am open to choosing either one. Since you mentioned VTSMX, I assume you see it has an advantage over VFIAX?
The expense ratio is higher. My plan was to hold small caps (IWM) separately.

The advantage is more theoretical than actual, but it goes like this: what is your rationale for investing in an S&P 500 fund in the first place? In my case, my rationale was "I don't want to pick stocks, I want to own the whole market." At the time when I first learned about the fund, the S&P 500 was taken as a reasonable proxy for the market. It still is--it's what's cited on the news. And although all the smart connoisseur types dump on it, it's not a bad proxy for the whole market. It covers about 80% of the market and the effect of adding the other 20% in midcaps and small caps has been surprisingly small.

Still, now that you can get a total market stock fund, if what you want is the whole market, a total market fund is a more faithful realization of that goal. So it tends to be be the default recommendation here.

Expense ratios don't matter much once you get under 0.10%, do the math, and in any case for comparable share classes the difference are small. For Admiral shares, 0.06% for VTSAX (total market) vs. 0.05% for VFIAX (S&P 500 only). For the ETF, same thing.

For small caps, you need to say, again, what your reasons are. Do you want small caps beyond what's already in the total market. Do you in fact want a "small-cap tilt" or a "small-cap value tilt?" That's a topic in itself.

I would certainly not flail around trying to shave 0.01% in expense ratios by buying three separate funds or ETFs and gluing them together to make up the total market. Not when total market funds are so easy to come by and with such low expense ratios.

[Taylor Larimore]

Goofball:

Welcome to the Bogleheads Forum!

You may find this portfolio of interest:

The Three Fund Portfolio

Best wishes.
Taylor

[Jerilynn]

Interestingly I was in Vanguard funds previously until I was lured away by well meaning advisers.

Well meaning advisers, eh? Can you please define what those are?


By definition, if an adviser is well meaning, they wouldn't be 'luring you away from Vanguard", yes?

[Blue88]

Can someone explain the pros and cons of investing in a a broadly based index fund like Vanguard 500 Index Fund Admiral (VFIAX) or an ETF like SPY ( S&P 500 Spider).

Blue 88

[nisiprius]

Can someone explain the pros and cons of investing in a a broadly based index fund like Vanguard 500 Index Fund Admiral (VFIAX) or an ETF like SPY ( S&P 500 Spider).

Blue 88

To make it even sharper: the pros and cons of investing in the Vanguard 500 Index Fund Admiral (VFIAX) versus the Vanguard S&P 500 ETF (VOO) which have the same expense ratio and are literally different share classes of the same fund and should have very very close to identical performance.

I think this is the answer you want: ETFs versus mutual funds.

ETFs are exchange traded funds. They are mutual funds, but are packaged differently and bought and sold with a different mechanism. There is a spectrum of small differences between the two. They don't amount to much. It mostly boils down to personal preference; people who are already familiar with and like the mechanics of stock trading will probably prefer ETFs. My very personal, sour opinion is that if you go with ETFs you will have a tendency to get acculturated in the "trading" subculture, as illustrated by the fact that if you ask Morningstar to show you a chart for VFIAX, it shows you a ten year growth chart, but if you ask it to show you a chart for VOO, it shows you a five day price chart. I think this speaks volumes to the question of whether there's really a difference in the attitude of ETF investors in general and mutual fund investors in general.

Re "broadly based." Note that total stock market index" funds and ETFs, such as Vanguard's VTI, or Fidelity Spartan Total Market Index (FTSMX), or iShares Russell 3000 (IWV), or many others, are more "broadly based" than S&P 500 funds. I am honestly unsure why anyone would choose an S&P 500 fund in preference to a total stock market index fund. The usual reason for wanting the S&P 500 is to approximate owning "the stock market," and the total stock market funds are better approximations. I think the default choice should always be a total stock market fund. Why own 80% of the market (S&P 500) when you can own 99.5%? To choose an S&P 500 fund in preference to a total stock market fund, you should be able to state a good reason (such as "it's the only index fund in my 401(k)").

[Blue88]

Nisiprius,
Thank you for the prompt and useful information.
Blue88

[Taylor Larimore]

Nisiprius:

My very personal, sour opinion is that if you go with ETFs you will have a tendency to get acculturated in the "trading" subculture, as illustrated by the fact that if you ask Morningstar to show you a chart for VFIAX, it shows you a ten year growth chart, but if you ask it to show you a chart for VOO, it shows you a five day price chart. I think this speaks volumes to the question of whether there's really a difference in the attitude of ETF investors in general and mutual fund investors in general.

I was unaware about the difference between the ETF and Mutual Fund charts at Morningstar. This is not the first time you have added to my investment knowledge.

Thank you and Happy Holidays!
Taylor

[Default User BR]

I was unaware about the difference between the ETF and Mutual Fund charts at Morningstar. This is not the first time you have added to my investment knowledge.

What you can do is start with mutual fund, click on More and put the ETF in as a comparison fund. Then you get growth for it as well.


Brian

[kenyan]

I am open to choosing either one. Since you mentioned VTSMX, I assume you see it has an advantage over VFIAX?
The expense ratio is higher. My plan was to hold small caps (IWM) separately.

The apples-to-apples comparison is VFIAX to VTSAX, not VTSMX. VFIAX and VTSAX are Admiral Shares funds (preferred class/expenses for balances over $10,000). VTSMX is Investor Shares, comparable to the 500 Index fund VFINX. You will hopefully note the identical expense ratios between VTSAX and VFIAX.

Holding small caps separately is a different issue. You probably should follow the above advice on reading and posting your financial situation if you want more comprehensive advice/direction on your portfolio.