hornet96 wrote: ↑Wed Apr 14, 2021 2:04 pm
Ok, then I'll ask you: If I know that another fund family's TDF costs 0.10% to operate, plus 0.10% in acquired fund fees (for a total expense ratio of 0.20%), but I only know that Vanguard's TDF expense ratio is a net of 0.15% (and thus still cheaper) - what information value does that really provide to me? What should I do with that information, particularly if both funds track their indexes tightly? Should I chose to pay more for the other fund, simply because it "feels" like they are providing me with some kind of valuable information?
I would frame the question slightly differently. You have a selection of target date funds. Which one do you pick? You create a list of criteria with weights and go from there.
How often do you you want to go through this process? Generally speaking, my holdings are long term so I have a long term view. Say 10 years.
With that I would put a very low weight on the difference on expense ratios. 5 bps is getting pretty close to being a measurement error. Considering the trend of expense ratios the difference in year-end selection could be 1 or 2 bps. That one is higher today may only have a modest impact on expenses over the next 10 years. Who knows, maybe the funds will switch positions next year.
I would put only slight more weight on tracking error. Considering how narrow the expense ratios are this is a better measure. However, I know that they are going to be tight. And the funds keep switching index providers. This makes things hard. Are they switching from one index to another because 1) the index is better (probably not), 2) the index methodology is easier to implement (maybe) or 3) licensing the index is cheaper (probably). And each switch makes getting high quality tracking error numbers harder.
I would probably put the highest weight on how they construct their portfolio.
And now to your question. I used to evaluate hedge funds for my brokerage to sell. There was a checklist. I did the operations stuff. It was of secondary importance but still important. Never approved a hedge fund because it had a high quality back office but some were knocked off because operations were second rate.
How sound is the company? Just not financially but is it sharp? Is it a thought leader or does it trail its peers by a decade? What are the conflicts of interests. How are they handled? Are they committed to high standards or just getting by? Are they papering over cracks with marketing buzzwords like "Rich Corinthian Leather" or "A Investor Owned Mutual Company"?
So to specifics. The regulation around mutual fund companies is high. Even following the minimal standards results in a high quality product. However, just doing the minimal amount of work and dodging hard questions is a yellow flag. As Vineviz says, it is a bad look for Vanguard. Lazy? Hiding something? Lack of regard for their customers? O.K., these are strong works that I am using to illustrate where the nature of my concerns are. Maybe they have a good reason to hide what is happening with our own company. I can't think of any but who knows. Like I said, yellow flags.
If they are slacking off here where else are they slacking off. Or more critically, where might they be slacking off 5 years down the line. I am looking specifically at the portfolio construction. Negotiations between the fund, fund family, the index provider is rife with conflicts of interests. It is always easier to resign the contract then negotiate a new one.
So, I don't own any target date funds. I like to self manage. I do own Vanguard funds. Vanguard is not my default option in major part because of discourse, reporting, and their poor ownership structure. Vanguard is in the top 4.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.