VFIFX vs SWYMX

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investwise1983
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VFIFX vs SWYMX

Post by investwise1983 » Fri Oct 06, 2017 5:29 pm

Bogleheads,

I'm 34 years old and looking to invest 1K into a Target Date Fund with the hopes at the moment to invest another 100-200 a month for the foreseeable future. I want to keep it simple and keep fee's low. I see that Charles Schwab has a Target Date Fund made up of ETF's and lower expense ratio of .08% with no minimum and is also a newer Target Date Fund. Vanguard has a 90% Stock Mix and the rest are Bonds with a ER of 0.16% and a minimum of 1K.

Vanguard Target Retirement 2050 Fund (VFIFX)
https://personal.vanguard.com/us/funds/ ... IntExt=INT

Schwab Target 2050 Index Fund SWYMX
http://www.schwab.com/public/schwab/inv ... ol%3DSWYMX

I'd like to get some opinions on which might be the better of the two. Is one more tax efficient than the other? I'd like to read some thoughts on these two.
Many thanks Bogleheads!!

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grabiner
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Re: VFIFX vs SWYMX

Post by grabiner » Fri Oct 06, 2017 6:44 pm

Target-date funds should be held in an IRA, so that you don't have to worry about tax efficiency. (If you contribute to a Roth IRA, you can take your contributions out at any time with no tax cost, so it's fine to invest in a Roth IRA even if you might need to withdraw some of the money before retirement.)

Checking some of Schwab's other target-date funds, it appears that the Schwab funds will add more expensive options over time, while Vanguard's won't. Therefore, I have a slight preference for Vanguard, but either one looks like a great way to get started in an IRA.
David Grabiner

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in_reality
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Re: VFIFX vs SWYMX

Post by in_reality » Fri Oct 06, 2017 9:13 pm

grabiner wrote:
Fri Oct 06, 2017 6:44 pm
Checking some of Schwab's other target-date funds, it appears that the Schwab funds will add more expensive options over time, while Vanguard's won't. Therefore, I have a slight preference for Vanguard, but either one looks like a great way to get started in an IRA.
Schwab does use a money market fund SVUXX at 0.19%. A similar fund at Vanguard runs 0.16% so costs are pretty comparable. Schwab uses intermediate tips while Vanguard uses short term. Obviously, the money market fund reduces the overall duration of the fixed income. Vanguard uses hedged international bonds which in theory should provide the same return as US ones. The duration is a little longer though and starting from below zero in many cases, you have to wonder how they will do if rates ever rise. Maybe rates won't.

Anyway, the way hedged bonds work (which Vanguard but not Schwab uses) you receive or pay the difference in short term rates. Actual returns in the bond bull have been fine but I don't see how you receive a term premium on them. I guess you have to keep your fingers crossed that the US on average doesn't have a steeper yield curve or it seems you would underperform holding hedged international bonds.

Other than that the most expensive ETF Schwab uses in the Target Index funds is emerging markets at 0.13%. Interestingly, Schwab decreased their allocation to this more volatile asset class to around zero at retirement. Given that sequence of risk is a concern in retirement, it makes some sense to me. Schwab doesn't hold small cap international either.

Schwab does have a separate older Target Retirement series that is more expensive and doesn't use their lower cost ETFs as SWYMX and others in the Target Index series does.

At retirement and five years after, Vanguard holds a little more in equities. Probably the biggest difference is that their percent of international is higher. For example for the 2015 fund, Vanguard is 40% international (27.4% US 18% international). Schwab is about 20% (43% US, 10% international (developed only)). I'll bet that the value of the dollar at the time determines which strategy is better.

For the 2050 fund, Schwab is 33% international, while Vanguard is 40%. Schwab's holding of US small cap, REITS, emerging markets and international all decrease as a percentage of holdings as time goes by. Obviously they are looking to reduce volatility by doing so.

So I really think the differences between the two will come down to which fixed income strategy ends up working best and how international stocks do. Also, Schwab seems a little more conservative at retirement and then has a more gradual reduction from then on while Vanguard is a little more risky nearing retirement and ramps down a little more quickly.

Both seem to be excellent vehicles and I can hardly imagine you regretting a decision either way.
[60% US _ 26% DEV _ 14% EM] | (-16% LC _ +8% MC _ +8% SC) | [47% FND/VAL _ 40% MKT _ 7% MOM _ 6% REIT] | (+/- 5% or *25% rebalancing bands)

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