Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I began to really dig into the portfolio breakdown of my Vanguard Target Retirement funds and became very alarmed at what I found. SHAME ON ME FOR NOT KNOWING EXACTLY WHAT IS IN THEM - however I feel like they don't align with many of my personal investing philosophies:
* I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter with me - but the International exposure is a lot higher than I expected.
* As a long time follower of John Bogle, I figured International exposure would be relatively conservative for a U.S. investor.
* Specifically: Target 2035 U.S Bonds comprise 17.7% and International comprise 7.6% of the portfolio. Excuse me, but I'm not comfortable with that high of exposure to International Bonds - and Intl Bonds really ramp up as the glide path gets closer to retirement - I see a lot of articles discuss how U.S. bonds are far superior.
* The effects of the Glide Path really caught me off guard - I started Target 2025 about 15 years ago in my 401K and set it on auto-pilot. As of today, Bonds comprise 42% of the total and will likely be at 50% in the next 4 years. I'm hugely bearish on bonds, particularly long term bonds.
* International equities comprise 27% of Target 2025 vs. U.S. equities comprising 34% - this seems reckless to me, and caused me to miss out on a lot of gains over the years. This level of International exposure seems terribly high.
* Again, shame on me for being ignorant of my portfolio's holdings but it's really caught me off guard.
* I'm now caught in the classic conundrum of trying to figure out when to move Target Funds to pure S&P 500, Extended Mrkt/Intl, and Bond funds.
* Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
* I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter with me - but the International exposure is a lot higher than I expected.
* As a long time follower of John Bogle, I figured International exposure would be relatively conservative for a U.S. investor.
* Specifically: Target 2035 U.S Bonds comprise 17.7% and International comprise 7.6% of the portfolio. Excuse me, but I'm not comfortable with that high of exposure to International Bonds - and Intl Bonds really ramp up as the glide path gets closer to retirement - I see a lot of articles discuss how U.S. bonds are far superior.
* The effects of the Glide Path really caught me off guard - I started Target 2025 about 15 years ago in my 401K and set it on auto-pilot. As of today, Bonds comprise 42% of the total and will likely be at 50% in the next 4 years. I'm hugely bearish on bonds, particularly long term bonds.
* International equities comprise 27% of Target 2025 vs. U.S. equities comprising 34% - this seems reckless to me, and caused me to miss out on a lot of gains over the years. This level of International exposure seems terribly high.
* Again, shame on me for being ignorant of my portfolio's holdings but it's really caught me off guard.
* I'm now caught in the classic conundrum of trying to figure out when to move Target Funds to pure S&P 500, Extended Mrkt/Intl, and Bond funds.
* Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
All Vanguards fund-of-funds (Target Retirement and LifeStrategy) have 40% of equities in international and 30% of (nominal) bonds in international.
They stay at 30% of the bond allocation, but obviously the bond allocation itself ramps up.and Intl Bonds really ramp up as the glide path gets closer to retirement
.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market
Reading your statements - you are bearish on bonds which is code for timing because you believe you know more correctly or not. We do agree however that one should always understand what it is they are purchasing before they buy it. Vanguard has long espoused their 40 percent allocation to international equities and the addition of international bonds was added to the mix over the last few years.
There is no conundrum-move the assets when you are ready. But only if you truly understand what it is you aim to accomplish.
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market
Reading your statements - you are bearish on bonds which is code for timing because you believe you know more correctly or not. We do agree however that one should always understand what it is they are purchasing before they buy it. Vanguard has long espoused their 40 percent allocation to international equities and the addition of international bonds was added to the mix over the last few years.
There is no conundrum-move the assets when you are ready. But only if you truly understand what it is you aim to accomplish.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
So, a little bit contradictory here. 2 big points.Flashes1 wrote: ↑Tue Apr 13, 2021 2:15 pm * I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter with me - but the International exposure is a lot higher than I expected.
...
* Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
Yes, Mr. Bogle was heavily biased against international equity. He may have had a point when he formed that opinion 30 or 40 years ago. However, even then he was a lonely voice, and the tide has strongly moved against him. International equity markets have radically changed since then. The indexes - US, DM, and EM - are dominated by multinational companies which are increasing homogenous in terms of performance, compliance requirements, etc.
What articles are you talking about on international bonds? Everything I have been reading have been positive. Note, I tend to skew towards academic and technical articles, not the popular press. IIRC, the bonds are FX hedged, so no risk there.
You are on Bogleheads, a passive website - yet you are advocating for active timing of the market in regards to bonds? Yeah, I too am bearish on bonds. However, I would never suggest that a passive fund take a active position. If you want to I would suggest rolling back to a later target date fund.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
It seems to me you want a target date fund that is heavily weighted in what has recently done well and not so much what hasn't. That's not really the purpose of a target date fund.Flashes1 wrote: ↑Tue Apr 13, 2021 2:15 pm I began to really dig into the portfolio breakdown of my Vanguard Target Retirement funds and became very alarmed at what I found. SHAME ON ME FOR NOT KNOWING EXACTLY WHAT IS IN THEM - however I feel like they don't align with many of my personal investing philosophies:
* I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter with me - but the International exposure is a lot higher than I expected.
* As a long time follower of John Bogle, I figured International exposure would be relatively conservative for a U.S. investor.
* Specifically: Target 2035 U.S Bonds comprise 17.7% and International comprise 7.6% of the portfolio. Excuse me, but I'm not comfortable with that high of exposure to International Bonds - and Intl Bonds really ramp up as the glide path gets closer to retirement - I see a lot of articles discuss how U.S. bonds are far superior.
* The effects of the Glide Path really caught me off guard - I started Target 2025 about 15 years ago in my 401K and set it on auto-pilot. As of today, Bonds comprise 42% of the total and will likely be at 50% in the next 4 years. I'm hugely bearish on bonds, particularly long term bonds.
* International equities comprise 27% of Target 2025 vs. U.S. equities comprising 34% - this seems reckless to me, and caused me to miss out on a lot of gains over the years. This level of International exposure seems terribly high.
* Again, shame on me for being ignorant of my portfolio's holdings but it's really caught me off guard.
* I'm now caught in the classic conundrum of trying to figure out when to move Target Funds to pure S&P 500, Extended Mrkt/Intl, and Bond funds.
* Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I started off with a target date fund in my Roth many years ago but left it precisely because I did not like how much international exposure it had. My move to build my own portfolio paid off, but who knows how this will trend in the long-run.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I'm still a beginner in all of this but I was always under the impression that transitioning to bonds was a feature of all target date funds. Isn't the point to reduce you're overall risk as you approach retirement? Are there any retirement type funds like this that don't switch to a higher proportion of bonds (besides something like a life strategy fund)?
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
The holdings of the TDFs are transparent, all you have to do is look. As to the specific objections, you be right or wrong. That said, I’d bet you a cup of coffee that the 10-year performance of the Vanguard TDF will be better than whatever you pick on your own. (In full transparency, I compared my DIY performance for the last 11 years and I was slightly below the Vanguard TDF performance for my estimated retirement year.)
80% global equities (faith-based tilt) + 20% TIPS (LDI)
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
What else if not bonds would it switch to?Volando wrote: ↑Tue Apr 13, 2021 2:39 pm I'm still a beginner in all of this but I was always under the impression that transitioning to bonds was a feature of all target date funds. Isn't the point to reduce you're overall risk as you approach retirement? Are there any retirement type funds like this that don't switch to a higher proportion of bonds (besides something like a life strategy fund)?
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
It seems to me that Bogleheads who signed up for a target date fund got a much better portfolio than if they randomly followed advice from people on the forum.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
You have this right.Volando wrote: ↑Tue Apr 13, 2021 2:39 pm I'm still a beginner in all of this but I was always under the impression that transitioning to bonds was a feature of all target date funds. Isn't the point to reduce you're overall risk as you approach retirement? Are there any retirement type funds like this that don't switch to a higher proportion of bonds (besides something like a life strategy fund)?
I can't think of publicly available funds that do this.
Doing so would be a case of active management and market timing. I can actually make a solid case for this - however I would need to know the client's risk tolerance and goals. And since this is a generic public fund following a generic strategy you can't have that information.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Sounds like you're smart enough to make your own "target" fund and reduce your costs as well. Time to quit researching and move to VTI, VXUS, BND in proportions of your choice.
VTI 48%, VXUS 12%, BND 40%
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.
Lesson learned: Vanguard Target Retirement funds have a lot of International Bond and Equity exposure - just make sure you're comfortable with it before blindly plowing your life savings in it.
Lesson learned: Make sure you're okay with exactly how the Glide Path works - specifically are you comfortable with Bonds comprising 42% of your portfolio 5 years before you retire (Target 2025). I personally am comfortable with no more than 40% at retirement. It's just hard when you're choosing your 401k investments at 30-40 years old to know exactly how your bond exposure really ramps up 30 years later and is that what you want?
International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.
Lesson learned: Vanguard Target Retirement funds have a lot of International Bond and Equity exposure - just make sure you're comfortable with it before blindly plowing your life savings in it.
Lesson learned: Make sure you're okay with exactly how the Glide Path works - specifically are you comfortable with Bonds comprising 42% of your portfolio 5 years before you retire (Target 2025). I personally am comfortable with no more than 40% at retirement. It's just hard when you're choosing your 401k investments at 30-40 years old to know exactly how your bond exposure really ramps up 30 years later and is that what you want?
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Agreed. That's what I think anyone with a healthy amount of investing acumen should do (which probably covers +75% of Bogleheads). You just have to know when/if you want to increase bond/cash prior to retirement.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
So 2 questions.Flashes1 wrote: ↑Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.
Why are you uncomfortable with ~40% international exposure. That is about the market cap weight. If not the market cap weight, then what weight would you suggest?
Why do you think that a AAA rated Japanese or German corporate bond would decline more than a US corporate bond in a major recession? What about a A rated bond?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
There have been plenty of posts about how heavily U.S. companies are involved with overseas operations and are should therefore only be partially considered as "U.S." stocks. Even if you're 100% VTI, you have lots of international exposure.alex_686 wrote: ↑Tue Apr 13, 2021 2:59 pmSo 2 questions.Flashes1 wrote: ↑Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.
Why are you uncomfortable with ~40% international exposure. That is about the market cap weight. If not the market cap weight, then what weight would you suggest?
Why do you think that a AAA rated Japanese or German corporate bond would decline more than a US corporate bond in a major recession? What about a A rated bond?
There have been plenty of posts saying that international bonds are unnecessary. People way smarter than me have proven this point.
VTI 48%, VXUS 12%, BND 40%
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Yep, I think target funds are targeted to noob investors. That's probably why the default setting for new employees in many 401k's is a target date fund. I think they are fine to be invested in until you accumulate enough money that fees and investing philosophy start to matter.
VTI 48%, VXUS 12%, BND 40%
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I think I was mainly just trying to understand OP's issue with the TDF and see if I was missing something in my understanding . They seemed to be upset with such a large proportion of bonds but I thought that was a component of all target date funds. So I was wondering if there was some other approach that funds take that didn't involve that, but I don't think there is. That being said, couldn't another solution be switching the fund to a later date fund to achieve an allocation more suitable instead of what they have? I suppose the international proportion is still there which was another issue.JBTX wrote: ↑Tue Apr 13, 2021 2:49 pmWhat else if not bonds would it switch to?Volando wrote: ↑Tue Apr 13, 2021 2:39 pm I'm still a beginner in all of this but I was always under the impression that transitioning to bonds was a feature of all target date funds. Isn't the point to reduce you're overall risk as you approach retirement? Are there any retirement type funds like this that don't switch to a higher proportion of bonds (besides something like a life strategy fund)?
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
There are 2 ways of looking at this.
You are suggesting that the US/international dimension is not a valid dimension and should be ignored. If you believe what you are saying is true, then isn't that a reason for holding companies at their market cap? It used to be that companies regressed along regional factors (North America, Europe, etc.), then sector. Now companies regressing along sector, then regional factors. This view point is becoming dominate.
Second, by selecting VTI you are trying to time the market. Why do you feel comfortable doing that? VTI is significantly overweighed in growth and technology stocks, and is underweighted in the value factor and the commodities, banking, and automotive sectors.
I am being a bit snaky. However, just because US stocks are kind of international is not a reason to exclude international companies.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Fleeced?
Really?
There was no bait and switch.
Vanguard is fully transparent about what is in the funds and the glide paths.
If you never bothered to look to see if it matched the kind of asset allocation you want, that's all on you.
There was nothing dishonest going on.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
We need a target date fund that invests in FAANG, TSLA and Bitcoin only. I'm tired of getting fleeced.watchnerd wrote: ↑Tue Apr 13, 2021 3:24 pmFleeced?
Really?
There was no bait and switch.
Vanguard is fully transparent about what is in the funds and the glide paths.
If you never bothered to look to see if it matched the kind of asset allocation you want, that's all on you.
There was nothing dishonest going on.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
As a U.S. person I'm comfortable with Intl. comprising 15-25% exposure with the belief my U.S. holdings (primarily the S&P companies) provide sufficient additional international exposure. I'm opening up a can worms, but I do believe in American exceptionalism primarily with IP protection, court system, strong influx of the world's best and brightest wanting to immigrate here and create businesses - the last one should particularly not be underestimated, IMHO - just compare the new companies created in the U.S. in the last 30 years to what's been created in Japan, UK, and Germany. In my line of work, I see all the foreign banks aggressively expanding into the U.S. for these very reasons. I don't see BoA aggressively investing their capital in Japan, Germany, and UK - but I see ALL of the international banks/equity sponsors aggressively investing in the U.S. Capital is what turns the lights on our houses every morning.alex_686 wrote: ↑Tue Apr 13, 2021 2:59 pmSo 2 questions.Flashes1 wrote: ↑Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.
Why are you uncomfortable with ~40% international exposure. That is about the market cap weight. If not the market cap weight, then what weight would you suggest?
Why do you think that a AAA rated Japanese or German corporate bond would decline more than a US corporate bond in a major recession? What about a A rated bond?
Bonds: I like the judicial protections and enforcements provided corporations in the U.S. Banks/investors get routinely fleeced in a lot of countries. But more importantly, I have faith that the US Dollar will continue to be the world's safe haven in times of great stress - the US Dollar can of course implode, but I feel the Euro, Yen, Remindi (sp) will be hurt more in a depression/recession.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
ARKK Target Retirement 2035
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
And I believe it was Alex who raised an interesting point, why the heck are the expense ratios on the Target Retirement funds more than their underlying funds?
Example: Target 2025 fee is 0.13%; TSM is approx. 0.04%, International Index is 0.11% and Total Bond is 0.05% - so HOW do they arrive at a 0.13% fee? Vanguard must be laughing at my ignorance!
Example: Target 2025 fee is 0.13%; TSM is approx. 0.04%, International Index is 0.11% and Total Bond is 0.05% - so HOW do they arrive at a 0.13% fee? Vanguard must be laughing at my ignorance!
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Why would they be the same?Flashes1 wrote: ↑Tue Apr 13, 2021 3:52 pm And I believe it was Alex who raised an interesting point, why the heck are the expense ratios on the Target Retirement funds more than their underlying funds?
Example: Target 2025 fee is 0.13%; TSM is approx. 0.04%, International Index is 0.11% and Total Bond is 0.05% - so HOW do they arrive at a 0.13% fee? Vanguard must be laughing at my ignorance!
There is an extra layer of rebalancing (daily, I think) and regular adjustment of the bond glide path.
That will incur trading costs.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I did not, but I used to work in fund accounting so I can answer that question.
The expense ratio is the "all in fee". So you have to include the fee of the underlying funds plus the fee to actually run the fund. While the marginal cost may be low that is not how fees are calculated. The fund has to bear its share of the costs. So there are the obvious accounting and operational fees. They have to file taxes and annual reports. Their share of running Vanguard's web site. etc.
There are 2 ways of doing this.
There is the "correct way" (my opinion) where the target date fund invests in the investment class shares and then adds a management fee on top.
However, many funds buy the retail version of the fund with the higher expense ratio. Then the underlying fund rebates a portion of that fee back to the fund of funds to cover their expenses.
In theory you should have the same expense ratio in either way. The problem I have with the second method is that it buries and obscures the costs.
Big picture - the fees are low and reasonable for what they are doing.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Trading costs are not part of the expense ratio. And there are no costs for trading mutual funds.
There is other overhead. Expenses need to be calculated at a average expense, not marginal expense. And shared expenses has to be charged in a fair, pro-rata fashion. One fund can't secretly subsidize another.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I don't understand your comment about trading costs not being part of an expense ratio.alex_686 wrote: ↑Tue Apr 13, 2021 4:01 pmTrading costs are not part of the expense ratio. And there are no costs for trading mutual funds.
There is other overhead. Expenses need to be calculated at a average expense, not marginal expense. And shared expenses has to be charged in a fair, pro-rata fashion. One fund can't secretly subsidize another.
Every fund has internal trading costs that are part of the expense of running the fund.
Now, if Vanguard is offsetting that in some way, that's a different matter.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I don't understand what you are not understanding.
One a more serious note....
The portfolio manager will run a trading desk. You have to pay staff, equipment, lease on the building, etc. In the case of a Fund of Funds you need to hire 2 junior portfolio managers for all of your funds. You need 2 in case 1 calls in sick. After all, all you need to do is put in the half dozen trade per fund once per day. This is going to be less than 200k per year for all FoFs combined. So next to nothing.
Mutual funds don't trade with commissions. However....
Expense ratios don't included trading costs. You don't count the explicate costs such as commissions. You don't count the implicit costs such as the bid/ask spread. Implicit costs tend to be much higher than explicate costs but these can only be estimated. Yes, they are expenses. No, they are not part of the SEC mandated expenses formulas.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I don't understand what you don't understand, either.alex_686 wrote: ↑Tue Apr 13, 2021 4:20 pmI don't understand what you are not understanding.
One a more serious note....
The portfolio manager will run a trading desk. You have to pay staff, equipment, lease on the building, etc. In the case of a Fund of Funds you need to hire 2 junior portfolio managers for all of your funds. You need 2 in case 1 calls in sick. After all, all you need to do is put in the half dozen trade per fund once per day. This is going to be less than 200k per year for all FoFs combined. So next to nothing.
Mutual funds don't trade with commissions. However....
Expense ratios don't included trading costs. You don't count the explicate costs such as commissions. You don't count the implicit costs such as the bid/ask spread. Implicit costs tend to be much higher than explicate costs but these can only be estimated. Yes, they are expenses. No, they are not part of the SEC mandated expenses formulas.
FoF or not, any mutual fund incurs trading costs with the outside world whenever there is portfolio churn, inflows, outflows, etc.
That has to be covered somehow.
In the case of normal ETFs (i.e. not Vanguard's dual format ETF/mutual fund), some of this cost is covered via the arbitrage of the APs.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
The expense ratio is mandated by the SEC. It specifically excludes trading costs.watchnerd wrote: ↑Tue Apr 13, 2021 4:28 pm I don't understand what you don't understand, either.
FoF or not, any mutual fund incurs trading costs with the outside world whenever there is portfolio churn, inflows, outflows, etc.
That has to be covered somehow.
In the case of normal ETFs (i.e. not Vanguard's dual format ETF/mutual fund), some of this cost is covered via the arbitrage of the APs.
You can infer trading costs but it is a hassle. I used to do it with internal data for internal reporting and I had to slap on some huge error bars. I will note that hiring a expensive 3rd party broker to run your trades can actually be cheaper than doing it yourself after you factor in implict costs.
For somebody in the public? I wouldn't even bother. Instead I would focus on "Tracking Error" - the difference between the fund performance and the index. That would capture all of the qualitative decisions by management.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
That's an interesting mandate by the SEC. I'm curious as to why that decision was made, probably way back in the depths of the mutual fund industry.alex_686 wrote: ↑Tue Apr 13, 2021 4:38 pm
The expense ratio is mandated by the SEC. It specifically excludes trading costs.
You can infer trading costs but it is a hassle. I used to do it with internal data for internal reporting and I had to slap on some huge error bars. I will note that hiring a expensive 3rd party broker to run your trades can actually be cheaper than doing it yourself after you factor in implict costs.
For somebody in the public? I wouldn't even bother. Instead I would focus on "Tracking Error" - the difference between the fund performance and the index. That would capture all of the qualitative decisions by management.
It's definitely not how things were handled when I was in VC and we had to prepare for an IPO by carving out a portion of a VC fund, bring it to investment bankers who would underwrite it, shop it around, etc. Any transaction costs involved in this process had to be explicitly itemized / estimated.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I don't see how anyone could be comfortable with 85% US stock index at these valuations.Flashes1 wrote: ↑Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
Frankly, I think you are performance chasing and should lookup the concept "priced in".Flashes1 wrote: ↑Tue Apr 13, 2021 3:40 pm As a U.S. person I'm comfortable with Intl. comprising 15-25% exposure with the belief my U.S. holdings (primarily the S&P companies) provide sufficient additional international exposure. I'm opening up a can worms, but I do believe in American exceptionalism primarily with IP protection, court system, strong influx of the world's best and brightest wanting to immigrate here and create businesses - the last one should particularly not be underestimated, IMHO - just compare the new companies created in the U.S. in the last 30 years to what's been created in Japan, UK, and Germany. In my line of work, I see all the foreign banks aggressively expanding into the U.S. for these very reasons. I don't see BoA aggressively investing their capital in Japan, Germany, and UK - but I see ALL of the international banks/equity sponsors aggressively investing in the U.S. Capital is what turns the lights on our houses every morning.
Bonds: I like the judicial protections and enforcements provided corporations in the U.S. Banks/investors get routinely fleeced in a lot of countries. But more importantly, I have faith that the US Dollar will continue to be the world's safe haven in times of great stress - the US Dollar can of course implode, but I feel the Euro, Yen, Remindi (sp) will be hurt more in a depression/recession.
Foreigners are investing in the US for the same reason US investors should invest in foreign stocks: diversification.
I think the Vanguard TDF did fine by you.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Reading this over, I think Vanguard Target Retirement Funds are excellent.
No one really knows the future but historically, people love to buy high and sell low.
Maybe the lands and waters of US is blessed. Who knows.
Personally, when I look at many of the US companies today and their valuations, I really don't want to have a portion of money invested with them.
I myself have almost 60/40 ratio of US:International myself.
I don't see anything wrong with it. If the returns are lower, then just save more.
I don't want to risk my only one life with an event that occurred like Nikkei 225 index.
As for bonds, those bonds are I believe currency hedged.
I believe International Bonds are heavily tilted towards AA/A/BBB while US Bonds are heavily tilted towards Treasuries.
If treasuries are considered 'risk free', the US bond portion is safer and should therefore long term result in potential lower returns than the International Bond market.
Now, if the purpose of bonds is for safety instead of returns, then ya, maybe you should switch up the bond portion to something treasury/AAA/TIPS heavy.
That said, if OP doesn't agree with TDF plan, then it makes sense to DIY.
No one really knows the future but historically, people love to buy high and sell low.
Maybe the lands and waters of US is blessed. Who knows.
Personally, when I look at many of the US companies today and their valuations, I really don't want to have a portion of money invested with them.
I myself have almost 60/40 ratio of US:International myself.
I don't see anything wrong with it. If the returns are lower, then just save more.
I don't want to risk my only one life with an event that occurred like Nikkei 225 index.
As for bonds, those bonds are I believe currency hedged.
I believe International Bonds are heavily tilted towards AA/A/BBB while US Bonds are heavily tilted towards Treasuries.
If treasuries are considered 'risk free', the US bond portion is safer and should therefore long term result in potential lower returns than the International Bond market.
Now, if the purpose of bonds is for safety instead of returns, then ya, maybe you should switch up the bond portion to something treasury/AAA/TIPS heavy.
That said, if OP doesn't agree with TDF plan, then it makes sense to DIY.
Last edited by fwellimort on Tue Apr 13, 2021 5:22 pm, edited 3 times in total.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I suspect that the cost of trading is very different for a VC fund.watchnerd wrote: ↑Tue Apr 13, 2021 4:51 pm That's an interesting mandate by the SEC. I'm curious as to why that decision was made, probably way back in the depths of the mutual fund industry.
It's definitely not how things were handled when I was in VC and we had to prepare for an IPO by carving out a portion of a VC fund, bring it to investment bankers who would underwrite it, shop it around, etc. Any transaction costs involved in this process had to be explicitly itemized / estimated.
The mutual fund answer is easy.
There are "Agency Trades", which is what most people are familiar with. You hire a independent 3rd party broker, they promise to get best execution, they charge you a commission. Nice, black & white. It is like when you buy a house - the commission is broken out.
Then there are "Principle Trades", where the fund's trader calls up another trading desk and buys the securities directly from them. What is the trading cost here? No idea. You bought X for $Y dollars. Who knows what the markup - or down - was. It is like buying a used car. You kind of suspect that the used car lot might be making a profit and that the sales guy is making a commission - but who knows?
And of course, for a FoF, the actual explicate cost is zero dollars. And yes, the underlying fund will have to do some trading tomorrow to account for the cash flows in and out of the fund. But maybe you are on the other side. And how will that trading be accounted for? And if the fund is with a 3rd party how are you actually even going to get that information?
And for a VC fund - well, that is not exactly SEC regulated. I can generate a estimate of trading costs. However, that estimate is going to be subjective, and subjective things are prone to manipulation, and the SEC really hates things that can be manipulated. They like nice objective measures that will be identical from fund to fund, from fund family to fund family.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I thought valuations weren’t supposed to matter for us stay-the-course Bogleheads? If OPs original preference was for 15-25% International, should they change it now based on valuation differences?000 wrote: ↑Tue Apr 13, 2021 4:58 pmI don't see how anyone could be comfortable with 85% US stock index at these valuations.Flashes1 wrote: ↑Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
In the end, valuations are the only thing that matter. Bogle himself acted on valuations, so....Kookaburra wrote: ↑Tue Apr 13, 2021 5:25 pm I thought valuations weren’t supposed to matter for us stay-the-course Bogleheads? If OPs original preference was for 15-25% International, should they change it now based on valuation differences?
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Vanguard's target date funds use Investor shares, not Admiral shares, which is the only reason why the expense ratio is slightly higher than what you have estimated it should be. Vanguard is one of the only (if not the only) mutual fund company that does not charge an additional fee on top of the underlying fund fees in their target date funds.Flashes1 wrote: ↑Tue Apr 13, 2021 3:52 pm And I believe it was Alex who raised an interesting point, why the heck are the expense ratios on the Target Retirement funds more than their underlying funds?
Example: Target 2025 fee is 0.13%; TSM is approx. 0.04%, International Index is 0.11% and Total Bond is 0.05% - so HOW do they arrive at a 0.13% fee? Vanguard must be laughing at my ignorance!
As to why they don't use the lower cost admiral shares, it was originally related to the higher minimums required for Admiral shares. I assume they haven't switched their target date funds to the lower cost admiral shares because they are aware that they have a large number of investors with small balances and it wouldn't make sense financially for them to make the transition at this time, but that's just a guess.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Heh....no kidding...
The biggest traffic cops were the institutional investors, but even they had a bit of a "what happens in VC stays in VC" attitude, although their move to start marking VC investments to market had a big impact.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
This is false. Vanguard does charge an extra fee on top. It says so right on the expense calculation.-ryan- wrote: ↑Tue Apr 13, 2021 6:02 pm Vanguard's target date funds use Investor shares, not Admiral shares, which is the only reason why the expense ratio is slightly higher than what you have estimated it should be. Vanguard is one of the only (if not the only) mutual fund company that does not charge an additional fee on top of the underlying fund fees in their target date funds.
As to why they don't use the lower cost admiral shares, it was originally related to the higher minimums required for Admiral shares. I assume they haven't switched their target date funds to the lower cost admiral shares because they are aware that they have a large number of investors with small balances and it wouldn't make sense financially for them to make the transition at this time, but that's just a guess.
You have the wrong reason for the admiral shares verse the investor shares. There is nothing directly linking small balance investors in the target funds with the underlying shares.
The reason they use the more expensive investor shares is so they can burry the actual explicate fee being charged. Lots of funds do this. This lack of transparency is not a good thing.
Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
I think the best approach to the OP's issues (and the questions about the expense ratios) would be to put most of your money in Vanguard Balanced Index (VBIAX, ER= .07%) and just enough in Vanguard International index (VTIAX, ER= .11%) to have just the right allocation of that you want.
This also avoids the OP's issues with a glide path into a large bond allocation. And it avoids the allocation into International Bonds.
So it it a simple and elegant 2-fund solution, and with some tweaking/re-balancing every 6 months or so, you can maintain it to your taste with a pretty low overall expense ratio.
And with the major portion in balanced index, you get continuous re-balancing in most of your portfolio, which is what target funds do (on the entire portfolio though).
This also avoids the OP's issues with a glide path into a large bond allocation. And it avoids the allocation into International Bonds.
So it it a simple and elegant 2-fund solution, and with some tweaking/re-balancing every 6 months or so, you can maintain it to your taste with a pretty low overall expense ratio.
And with the major portion in balanced index, you get continuous re-balancing in most of your portfolio, which is what target funds do (on the entire portfolio though).
Last edited by rgs92 on Tue Apr 13, 2021 6:40 pm, edited 1 time in total.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Where does Vanguard say they charge an extra fee?alex_686 wrote: ↑Tue Apr 13, 2021 6:31 pmThis is false. Vanguard does charge an extra fee on top. It says so right on the expense calculation.-ryan- wrote: ↑Tue Apr 13, 2021 6:02 pm Vanguard's target date funds use Investor shares, not Admiral shares, which is the only reason why the expense ratio is slightly higher than what you have estimated it should be. Vanguard is one of the only (if not the only) mutual fund company that does not charge an additional fee on top of the underlying fund fees in their target date funds.
As to why they don't use the lower cost admiral shares, it was originally related to the higher minimums required for Admiral shares. I assume they haven't switched their target date funds to the lower cost admiral shares because they are aware that they have a large number of investors with small balances and it wouldn't make sense financially for them to make the transition at this time, but that's just a guess.
You have the wrong reason for the admiral shares verse the investor shares. There is nothing directly linking small balance investors in the target funds with the underlying shares.
The reason they use the more expensive investor shares is so they can burry the actual explicate fee being charged. Lots of funds do this. This lack of transparency is not a good thing.
Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Just to put the expense ratio difference into perspective:
Portfolio 1
VFFVX: 100%
Portfolio 2*
VTI: 54.2%
VXUS: 36.3%
BND: 6.5%
BNDX: 3%
January 2018 through December 2020:
Portfolio 1: Inflation-adjusted CAGR: 8.22%
Portfolio 2: Inflation-adjusted CAGR: 8.16%
*Rebalanced annually.
Portfolio 1
VFFVX: 100%
Portfolio 2*
VTI: 54.2%
VXUS: 36.3%
BND: 6.5%
BNDX: 3%
January 2018 through December 2020:
Portfolio 1: Inflation-adjusted CAGR: 8.22%
Portfolio 2: Inflation-adjusted CAGR: 8.16%
*Rebalanced annually.
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
It used to be on their website. Now they are so embarrassed that they are buying it in the annual report with confusing language.
From a language prospective it is equivalent. Buying the cheap shares and charging a separate management fee. Buying the expensive share class and have them rebate the expenses. Rebate is the more standard language, and I think clearer.
https://personal.vanguard.com/funds/rep ... 2210167722
Page 14
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. The FSA provides that expenses otherwise allocable to Vanguard funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services provided by Vanguard to the fund and all other expenses incurred by the fund during the period ended September 30, 2020, were borne by the underlying Vanguard funds in which the fund invests. The fund’s trustees and officers are also trustees and officers, respectively, of the underlying Vanguard funds, as well as directors and employees, respectively, of Vanguard.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Another opinion:Grt2bOutdoors wrote: ↑Tue Apr 13, 2021 2:23 pm The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market (emphasis added)
https://tinyurl.com/ye583fepAlex Frakt wrote: ↑Sat Jun 02, 2012 2:26 pmI know it's bad form to follow up on your own posts, but I remembered something over lunch.Alex Frakt wrote:You can see the conventional wisdom in action in Vanguard's pre-target date all-in-one funds. The LifeStrategy funds had fixed allocations, you were meant to switch between them as you aged. They started with Growth at 20% bonds and ended up with Income at 80%. STAR is an all-in-one fund with a benchmark of 37.5% bonds. Wellington is Vanguard's original fund and has a benchmark of 35% bonds.
You can even see age in bonds as conventional wisdom with the original allocations in the Target Retirement funds. When Vanguard launched the funds, they used a glideslope that started out somewhat below than age in bonds, but increased bonds at a rate greater than 1% a year to end up at 65% bonds at age 65. Why did they switch? The few other target funds available in the early 2000s, notably from Fidelity and T Rowe Price, had higher stock allocations and thus had outperformed Vanguard over the years of that bull market. They had two choices at that point. Stick to their guns and lose out on new investments or jump aboard the approximately age-15 in bonds bandwagon and rely on their cost advantage to eke out a small advantage going forward. In 2006, they chose the latter. Of course their investors paid the price in the ensuing crash.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* |
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
You should have been thanking Vanguard for including the international bonds.Flashes1 wrote: ↑Tue Apr 13, 2021 2:15 pm
* Specifically: Target 2035 U.S Bonds comprise 17.7% and International comprise 7.6% of the portfolio. Excuse me, but I'm not comfortable with that high of exposure to International Bonds - and Intl Bonds really ramp up as the glide path gets closer to retirement - I see a lot of articles discuss how U.S. bonds are far superior.
They have outperformed the total US bond market index fund since the international bond fund started in 2013.
Source: https://www.portfoliovisualizer.com/bac ... ion2_2=100
The articles you mention where US bonds are far superior appear to based on opinion more than fact.
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Yes, confusing language.alex_686 wrote: ↑Tue Apr 13, 2021 7:02 pmIt used to be on their website. Now they are so embarrassed that they are buying it in the annual report with confusing language.
From a language prospective it is equivalent. Buying the cheap shares and charging a separate management fee. Buying the expensive share class and have them rebate the expenses. Rebate is the more standard language, and I think clearer.
https://personal.vanguard.com/funds/rep ... 2210167722
Page 14
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. The FSA provides that expenses otherwise allocable to Vanguard funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services provided by Vanguard to the fund and all other expenses incurred by the fund during the period ended September 30, 2020, were borne by the underlying Vanguard funds in which the fund invests. The fund’s trustees and officers are also trustees and officers, respectively, of the underlying Vanguard funds, as well as directors and employees, respectively, of Vanguard.
Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
There may be something to that!
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds
Vanguard essentially allocates 40% of stock to international and 30% of bond to international for both Target and LifeStrategy funds. Inflation bonds are included in one or two Target funds (closest to retirement).
Tony
Tony
John C. Bogle: “Simplicity is the master key to financial success."