Performance differentiations (VTSAX vs. VWNAX)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
aaronh
Posts: 17
Joined: Sat Feb 22, 2014 9:17 am

Performance differentiations (VTSAX vs. VWNAX)

Post by aaronh » Wed Jul 10, 2019 7:13 am

Can someone help me to understand how VTSAX (Total Stock Market) has outperformed VWNAX (Windsor II) every year over the last five years?

I'm really confused about how TSM outperforms Windsor, when TSM is more expensive and pays out less in dividends and capital gains than Windsor.

Here are stats according to Vanguard: Please notice that Windsor is cheaper than TSM.

Image

Image

And here are the dividends and capital gains distributions over the last few years for both funds:

Windsor
Image

Total Stock Market
Image

So for example, last year, here is what you would have received in distributions for each share owned:

$6.32 - per share of Windsor

$1.24 - per share of TSM

How is it that TSM outperforms Windsor? Given that:
  • Windsor payouts far exceeded TSM
  • The price for Windsor was a bit lower than TSM
  • The reinvest prices for Windsor were always lower than TSM
I can't imagine the expense ratio between them (.25% Windsor, .04% TSM) makes that much of a difference?

Thank you for trying to help me understand!
Last edited by aaronh on Wed Jul 10, 2019 9:11 am, edited 1 time in total.

Garfieldthecat
Posts: 30
Joined: Mon Dec 24, 2018 10:48 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by Garfieldthecat » Wed Jul 10, 2019 7:36 am

I'm no expert, but two things come to mind:

- The price difference between the two funds is irrelevant. What was the price of the two funds 5 years ago, and what is the price of the two funds now? What is the 2014 -> 2019 VTSAX % increase in price? What is the 2014 -> 2019 VWNAX % increase in price. My guess is that VTSAX appreciated more.

-VTSAX is the "whole market", while VWNAX is a sub group of "value" stocks. Perhaps value stocks have under-performed for the past 5 years? (haven't looked, so don't know).

The performance of any fund isn't just in dividends, it is also the price of the fund itself, which is what you were overlooking. In fact, many people here do not like dividends, and prefer to just have the fund's value appreciate.

User avatar
JoMoney
Posts: 7129
Joined: Tue Jul 23, 2013 5:31 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by JoMoney » Wed Jul 10, 2019 8:06 am

A mutual fund is also called an "open-end fund" (as opposed to a closed end fund).
The individual "share" price on a "open-end fund" is not relevant because there is no fixed number of shares over time. The fund can create new shares to represent new money inflows to the funds net asset value. Otherwise whenever someone bought the fund the price would go up even if the underlying assets didn't move. If new money is coming into the fund faster than the underlying net asset value of the fund is appreciating the share price can fall, but that is irrelevant because the fund has grown it's underlying assets (it's just divided out over more shares).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

snailderby
Posts: 202
Joined: Thu Jul 26, 2018 11:30 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by snailderby » Wed Jul 10, 2019 9:53 am

A couple thoughts:

1. The difference in NAV is not important. Whether you own 2 shares of VTSAX worth $50 apiece or 1 share of VTSAX worth $100 apiece, the end result is the same: You own $100 worth of VTSAX.

2. From https://www.investopedia.com/ask/answer ... -funds.asp: "When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19. When you receive the dividend distribution, you could either keep the cash or reinvest it in additional shares of the mutual fund at the reduced net asset value."

So let's say you own 1 share each of two mutual funds. Both funds are worth $100 per share. Fund A doesn't pay any dividends. Fund B pays out a $1 dividend, which drops the NAV of Fund B to $99. You immediately reinvest that $1 dividend, however, leaving you with $100 worth of Fund B, exactly where you started before the dividend payout (ignoring any tax issues). See viewtopic.php?t=192540.

3. VWNAX is more valuey than VTSAX, and value stocks have lagged the total stock market recently.

4. VTSAX has a lower expense ratio than VWNAX.

Topic Author
aaronh
Posts: 17
Joined: Sat Feb 22, 2014 9:17 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by aaronh » Wed Jul 10, 2019 11:16 am

snailderby wrote:
Wed Jul 10, 2019 9:53 am
A couple thoughts:

1. The difference in NAV is not important. Whether you own 2 shares of VTSAX worth $50 apiece or 1 share of VTSAX worth $100 apiece, the end result is the same: You own $100 worth of VTSAX.

2. From https://www.investopedia.com/ask/answer ... -funds.asp: "When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19. When you receive the dividend distribution, you could either keep the cash or reinvest it in additional shares of the mutual fund at the reduced net asset value."

So let's say you own 1 share each of two mutual funds. Both funds are worth $100 per share. Fund A doesn't pay any dividends. Fund B pays out a $1 dividend, which drops the NAV of Fund B to $99. You immediately reinvest that $1 dividend, however, leaving you with $100 worth of Fund B, exactly where you started before the dividend payout (ignoring any tax issues). See viewtopic.php?t=192540.

3. VWNAX is more valuey than VTSAX, and value stocks have lagged the total stock market recently.

4. VTSAX has a lower expense ratio than VWNAX.
Thanks for this, very helpful. However, I'm still a bit confused. In 2.) if Stock A doesn't pay anything, what do you really have in the long run, except current market value? Whereas Stock B that is constantly paying, allowing you to purchase more stock over time and benefiting from compounding interest.

Does my further confusion make sense?

pkcrafter
Posts: 13445
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by pkcrafter » Wed Jul 10, 2019 12:17 pm

aaronh, this is from your link.
Total Return

The NAV doesn't tell the whole story of a mutual fund's performance; total return does. Total return is expressed as a percentage of the NAV over a given time period. It represents both appreciation and fund distributions. Together, these reflect the true return on investment of a mutual fund.
Here is another quote--
Why do stocks without dividends have value?
Reasons to Buy Non-Dividend Paying Stocks. ... Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund expansion and other projects which they hope will yield greater returns via rising stock price.
https://www.investopedia.com/ask/answers/135.asp

When looking at returns, TOTAL return is what matters. Total stock market has had a better total return than Windsor II

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

AlohaBill
Posts: 93
Joined: Thu Jan 24, 2008 1:20 pm
Location: California

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by AlohaBill » Wed Jul 10, 2019 12:29 pm

Dear Aaron,
I think you better check the charges. Windsor is .25% and the total stock market is the lower at .04%.
I may be wrong.

snailderby
Posts: 202
Joined: Thu Jul 26, 2018 11:30 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by snailderby » Wed Jul 10, 2019 2:18 pm

aaronh wrote:
Wed Jul 10, 2019 11:16 am
snailderby wrote:
Wed Jul 10, 2019 9:53 am
A couple thoughts:

1. The difference in NAV is not important. Whether you own 2 shares of VTSAX worth $50 apiece or 1 share of VTSAX worth $100 apiece, the end result is the same: You own $100 worth of VTSAX.

2. From https://www.investopedia.com/ask/answer ... -funds.asp: "When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19. When you receive the dividend distribution, you could either keep the cash or reinvest it in additional shares of the mutual fund at the reduced net asset value."

So let's say you own 1 share each of two mutual funds. Both funds are worth $100 per share. Fund A doesn't pay any dividends. Fund B pays out a $1 dividend, which drops the NAV of Fund B to $99. You immediately reinvest that $1 dividend, however, leaving you with $100 worth of Fund B, exactly where you started before the dividend payout (ignoring any tax issues). See viewtopic.php?t=192540.

3. VWNAX is more valuey than VTSAX, and value stocks have lagged the total stock market recently.

4. VTSAX has a lower expense ratio than VWNAX.
Thanks for this, very helpful. However, I'm still a bit confused. In 2.) if Stock A doesn't pay anything, what do you really have in the long run, except current market value? Whereas Stock B that is constantly paying, allowing you to purchase more stock over time and benefiting from compounding interest.

Does my further confusion make sense?
Sure, Stock A may not pay any dividends, but its stock price can still go up. Take Amazon, for example. I don't think it's ever paid a dividend to its shareholders, but the "current market value" of its stock has grown exponentially over the last decade.

If you buy 1 share of a mutual fund for $100 per share and sell it for $200 per share, you've doubled your investment. If, somewhere, along the way, the mutual fund pays out a 1% dividend, the value of the mutual fund will drop by the same amount of the dividend that is payed out. In that way, receiving a dividend is like taking money out of your left pocket and putting it into your right pocket. In a world without taxes, you could have achieved the same result by simply selling 1% of the mutual fund. Either way, your investment drops in value, and you end up with extra cash in your hand. What if you automatically reinvest the dividend that you've just received? Then you've essentially taken money out of your left pocket (in the form of the decrease in the mutual fund's value), put it into your right pocket (in the form of the dividend that you've received), and then transferred it back into your left pocket (by reinvesting the dividend).
Last edited by snailderby on Wed Jul 10, 2019 2:52 pm, edited 1 time in total.

User avatar
goingup
Posts: 3580
Joined: Tue Jan 26, 2010 1:02 pm

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by goingup » Wed Jul 10, 2019 2:42 pm

Value funds have been lagging Growth and Blend funds for several years. The expense ratio of Windsor is more than TSM, so it would commonly be called the more expensive fund.

As everyone has noted, the relative price of the shares (to each other) is not something to consider when gauging performance.

Topic Author
aaronh
Posts: 17
Joined: Sat Feb 22, 2014 9:17 am

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by aaronh » Wed Jul 10, 2019 3:49 pm

snailderby wrote:
Wed Jul 10, 2019 2:18 pm
aaronh wrote:
Wed Jul 10, 2019 11:16 am
snailderby wrote:
Wed Jul 10, 2019 9:53 am
A couple thoughts:

1. The difference in NAV is not important. Whether you own 2 shares of VTSAX worth $50 apiece or 1 share of VTSAX worth $100 apiece, the end result is the same: You own $100 worth of VTSAX.

2. From https://www.investopedia.com/ask/answer ... -funds.asp: "When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19. When you receive the dividend distribution, you could either keep the cash or reinvest it in additional shares of the mutual fund at the reduced net asset value."

So let's say you own 1 share each of two mutual funds. Both funds are worth $100 per share. Fund A doesn't pay any dividends. Fund B pays out a $1 dividend, which drops the NAV of Fund B to $99. You immediately reinvest that $1 dividend, however, leaving you with $100 worth of Fund B, exactly where you started before the dividend payout (ignoring any tax issues). See viewtopic.php?t=192540.

3. VWNAX is more valuey than VTSAX, and value stocks have lagged the total stock market recently.

4. VTSAX has a lower expense ratio than VWNAX.
Thanks for this, very helpful. However, I'm still a bit confused. In 2.) if Stock A doesn't pay anything, what do you really have in the long run, except current market value? Whereas Stock B that is constantly paying, allowing you to purchase more stock over time and benefiting from compounding interest.

Does my further confusion make sense?
Sure, Stock A may not pay any dividends, but its stock price can still go up. Take Amazon, for example. I don't think it's ever paid a dividend to its shareholders, but the "current market value" of its stock has grown exponentially over the last decade.

If you buy 1 share of a mutual fund for $100 per share and sell it for $200 per share, you've doubled your investment. If, somewhere, along the way, the mutual fund pays out a 1% dividend, the value of the mutual fund will drop by the same amount of the dividend that is payed out. In that way, receiving a dividend is like taking money out of your left pocket and putting it into your right pocket. In a world without taxes, you could have achieved the same result by simply selling 1% of the mutual fund. Either way, your investment drops in value, and you end up with extra cash in your hand. What if you automatically reinvest the dividend that you've just received? Then you've essentially taken money out of your left pocket (in the form of the decrease in the mutual fund's value), put it into your right pocket (in the form of the dividend that you've received), and then transferred it back into your left pocket (by reinvesting the dividend).
That doesn't make sense to me. Here's how I'm thinking about it:

Fund A - $ 100 -> $0 dividend

Fund B - $100 -> 5$ dividend -> Fund B now == $95.

Reinvest the $5 dividend into Fund B, and I now own 1.05 shares (5 / 95), whereas I still only have 1 share of Fund A.

Is this logic incorrect?

User avatar
Phineas J. Whoopee
Posts: 8402
Joined: Sun Dec 18, 2011 6:18 pm

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by Phineas J. Whoopee » Wed Jul 10, 2019 4:48 pm

aaronh wrote:
Wed Jul 10, 2019 3:49 pm
...
That doesn't make sense to me. Here's how I'm thinking about it:

Fund A - $ 100 -> $0 dividend

Fund B - $100 -> 5$ dividend -> Fund B now == $95.

Reinvest the $5 dividend into Fund B, and I now own 1.05 shares (5 / 95), whereas I still only have 1 share of Fund A.

Is this logic incorrect?
Yes, it is incorrect. A portfolio is properly valued in currency units, not in numbers of shares. If it weren't, a, for example, ten for one stock split would multiply your assets by a factor of ten. It doesn't. You simply have ten times as many shares that are worth one tenth as much each.

Equity fund dividends come directly out of share prices. They do not increase one's wealth.

In your example, you own one $100.00 share, vs. 1.0526 $95.00 shares worth $100.00. Your wealth is unchanged.

Unless, that is to say, you have to pay income tax on the dividend. In that case your Fund B scenario is decidedly worse, because you don't have the full $5 left to reinvest.

PJW

rossington
Posts: 63
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida Suncoast

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by rossington » Wed Jul 10, 2019 5:47 pm

But if your share price goes back up to $100 you now have $105.26 with the reinvested dividend. So yes, reinvesting the dividends gives you the opportunity for more growth/wealth.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

User avatar
Phineas J. Whoopee
Posts: 8402
Joined: Sun Dec 18, 2011 6:18 pm

Re: Performance differentiations (VTSAX vs. VWNAX)

Post by Phineas J. Whoopee » Wed Jul 10, 2019 5:54 pm

rossington wrote:
Wed Jul 10, 2019 5:47 pm
But if your share price goes back up to $100 you now have $105.26 with the reinvested dividend. So yes, reinvesting the dividends gives you the opportunity for more growth/wealth.
The effect would be exactly the same as if the non-dividend share proportionally increased in price. Dividends, barring income taxes, have nothing to do with it. Addition and multiplication are commutative.

PJW

Post Reply