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The base of most investors' equity portfolios is (and probably should be
— for psychological/behavioural reasons)
domestic large-cap funds. There are several very similar investment options
available. Which is best?
The funds are listed in rough order of our overall preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
 | AQR Large Cap Momentum Style Fund (AMOMX). E/R: 0.40%.
This fund invests in large/mid cap US momentum stocks (i.e., stocks that have
done well over the past 12 months, excluding the most recent month).
Momentum has been shown to have both a positive risk premium and a negative
correlation with the value premium. Thus, momentum stocks are good
diversifiers to value stocks. As such, this fund is most appropriate
for those who are using it to both get large cap exposure and to diversify
value exposure elsewhere in their portfolio. Because this fund is
expected to have very high turnover and is not managed to minimize capital
gains distributions, it is inappropriate to hold it in a taxable account,
unless you have high realized capital losses banked. For more
information on momentum investing, see
here.
|
| Vanguard Large-Cap Index Fund Admiral Shares (VLCAX). E/R: 0.08%.
Minimum initial investment = $10,000. This
fund tracks the obscure CRSP US Large Cap Index.
|
| iShares MSCI USA Momentum Factor ETF (MTUM). E/R: 0.15%.
This fund tracks the MSCI USA Momentum Index of large- and mid- cap stocks
which have been exhibiting strong risk-adjusted price momentum over the past
6- and 12- month periods. We like that this fund has such a low
expense ratio. We don't like that the index's definition of momentum
differs from that shown in the original Jegadeesh/Titman research as
optimal. For more information on ETFs, see here.
For more information on momentum investing, see
here.
|
| DFA Enhanced US Large Company Portfolio (DFELX). E/R: 0.23%.
This fund basically invests in S&P 500 index futures. Implicit in the
price of a futures contract is an assumed interest rate covering the period from
purchase of the contract to the contract expiration date. The futures
themselves are a relatively small portion of the portfolio (enough futures are
bought to simulate full investment in the index). An even smaller
portion of the portfolio is set aside in very short-term treasuries as
collateral. The remaining cash is invested passively in Short-Term bonds using DFA's
"variable maturity" strategy. If the Short-Term bonds can earn a
better risk-adjusted return than the interest rate implicit in the futures
price, it is possible to have better risk-adjusted returns than the index
(before fees). This fund has done quite well. It is
important not to use this fund inside a taxable account —
it is VERY tax-inefficient.
|
| Vanguard 500 Index Fund Admiral Shares (VFIAX). E/R: 0.05%.
Minimum initial investment = $10,000. This fund
is one of the largest mutual funds in the world. This, combined with
expert implementation, combines to allow this fund to actually beat its index
occasionally, which is VERY rare for index funds. This is the safe
choice. Its performance against the benchmark has been, and we expect will
continue to be, outstanding. Great diversification — low fees
— this is the standard against which all others are
judged. There is a $10,000 minimum initial purchase requirement for
the Admiral class shares of this fund.
|
| DFA US Large Cap Equity Portfolio (DUSQX). E/R: 0.19%.
This fund invests in large/mid cap US profitability stocks (i.e., large cap
stocks of companies that are currently most profitable, compared to
their book value).
It also slightly tilts the portfolio towards small and value stocks. Stocks of profitable companies have been shown to have both a positive risk premium and a negative
correlation with the value premium. Thus, profitability stocks are good
diversifiers to value stocks. As such, this fund is most appropriate
for those who are using it to both get large cap exposure and to diversify
value exposure elsewhere in their portfolio. For more
information on profitability investing, see
here.
|
| Vanguard S&P 500 ETF (VOO). E/R: 0.05%.
This is the ETF share class of the Vanguard 500 Index Fund (VFINX). For
more information on ETFs, see here.
|
| Schwab U.S. Large Cap ETF (SCHX). E/R: 0.03%.
This ETF tracks the Dow Jones U.S. Large-Cap Total Stock Market Index. For
more information on ETFs, see here.
|
| Vanguard Mega Cap 300 ETF (MGC). E/R: 0.11%. This ETF is a
share class of the Vanguard Mega Cap 300 Index Fund Institutional Shares (VMCTX). It attempts to track the
CRSP US Mega Cap Index of very large US companies. For more information on ETFs, see here.
|
| Vanguard Large-Cap ETF (VV). E/R: 0.04%.
This is the ETF share class of the Vanguard Large-Cap Index Fund (VLACX). For
more information on ETFs, see here.
|
| Vanguard Russell 1000 ETF (VONE). E/R: 0.12%. This ETF is a
share class of the Vanguard Russell 1000 Index Fund Institutional Shares (VRNIX). It attempts to track the Russell
1000 Index of large US companies. For more information on ETFs, see here.
|
| Bridgeway Blue Chip 35 Index Fund (BRLIX). E/R: 0.15%.
This fund passively invests in the stocks of 35 of the largest US companies.
As such, the fund is dramatically less diversified than the other choices
here. However, since the companies it invests in are among the most
liquid on the planet, internal transaction expenses are very low. The
fund equal weights the 35 stocks, using new money to rebalance. The
equal weighting should lessen the fund's volatility. The fund
manages to minimize capital gains distributions, but this shouldn't adversely
affect its pre-tax performance.
|
| Fidelity Spartan 500 Index Fund - Fidelity Advantage Class (FUSVX). E/R: 0.07%.
Minimum initial investment: $10,000. This fund
charges a short-term trading fee of 0.5% if you sell shares within 90 days of buying
them. This fee, paid directly to the fund, is intended to discourage
market timing.
|
| iShares S&P 500 Fund (IVV). E/R: 0.04%. This is an ETF
which tracks the S&P 500 index. For more information on ETFs, see here.
|
| Vanguard 500 Index Fund (VFINX). E/R: 0.17%. This fund
is one of the largest mutual funds in the world. This, combined with
expert implementation, combines to allow this fund to actually beat its index
occasionally, which is VERY rare for index funds. This is the safe
choice. Its performance against the benchmark has been, and will
continue to be, outstanding. Great diversification — low fees
— this
is the standard against which all others are judged.
|
| SSgA S&P 500 Index Fund (SVSPX). E/R: 0.16%. This fund
tracks the S&P 500 Index.
|
| Vanguard Large-Cap Index Fund (VLACX). E/R: 0.24%.
This fund tracks the obscure CRSP US Large Cap Index.
|
| Guggenheim Russell Top 50 Fund (XLG). E/R: 0.20%. This is an ETF
which tracks the Russell Top 50 index — the largest
50
US stocks. While its E/R is higher than many others
here, we like that it is very style-pure (i.e., only large cap stocks
— no mid or small cap) and the fact that its stocks are
among the most liquid on the planet should give it extremely low internal
transaction costs. For more information on ETFs, see here.
|
| iShares Russell Top 200 Fund (IWL). E/R: 0.20%. This is an ETF
which tracks the Russell Top 200 index — the largest
200
US stocks. While its E/R is higher than many others
here, we like that it is very style-pure (i.e., only large cap stocks
— no mid or small cap) and the fact that its stocks are
among the most liquid on the planet should give it extremely low internal
transaction costs. For more information on ETFs, see here.
|
| DFA US Large Company Portfolio (DFUSX). E/R: 0.08%.
This is an S&P 500 index fund. Though it has a lower expense ratio than
the Vanguard 500 Index Fund, it has underperformed the Vanguard fund fairly
consistently.
|
| iShares Russell 1000 Fund (IWB). E/R: 0.15%. This is an ETF
which tracks the Russell 1000 index. For more information on ETFs, see here.
|
| S&P 500 SPDR (SPY). E/R: 0.09%. This is the oldest,
largest ETF in the world. On the plus side, its bid-ask spreads tend to
be smaller than those of other ETFs (because of high demand for shares). On the other hand, its E/R is higher
than IVV's, and, unlike the other ETFs listed here, it is
organized as a Unit Investment Trust. The main problem with this is
that, as a UIT, it is required to hold dividends it receives in a
non-interest account until paid out to investors. This causes a
"cash-drag" on the fund's earnings, as compared with alternatives.
For more information on ETFs, see here.
|
| iShares Morningstar Large Core Fund (JKD). E/R: 0.20%. This is an ETF
which tracks the stocks classified by Morningstar as "Large Core." With
the relatively high expense ratio, we see no good reason to buy this fund over
its less expensive, more diversified alternatives above. For more information on ETFs, see here.
|
| iShares S&P 100 Fund (OEF). E/R: 0.20%. This is an ETF
which tracks the S&P 100 index — a subset of
stocks in the S&P 500 index. We see little reason to use this fund.
It is less diversified and more costly than most alternatives here. For more information on ETFs, see here.
|
| PowerShares S&P 500 Momentum Portfolio ETF (SPMO). E/R:
0.25%. This fund tracks the S&P 500 Momentum Index of large-cap stocks
which have been exhibiting strong risk-adjusted price momentum over the past
12 months (excluding the most recent month). This is a very new fund
that will be somewhat illiquid for a while - until/unless it becomes larger.
We don't like that the index's definition of momentum differs from that
shown in the original Jegadeesh/Titman research as optimal. For more
information on ETFs, see here. For more
information on momentum investing, see
here.
|
| MomentumShares U.S. Quantitative Momentum ETF (QMOM). E/R: 0.79%.
The MomentumShares US Quantitative Momentum ETF tracks an equal-weighted
index of US stocks with strong and consistent momentum. QMOM targets
the 10% of stocks with the highest total return over the last 12 months,
excluding the most recent month. The fund also screens for consistency of
momentum by excluding stocks with too many negative-return days during the
12-month period. This methodology produces a few dozen holdings which get
weighted equally. We don't like that the fund has such a relatively
high expense ratio. For more information on ETFs, see here.
For more information on momentum investing, see
here.
|
| WisdomTree Earnings 500 Fund (EPS). E/R: 0.28%.
This is an ETF which tracks the WisdomTree Earnings 500 Index. This
index consists of the 500 largest (by market cap) companies in the WisdomTree
Earnings Index of US companies with positive earnings. The index weights
the 500 companies by the cash value of their earnings. For more information on ETFs, see here.
|
| WisdomTree LargeCap Dividend Fund (DLN). E/R: 0.28%.
This is an ETF which tracks the WisdomTree LargeCap Dividend Index. This
index consists of the 300 largest (by market cap) companies in the WisdomTree
Dividend Index of regular dividend paying companies. The index weights
the 300 companies by the cash value of their dividend payouts. For more information on ETFs, see here.
|
| PowerShares FTSE RAFI 1000 Portfolio (PRF). E/R: 0.39%.
This is an ETF which tracks the FTSE RAFI 1000, a non-cap weighted index of US
large cap stocks. The
high expense ratio and relative illiquidity costs of new funds such as this
cause us pause at this time. For more information on ETFs, see here.
|
| Schwab Fundamental US Large Company Index Fund (SFLVX). E/R: 0.59%.
This fund tracks the FTSE RAFI US 1000 index, a non-cap weighted index of US
large cap stocks. The
high expense ratio precludes this being a good choice. Two lower cost
share classes are available for higher minimum dollar amounts, but even those
are too expensive, given the less expensive large cap choices above.
|
| PIMCO Fundamental IndexPLUS Fund Institutional Shares (PFPIX). E/R: 0.65%.
This fund basically invests in Research Affiliates 1000 Index futures.
Implicit in the price of a futures contract is an assumed interest rate
covering the period from purchase of the contract to the contract expiration
date. The futures themselves are a relatively small portion of the
portfolio (enough futures are bought to simulate full investment in the
index). An even smaller portion of the portfolio is set aside in very
short-term treasuries as collateral. The remaining cash is invested
actively in Short-Term bonds. If the Short-Term bonds can earn a better
risk-adjusted return than the interest rate implicit in the futures price, it
is possible to have better risk-adjusted returns than the index (before fees). It is
important not to use this fund inside a taxable account —
it is VERY tax-inefficient.. |
| Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX). E/R:
0.11%. This fund tracks the Russell 1000 index of large-cap stocks while
minimizing both dividend and capital gains distributions. There is a
$10,000 minimum initial purchase requirement for the Admiral class shares of
this fund. This fund is expected to
be the most tax efficient of all choices here.
|
| AQR TM Large Cap Momentum Style Fund (ATMOX). E/R: 0.40%.
This fund invests in large/mid cap US momentum stocks (i.e., stocks that have
done well over the past 12 months, excluding the most recent month).
Momentum has been shown to have both a positive risk premium and a negative
correlation with the value premium. Thus, momentum stocks are good
diversifiers to value stocks. As such, this fund is most appropriate
for those who are using it to both get large cap exposure and to diversify
value exposure elsewhere in their portfolio. This fund manages to
lesson short-term capital gain and dividend distributions. For
more information on momentum investing, see
here.
|
| Vanguard Large-Cap Index Fund Admiral Shares (VLCAX). E/R: 0.08%.
Minimum initial investment = $10,000. This
fund tracks the obscure CRSP US Large Cap Index. The fact that there is an ETF associated with this fund should
make it more tax-efficient than it otherwise would be (low basis stocks will
tend to be disposed of via periodic in-kind redemptions of the ETF shares).
In fact, because ETF shares make up a large portion of the money in this fund,
it is likely to be almost as (capital gains) tax efficient as a standard ETF.
|
| iShares MSCI USA Momentum Factor ETF (MTUM). E/R: 0.15%.
This fund tracks the MSCI USA Momentum Index of large- and mid- cap stocks
which have been exhibiting strong risk-adjusted price momentum over the past 6- and 12-
month periods. We like that this fund has such a low expense ratio.
We don't like that the index's definition of momentum differs from that
shown in the original Jegadeesh/Titman research as optimal. For
more information on ETFs, see here. For more
information on momentum investing, see
here.
|
| Bridgeway Blue Chip 35 Index Fund (BRLIX). E/R: 0.15%.
This fund invests in the stocks of 35 of the largest US companies. As
such, the fund is dramatically less diversified than the other choices here.
However, since the companies it invests in are among the most liquid on the
planet, internal transaction expenses are very low. The fund equal
weights the 35 stocks, using new money to rebalance. The equal
weighting should lessen the fund's volatility. The fund manages to
minimize capital gains distributions.
|
| Schwab U.S. Large Cap ETF (SCHX). E/R: 0.03%.
This ETF tracks the Dow Jones U.S. Large-Cap Total Stock Market Index. For
more information on ETFs, see here.
|
| Vanguard Mega Cap 300 ETF (MGC). E/R: 0.11%. This ETF is a
share class of the Vanguard Mega Cap 300 Index Fund Institutional Shares (VMCTX). It attempts to track the
CRSP US Mega Cap Index of very large US companies.
However, unlike other non-Vanguard ETFs, this fund will be only as tax
efficient as its underlying fund — no more and no less.
We expect VMCTX to be extremely capital gains tax efficient for at least the
following reasons:
 | The index it tracks has very little turnover (by design). |
| When there is turnover, it will generally be due to a stock holding
being sold because it has gotten too small in relative market capitalization
— this suggests realization of losses. |
| A very large portion of VMCTX is expected to be the ETF shares (MGC), which
increases the capital gains tax efficiency of VMCTX through its share
redemption process. |
For
more information on ETFs, see here.
|
| Vanguard Large-Cap ETF (VV). E/R: 0.09%.
This is the ETF share class of the Vanguard Large-Cap Index Fund (VLACX). However, unlike other non-Vanguard ETFs, this fund will be only as tax efficient
as its underlying fund — no more and no less.
We expect VLACX to be extremely capital gains tax efficient for at least the
following reasons:
| The index it tracks has very little turnover (by design). |
| When there is turnover, it will generally be due to a stock holding
being sold because it has gotten too small in relative market capitalization
— this suggests realization of losses. |
| A large portion of VLACX (almost half) is the ETF shares (VV), which
increases the capital gains tax efficiency of VLACX through its share
redemption process. |
For
more information on ETFs, see here.
|
| Vanguard Russell 1000 ETF (VONE). E/R: 0.12%. This ETF is a
share class of the Vanguard Russell 1000 Index Fund Institutional Shares (VRNIX). It attempts to track the Russell
1000 Index of large US companies. However, unlike other non-Vanguard ETFs, this fund will be only as tax
efficient as its underlying fund — no more and no
less. For more information on ETFs, see here.
|
| Vanguard 500 Index Fund Admiral Shares (VFIAX). E/R: 0.05%.
Minimum initial investment = $10,000. This fund
is one of the largest mutual funds in the world. This, combined with
expert implementation, combines to allow this fund to actually beat its index
occasionally, which is VERY rare for index funds. This is the safe
choice. Its performance against the benchmark has been, and will
continue to be, outstanding. Great diversification — low fees
— this is the standard against which all others are
judged.
|
| Vanguard S&P 500 ETF (VOO). E/R: 0.05%.
This is the ETF share class of the Vanguard 500 Index Fund (VFINX). For
more information on ETFs, see here.
|
| iShares S&P 500 Fund (IVV). E/R: 0.04%. This is an ETF
which tracks the S&P 500 index. For more information on ETFs, see here.
|
| Vanguard Large-Cap Index Fund (VLACX). E/R: 0.24%. This
fund tracks the obscure CRSP US Large Cap Index. The fact that there is an ETF associated with this fund should
make it more tax-efficient than it otherwise would be (low basis stocks will
tend to be disposed of via periodic in-kind redemptions of the ETF shares).
In fact, because ETF shares make up a large portion of the money in this fund,
it is likely to be almost as (capital gains) tax efficient as a standard ETF.
|
| Fidelity Spartan 500 Index Fund - Fidelity Advantage Class (FUSVX). E/R: 0.07%.
Minimum initial investment: $10,000. This fund
charges a short-term trading fee of 0.5% if you sell shares within 90 days of buying
them. This fee, paid directly to the fund, is intended to discourage
market timing.
|
| Vanguard 500 Index Fund (VFINX). E/R: 0.17%. This fund
is one of the largest mutual funds in the world. This, combined with
expert implementation, combines to allow this fund to actually beat its index
occasionally, which is VERY rare for index funds. This is the safe
choice here. Its performance against the benchmark has been, and will
continue to be, outstanding. Great diversification — low fees — this
is the standard against which all others are judged.
|
| SSgA S&P 500 Index Fund (SVSPX). E/R: 0.16%. This fund
tracks the S&P 500 Index.
|
| Guggenheim Russell Top 50 Fund (XLG). E/R: 0.20%. This is an ETF
which tracks the Russell Top 50 index — the largest
50
US stocks. While its E/R is higher than many others
here, we like that it is very style-pure (i.e., only large cap stocks
— no mid or small cap) and the fact that its stocks are
among the most liquid on the planet should give it extremely low internal
transaction costs. For more information on ETFs, see here.
|
| iShares Russell Top 200 Fund (IWL). E/R: 0.20%. This is an ETF
which tracks the Russell Top 200 index — the largest
200
US stocks. While its E/R is higher than many others
here, we like that it is very style-pure (i.e., only large cap stocks
— no mid or small cap) and the fact that its stocks are
among the most liquid on the planet should give it extremely low internal
transaction costs. For more information on ETFs, see here.
|
| iShares Russell 1000 Fund (IWB). E/R: 0.15%. This is an ETF
which tracks the Russell 1000 index. For more information on ETFs, see here.
|
| S&P 500 SPDR (SPY). E/R: 0.09%. This is the oldest,
largest ETF in the world. On the plus side, its bid-ask spreads tend to
be smaller than those of other ETFs (because of high demand for its shares). On the other hand, its E/R is higher
than IVV's, and, unlike the other ETFs listed here, it is
organized as a Unit Investment Trust. The main problem with this is
that, as a UIT, it is required to hold dividends it receives in a
non-interest account until paid out to investors. This causes a
"cash-drag" on the fund's earnings, as compared with alternatives.
For more information on ETFs, see here.
|
| iShares Morningstar Large Core Fund (JKD). E/R: 0.20%. This is an ETF
which tracks the stocks classified by Morningstar as "Large Core." With
the relatively high expense ratio, we see no good reason to buy this fund over
its less expensive, more diversified alternatives above. For more information on ETFs, see here.
|
| iShares S&P 100 Fund (OEF). E/R: 0.20%. This is an ETF
which tracks the S&P 100 index — a subset of
stocks in the S&P 500 index. We see little reason to use this fund.
It is less diversified and more costly than most alternatives here. For more information on ETFs, see here.
|
| PowerShares S&P 500 Momentum Portfolio ETF (SPMO). E/R:
0.25%. This fund tracks the S&P 500 Momentum Index of large-cap stocks
which have been exhibiting strong risk-adjusted price momentum over the past
12 months (excluding the most recent month). This is a very new fund
that will be somewhat illiquid for a while - until/unless it becomes larger.
We don't like that the index's definition of momentum differs from that
shown in the original Jegadeesh/Titman research as optimal. For more
information on ETFs, see here. For more
information on momentum investing, see
here.
|
| WisdomTree Earnings 500 Fund (EPS). E/R: 0.28%.
This is an ETF which tracks the WisdomTree Earnings 500 Index. This
index consists of the 500 largest (by market cap) companies in the WisdomTree
Earnings Index of US companies with positive earnings. The index weights
the 500 companies by the cash value of their earnings. For more information on ETFs, see here.
|
| WisdomTree LargeCap Dividend Fund (DLN). E/R: 0.28%.
This is an ETF which tracks the WisdomTree LargeCap Dividend Index. This
index consists of the 300 largest (by market cap) companies in the WisdomTree
Dividend Index of regular dividend paying companies. The index weights
the 300 companies by the cash value of their dividend payouts. For more information on ETFs, see here.
|
| PowerShares FTSE RAFI 1000 Portfolio (PRF). E/R: 0.39%.
This is an ETF which tracks the FTSE RAFI 1000, a non-cap weighted index of US
large cap stocks. The
high expense ratio and relative illiquidity costs (i.e., bid-ask spreads) of new
ETFs such as this
cause us pause at this time. For more information on ETFs, see here.
|
| Schwab Fundamental US Large Company Index Fund (SFLVX). E/R: 0.59%.
This fund tracks the FTSE RAFI US 1000 index, a non-cap weighted index of US
large cap stocks. The
high expense ratio precludes this being a good choice. Two lower cost
share classes are available for higher minimum dollar amounts, but even those
are too expensive, given the less expensive large cap choices above.
|
| DFA Tax-Managed US Equity Portfolio (DTMEX). E/R: 0.22%. This
fund is really an all-market fund, which is why it is low-rated here. If
it were more style-pure (i.e., entirely composed of large-cap stocks), it
might be our top choice. The fund manages to minimize dividend as
well as capital gain distributions. |
This web page contains the current opinions of Eric E. Haas at the time it is
written — and such opinions are subject to change
without notice. This web page is intended to serve two purposes:
| To educate the public; and |
| To provide disclosure of Mr. Haas' opinions to prospective clients.
We believe that prospective clients are well-served by being made aware of
what they are buying — and what they are buying is advice
that is based on these opinions. |
We believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to
contact us. |
