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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?
All of the options discussed here will likely have very similar performance
and will get the job done quite well. You can't go far wrong choosing any
of the options listed here. The funds are listed in rough overall
order of 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)
 | Vanguard Mega Cap 300 ETF (MGC). E/R: 0.13%. This ETF is a
share class of the Vanguard Mega Cap 300 Index Fund Institutional Shares (VMCTX). As such, it
should benefit from greater internal efficiency that incoming cash flows
bring, as compared with other ETFs. It attempts to track the MSCI US
Large Cap 300 Index of very large US companies. For more information on ETFs, see here.
Our preference for MGC over VV and BRLIX is quite small.
|
| Vanguard Large-Cap ETF (VV). E/R: 0.13%.
This is the ETF share class of the Vanguard Large-Cap Index Fund (VLACX).
Its internal efficiency should benefit from the cash flows of VLACX (i.e., it
should have better internal efficiency than other ETFs in this asset class). For
more information on ETFs, see here. Our
preference for VV over BRLIX is extremely small.
|
| 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.
|
| Schwab U.S. Large Cap ETF (SCHX). E/R: 0.08%.
This ETF tracks the Dow Jones U.S. Large-Cap Total Stock Market Index. For
more information on ETFs, see here.
|
| Fidelity Spartan 500 Index Fund (FSMKX). E/R: 0.10%.
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: 0.18%. 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: 0.26%.
This fund tracks the obscure MSCI US Prime Market 750 index. Vanguard
has demonstrated an amazing ability to do well against its benchmark with
the Vanguard 500 Index Fund. This fund may be a viable alternative to the 500
Index Fund. But then again, it remains to be seen if they can work
similar magic with this fund, which tracks a more obscure index. This
fund's dramatically smaller asset base will mean lesser "economies of scale"
as well.
|
| Rydex 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 NYSE 100 Fund (NY). E/R: 0.20%. This is an ETF
which tracks the NYSE 100 index — the largest 100
stocks listed on the NYSE. 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 (DFLCX). E/R: 0.15%.
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 S&P 500 Fund (IVV). E/R: 0.09%. This is an ETF
which tracks the S&P 500 index. While its E/R is lower than the Vanguard
500 Index fund, it has tended to underperform it. Further, the commissions
and bid-ask spreads incurred on buying/selling ETFs somewhat offset the
benefit of the low expense ratio. 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. The commissions
and bid-ask spreads incurred on buying/selling ETFs somewhat offset the
benefit of the low expense ratio. However, for large amounts invested
for many years, the lower expense ratio suggests that this fund may outperform the Vanguard 500
Index Fund over time. For more information on ETFs, see here.
|
| DFA Enhanced US Large Company Portfolio (DFELX). E/R: 0.25%.
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 recently.
It remains to be seen whether the outperformance will continue. It is
important not to use this fund inside a taxable account —
it is VERY tax-inefficient.
|
| S&P 500 SPDR (SPY). E/R: 0.10%. 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.
|
| 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.
The WisdomTree Earnings 500 Index is 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.
|
| 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.
The WisdomTree LargeCap Dividend Index is 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.
|
| PowerShares FTSE RAFI 1000 Portfolio (PRF). E/R: 0.60%.
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.
|
| 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.
The Research Affiliates 1000 Index is a non-cap weighted index of US
large cap stocks. The
high expense ratio precludes us from being more enthusiastic about this fund. |
| 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. Our preference for BRLIX over MGC
and VV
is extremely small.
|
| Vanguard Mega Cap 300 ETF (MGC). E/R: 0.13%. This ETF is a
share class of the Vanguard Mega Cap 300 Index Fund Institutional Shares (VMCTX). As such, it
should benefit from greater internal efficiency that incoming cash flows
bring, as compared with other ETFs. It attempts to track the MSCI US
Large Cap 300 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. Our preference
for MGC over VV is quite small.
|
| Vanguard Large-Cap ETF (VV). E/R: 0.13%.
This is the ETF share class of the Vanguard Large-Cap Index Fund (VLACX).
Its internal efficiency should benefit from the cash flows of VLACX (i.e., it
should have better internal efficiency than other ETFs in this asset class).
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.
|
| Schwab U.S. Large Cap ETF (SCHX). E/R: 0.08%.
This ETF tracks the Dow Jones U.S. Large-Cap Total Stock Market Index. For
more information on ETFs, see here.
|
| Vanguard Tax-Managed Capital Appreciation Fund (VMCAX). E/R:
0.21%. This fund tracks the Russell 1000 index of large-cap stocks while
minimizing both dividend and capital gains distributions. Unfortunately,
the fund's short-term redemption fees (1% for redemptions in the first five
years after buying) limit opportunities for otherwise
beneficial tax-loss harvesting and rebalancing. This fund is expected to
be the most tax efficient of all choices here. For those who don't
intend to do any tax-loss harvesting or rebalancing in the next five years,
this is the top choice. This fund's restrictive redemption fees preclude
us from recommending this fund as highly as some others.
|
| Vanguard Tax-Managed Growth and Income Fund (VTGIX). E/R:
0.15%. This fund tracks the S&P 500 index while minimizing capital gains distributions. Unfortunately, the fund's
short-term redemption fees (1% for redemptions in the first five years after
buying) limit opportunities for otherwise
beneficial tax-loss
harvesting and rebalancing. We see no reason to prefer this fund over VMCAX, since this
fund doesn't manage to minimize dividend distributions.
|
| Vanguard Large-Cap Index Fund (VLACX). E/R: 0.26%. This
fund tracks the obscure MSCI US Prime Market 750 index. Vanguard has
demonstrated an amazing ability to do well against its benchmark with the
Vanguard 500 Index Fund. This fund may be a viable alternative to the
500 Index Fund. But then again, it remains to be seen if they can work
similar magic with this fund, which tracks a more obscure index. This
fund's dramatically smaller asset base will mean lesser "economies of scale"
as well. 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 (FSMKX). E/R: 0.10%.
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: 0.18%. 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.
|
| iShares S&P 500 Fund (IVV). E/R: 0.09%. This is an ETF
which tracks the S&P 500 index. While its E/R is lower than the
Vanguard
500 Index fund, it has tended to underperform it. Further, the commissions
and bid-ask spreads incurred on buying/selling ETFs somewhat offset the
benefit of the low expense ratio. However, for large amounts invested
for many years, the combination of the lower expense ratio and the greater
(capital gains) tax-efficiency of ETFs suggests that this fund may outperform the Vanguard 500
Index Fund over time on an after-tax basis. For more information on
ETFs, see here.
|
| SSgA S&P 500 Index Fund (SVSPX). E/R: 0.16%. This fund
tracks the S&P 500 Index.
|
| Rydex 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 NYSE 100 Fund (NY). E/R: 0.20%. This is an ETF
which tracks the NYSE 100 index — the largest 100
stocks listed on the NYSE. 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. While its E/R is lower than the
Vanguard
500 Index fund, it has tended to underperform it. Further, the commissions
and bid-ask spreads incurred on buying/selling ETFs somewhat offset the
benefit of the low expense ratio. However, for large amounts invested
for many years, the combination of the lower expense ratio and the greater
(capital gains) tax-efficiency of ETFs suggests that this fund may outperform the Vanguard 500
Index Fund over time on an after-tax basis. For more information on
ETFs, see here.
|
| S&P 500 SPDR (SPY). E/R: 0.10%. 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.
|
| 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.
The WisdomTree Earnings 500 Index is 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.
|
| 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.
The WisdomTree LargeCap Dividend Index is 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.
|
| 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. |
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