Regular readers know that The Skilled Investoradvocates a very boring (but usually much more profitable) low cost, broad market, passive indexmutual fund investment strategy.
Costs less. Gets the broad market return --whatever that will be. Narrows the range of outcomes and therefore therisk to your long-term personal financial plan. Takes far less time.Furthermore,extensive financial research has shown clearly andoverwhelmingly that a passive, low cost index strategy for individualinvestors tends to be superior from a risk-adjusted, after-tax netreturns standpoint.
The Skilled Investor advocatesstrategies that are in line with the general investment strategy statedabove. You will never get a stock or bond tip here. Ever. Purchasingindividual stocks and bonds tends just to be a big waste of yourvaluable money and time.
Very broad and very low cost passive indexmutual funds and ETFs are the way to go. Funds can give youprofessionally managed, cheap, and broad diversification that youcannot achieve by yourself. (See these articles on The Skilled Investor website: "Investment securities markets do not pay you for the risks of holding individual common stocks and bonds" and "What is the cost to individual investors of sub-optimal portfolio diversification?")
(Concerning the boring aspect of all this, this strategy also means that you aremore likely to reduce your personal production of stomach acid. Whenyoudecide NOT to spend some small or large proportion of your lifepaying attention to the fates of individual companies that you cannot foresee or cannot control, then you have less toworry about. However, a passive strategy will still give you the excitementof riding bull and bear markets, as if you really need that kind of unavoidable stimulation.)
Unfortunately, theindex mutual fund investment space has become a minefield forindividual investors in recent years.
Given the growing popularity of index fundinvesting, many new supposed "index" mutual fund and ETF products havebeen introduced to the market that may not necessarily serve theinterests of passive, buy and hold investors. Some of the indexinvestment land mines out there are high index fund costs, active"index" management, and new indexing definitions and concepts thatstray from the original asset weighted capitalization concept that hasserved individual investors so well for several decades.
Measuredby invested assets, the S&P 500 index is the most common index fundbenchmark in the U.S. The S&P 500 tracks about 75% of publiclytraded U.S. equity market asset value. You might think that you canpick any old S&P500 benchmarked index fund or ETF and thereby adopta passive, low cost, broad market index strategy.Nope. Life justnever seemsto be that easy.
The dominant issue with S& P 500 index mutual funds and ETFfunds is that securitiesindustry fees are all over the map from reasonably low to shockinglyhigh.
Ifyou are not careful, there is even one S & P 500indexfund out there that will charge you 2.71% annually formanagement fees and 12b-1 investment sales fees combined. You mightask, what is the value added for such high fees, when you can purchaseS&P 500 index mutual funds directly from other fund families atjust a .1% annual management fee with no sales charges? There is novalue-added. None. Zip. Nada. If you are naive enough to pay higherinvestment costs for commodity index funds, then these ridiculouslyhighfees are just a wealth transfer from you to the industry thatrepeatedly bleeds your personal investment portfolio year after year.
So,how can you find low cost S&P 500 Index Mutual Funds? There are acouple ways. First, you could read these fund screening articles by The Skilled Investor: "Selecting Investment Funds," "Screening index mutual funds on-line with IndexUniverse.com," and "Screening mutual funds on-line with Morningstar.com."Then, use IndexUniverse.com and Morningstar.com to screen funds andfind those with very low costs and other characteristics that you want.Also, you shouldread this article on The Skilled Investor website: "Scientific mutual fund and ETF screening criteria -- a summary."Get educated and get smart about selecting mutual funds and ETFs.Picking them just because they have 4 star and 5 star ratings and anice historical performance graph could lead to lousy, sub-parresults.See: "Investment astrology – should you pick investments according to the Morningstars?"Historical performance is just industry marketing bait for naive,performance chasing investors, who very often arrive at the party toolate.
Second, you can read this research article, "S&P 500 Index Mutual Funds,"by John A. Haslem, H. Kent Baker, and David M. Smith published in theMarch/April 2007 Journal of Indexes (pages 34-38).You can alsofindthis same research article using this link: "S&P 500 Index Mutual Funds: Diverse expenses and performance characteristics."
Haslem, Baker, and Smith analyzed the investment expenses of S&P 500index mutual funds and found a very wide dispersion of management feesand total expense ratios.
Withoutall their research details, which youcan read yourself, Haslem, et.al. simply found that higher expensesjust lowered investors' net returns. They groupedS & P 500indexfunds by expense groupingsfrom low to high, i.e.standard deviations around the average expense ratio.Theyreported a list of twenty-five retail and institutional index mutualfunds withlower costs.
Excludingthe obvious institutional funds, here are the remaining lowcost S&P 500 index mutual funds that it seems an investor might be able tobuy retail.
- California InvestmentS&P 500, Inv (SPFIX)
- Fidelity Spartan 500 Index, Inv (FSMKX)
- Schwab S&P 500 Select, Inv (SWPPX)
- SSga S&P 500 Index, Inv (SVSPX)
- T. Rowe Price Equity Index 500, Inv. (PREIX)
- United Association S&P 500 Index, Inv (UAIIX)
- USAA S&P 500 Index Member, Inv(USSPX)
- Vanguard500 Index Admiral, Inv (VFIAX)
- Vanguard500 Index, Inv (VFINX)
- Vantagepoint 500 Stock II, Inv (VPSKX)
Theremay be other restrictions, costs, and purchase conditionsassociated with buying the lower cost index mutual funds in thelistabove, so pay attention when youshop. Also, note that there still is a noticeable range of total annualexpenseswithin this list. Haslem, Baker, and Smith reported that the mean oraverage expense ratio was .19% per year. Since many of the obviousinstitutional funds wereremoved from Haslem, Baker, and Smith's initial list of 25 lower costindex mutual funds that track the Standard and Poors 500 compositeindex, therefore the average expense ratio for the remaininglistcould be higher.
Furthermore,youcan purchase many ofthese Standard & Poors 500 composite index mutual funds directlyfrom the sponsoring fund family, which will keep your costs down.
However, some of these index funds may only be available through abroker or investment advisor, and this could substantially increaseyour purchasing and annual expense costs.Therefore, it might really pay youto shop around even within thislist. Even a .1% annual expense difference can mount up year after yearafter year. Use your favorite search engine to do your own researchonline. Finally, there are no ETFs in this list. If you want to findlow cost S&P 500 ETFs, consult the online screening tools articlesreferenced above.
NOTE:JUST BECAUSE A FUND FAMILY HAS A LOW COST S&P 500 INDEX MUTUAL FUNDON THE LIST ABOVE DOES NOT MEAN THAT ALL OF THAT FUND FAMILY'S S&P500 FUNDS ARE LOW COST. Always be careful and check expenses beforeinvesting. Note that the reason many index funds were more expensivewas because they wereA, B, and C share classes, which are soldthrough brokers and investment advisors. You can buy some index fundsdirectly and cut out these expensive broker and advisor intermediaries,if you do not think theyreally add value when you buy a passive,broad market index fund. (See these articles by The Skilled Investor: "The heavy burden of recurring investment fees" and "Can you really get free and objective investment advice, when you pay investment sales loads?")
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