Mutual Fund Overlap

Discussion in 'Business, Investing & Finance' started by 78, Mar 10, 2019.

  1. 78

    78 Dazed and Confused
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    You're perusing the fund lineup for a 401(k) or IRA and your eyes come across a pair of well-known offerings, Vanguard Index 500 and Vanguard Growth & Income.

    Rather than throw all your money into one basket, you rationalize it might be better to diversify by putting money into each fund.

    Are you accomplishing your goal?

    Below are the current top 10 holdings for each fund beginning with Index 500.

    Not surprisingly, funds with similar investment objectives, and esp if they're from the same family where managers share data, tend to share similar holdings. Rather than further diversify, you're further concentrating your holdings.

    1) Check the investment objective. If two funds categorize themselves as "large cap blend" or "growth and income," they probably have a lot of fund overlap.

    2) Look at the stat R-Squared. This will tell you how positively correlated the fund is to a certain index that can explain its movements.

    Vanguard Index 500 being a clone of the underlying index has an R2 of 100.00. Vanguard Growth & Income is rated 99.38. Almost all of its movements can be explained by the S&P 500. That's a poor complement to Vanguard Index 500.

    Diversification isn't just about putting money into several buckets. It's about putting money into unalike buckets -- buckets that are said to be negatively correlated.

    [​IMG][​IMG]
     
    • Pablos Tunnel

      Pablos Tunnel Well-Known Member
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      If your plan offers ETF’s always choose those. The two funds above are essentially the same so no wonder the holdings are too. To be diversified you need aggressive growth, growth, growth & income, and balanced funds or total return funds. You can mix these how you please based on your age, goals ect.
       
    • 78

      78 Dazed and Confused
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      Most 401(k) plans don't offer ETFs. Further, when you put all your money into passive index funds, guess what? When large institutional managers rebalance the index or unload a particular laggard, you get a lot of volatility.

      That's an entirely different subject that can be addressed in another thread. I'm not against ETFs. I use them extensively with clients, but as with any investment there are plusses and minuses.

      I listed the two similar Vanguard funds in an attempt to underscore the point. Most investors aren't as savvy as you, PT. To your point, Vanguard Growth is most closely tied to the Russell 1000 Growth TR yet its R2 to the S&P 500 is 91.30. That's a high correlation.
       
      • ChiefGator

        ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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        I avoid "funds", they are either run by people who really don't know that much, or are driven by market trends (index funds) that force them to buy or sell.

        I like having companies that I generally understand and meet my requirements, but that is very rare in the investment arena.
         
      • Detroitgator

        Detroitgator General Factotum
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        This is one of those areas that I mentioned in my Life Insurance post that all tie together philosophically for me and why I do what I do (and I'll post about that later). It also gets into the world (and fact) that nearly 100% of everything discussed in every thread so far are "paper derivatives" which really means that one is not diversified AT ALL... one is 100% in paper/digital paper/digital real estate/digital precious metals.... Hopefully that will make more sense when I post later.

        N.B.: I apologize right now for not handing out about 264 "likes" already and for not handing them out in the future in this forum because I'd be liking just about everything... i'll try harder! ;)
         
        • FireFoley

          FireFoley Senior Member
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          78, your point is well taken and the exact reason I am against funds once you have a certain amount of money. Instead of paying a mgmt fee for some idiot to do nothing, you can purchase individual shares of the top holdings of some fund you might like, pay that one time transaction commissions for the trades (much less than an annual fee) and then make changes if you choose!!!!!! You can purchase 10 stocks, 10% each in a portfolio and do it for a one time fee of about 30 bucks at say Interactive Brokers.
           
          • 78

            78 Dazed and Confused
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            Are you saying all individual stocks? That's clearly cheaper than funds or ETFs, but unless you're populating the account with 50 or more positions, there's obvious diversification risk in that approach.

            FWIW, for higher networth investors, I like a blend of ETFs and individual stocks. I don't outsource to third-party managers. It's time intensive but it's what you have to do to keep clients happy.
             
          • Detroitgator

            Detroitgator General Factotum
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            LMT, NOC, RT, GD, HII... go to sleep for another 20 years. Have more lobbyists combined than anyone and no party is going to stop spending a third of our budget on them no matter what they campaign on. No diversification, but none needed. Diversify through other asset classes. ;)
             
          • FireFoley

            FireFoley Senior Member
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            I hear what you are saying and you are correct, but 50 positions is probably too many for the average individual to evaluate. I was using 10 as an example and you are correct that it could be sector heavy, so maybe don;t take the top 10, but spread it around. However some people like certain sectors and often will buy funds or ETF's that follow certain sectors. I appreciate that you do not farm out your work. People are paying you not to. I am not huge into ETF's and really only use them as hedges in my portfolio, due to they have to be rebalanced each day, and may not correlate exactly to the stocks they contain. However I understand using them b/c they are liquid and trade all day, unlike funds where you can only get the NAV each day (huge ripoff). Keep up the good work.
             
            • 78

              78 Dazed and Confused
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              Hmmmm.[​IMG]
               
              • 78

                78 Dazed and Confused
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                Your thinking isn't lost on me, DG. Defense stocks are just that, defensive. GD and RTN have been a disappointment of late, BA the bomb.

                ITA is a good ETF for that play. More of them than you probably want to gather, but a good upside hedge nonetheless.
                 
                • FireFoley

                  FireFoley Senior Member
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                  Gotta hand it to you 78', the forum is not even a week old and you are breaking out charts already so we can do technical analysis. I love it. Way to go:fistbump:
                   
                  • Detroitgator

                    Detroitgator General Factotum
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                    I said, go to sleep for "another" twenty years, as in "sleeping with no worries" for the last 20. ;) And yes, could add BA, but I've liked the pure defense nature of the others over BA's "civilian" exposure. If someone wants to put their retirement money on FANG/Amazon alone when what everyone has been talking about is averaging 5-8% return over the long haul, I guess I could whip out FANG/Amazon alone against any suggested investment. FSDAX is another fund that covers defense, but when the subject was buying a few individual stocks vs a fund, that list has gotten it done for the last 20 and will for the next 20 with less volatility and again, I'm talking about something the 'average investor" could do with an etrade account and not have to worry about knowing how to do anything but let it ride and keep adding to it.

                    Now you're lboy cherry picking a two year time frame like a global warming nut! And are you honestly going to tell me that Amazon is your measuring stick because 100% of your investment is in Amazon? ;)
                     
                    #13 Detroitgator, Mar 10, 2019
                    Last edited: Mar 10, 2019
                    • Concrete Helmet

                      Concrete Helmet Hook, Line, and Sinker
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                      Wow, all of this fund and that fund is enough to make me go buy more real estate and make renters buy it for me....
                      [​IMG]
                       
                      • 78

                        78 Dazed and Confused
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                        Haha, had to goose you with a couple flyers. Hey, man, I acknowledge your low-maintenance wisdom. Was just putting out a few alpha cherries for play.

                        I also like CNC, SQ, CRM, ANTM, NCLH and COST.
                         
                        • Detroitgator

                          Detroitgator General Factotum
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                          :) I just try to KISS everything I do, makes most things manageable over the long haul, especially when life is busy and I don't want to shyt my pants every time the entire market moves because of 5 stocks that dominate every algo. I lost plenty playing around trying to be smart and tricky, now i'm older and more boring. Yeah, Amazon is up 9000% since 2000, but i'll take the 200-800% from my list over the same period while never losing sleep. Your eyeballs deep in all of this, so I look forward to all your posts... always learning, even if old(er) and boring(er). ;)

                          Another trick I've learned for individual stocks? I used to always set stop losses per every "how to trade" read ever.... I then learned (the hard way) that in the age of algorithms, it is incredibly stupid to set stop losses as the big boys know exactly what every retail guy like me has ever read: "where to set a stop loss." So, in a millisecond, they'll jam a stock/sector down to trip every standing sell order stop loss there is, buy everything up, and within that nano second, the stock was down say 10%, triggered the sell, they buy, then the stock is back up 12% above where it started and we're left wondering, "WTF JUST HAPPENED?!?!?!" Now I only set "alerts" for where my stop loss/trailing stop loss would be and get the text when that nano-second happens and can decide if I need to bail or not. Live and learn... by losing! ;)
                           
                          • Detroitgator

                            Detroitgator General Factotum
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                            Yeah, you and I are a lot alike. I started typing up my thoughts for a thread I wanted to title "Personal Philosophy(ies)" so we could see where everyone is coming from, and because I don't put a single penny into ANY retirement account and wanted to explain why. But it is REALLY fookin long, so I didn't post it.
                             
                            • 78

                              78 Dazed and Confused
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                              Lol, so true re the stop. It's why they're relatively useless.

                              Hey, DG, you're yet another example why investing and, in particular, investment management, are not one-size-fits-all. We all have a different downside tolerance.

                              As an anecdote to the discussion, I had a client with two large rollover IRAs, one that was managed and one that garaged shares of LMT. She was an LMT retiree and felt it was a "safe" investment.

                              When LMT warned of an earnings miss last summer and the stock began falling, she freaked. We had a meeting on diversification. One by one I overlayed other defense stocks, then stocks from other sectors, some with lower beta ratings than LMT. Not a two-year graph, but five and 10 years. When LMT did poorly, others did well, and vice versa. Her managed account had done better over time.

                              Her eyes grew large as saucers. Now she could see why. She still owns LMT, just not as much.
                               
                              • bradgator2

                                bradgator2 1/29/17 half marathon - 1 hour, 34 min, 2 secs
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                                So, inside my 401k, my options are pretty limited. But this is what I have chosen, which is a pretty aggressive setup. I am over 20 years out and fluctuations dont bother me.

                                50% into a blue chip.
                                Top Holdings (as of 12-31-18)¤
                                Amazon.com Inc 9.8%
                                Microsoft Corp 5.4%
                                Alphabet Inc Class C 4.0%
                                Facebook Inc A 3.9%
                                Boeing Co 3.8%
                                Visa Inc Class A 3.4%
                                Booking Holdings Inc 3.4%
                                UnitedHealth Group Inc 3.1%
                                Mastercard Inc A 2.8%
                                Alibaba Group Holding Ltd ADR 2.7%

                                12.5% into a small cap
                                Top Holdings (as of 12-31-18)¤
                                Burlington Stores Inc 0.7%
                                Tableau Software Inc A 0.6%
                                Lennox International Inc 0.6%
                                PTC Inc 0.6%
                                Sarepta Therapeutics Inc 0.6%
                                Zebra Technologies Corp 0.6%
                                Exact Sciences Corp 0.6%
                                VICI Properties Inc Ordinary Shares 0.5%
                                Sun Communities Inc 0.5%
                                West Pharmaceutical Services Inc 0.5%

                                12.5 into a mid cap
                                Top Holdings (as of 12-31-18)¤
                                Exact Sciences Corp 3.9%
                                Workday Inc Class A 3.5%
                                Guidewire Software Inc 3.0%
                                Spotify Technology SA 2.9%
                                ServiceNow Inc 2.9%
                                CoStar Group Inc 2.8%
                                Wayfair Inc Class A 2.8%
                                Monster Beverage Corp 2.4%
                                TD Ameritrade Holding Corp 2.4%
                                DexCom Inc 2.4%

                                12.5% in a health science
                                Top Holdings (as of 12-31-18)¤
                                UnitedHealth Group Inc 7.3%
                                Intuitive Surgical Inc 5.3%
                                Becton, Dickinson and Co 4.9%
                                Vertex Pharmaceuticals Inc 3.8%
                                Anthem Inc 3.0%
                                Cigna Corp 2.8%
                                Thermo Fisher Scientific Inc 2.7%
                                Alexion Pharmaceuticals Inc 2.5%
                                Stryker Corp 2.4%
                                Merck & Co Inc 2.3%

                                12.5% in a science and technology
                                Top Holdings (as of 12-31-18)¤
                                Facebook Inc A 8.1%
                                Ctrip.com International Ltd ADR 7.0%
                                Altaba Inc 5.4%
                                Alphabet Inc Class C 5.0%
                                Tencent Holdings Ltd 4.8%
                                Booking Holdings Inc 4.6%
                                Micron Technology Inc 4.4%
                                Samsung Electronics Co Ltd 4.4%
                                Lam Research Corp 4.1%
                                Microsoft Corp 3.9%

                                There is definitely overlap in the blue chip & science/tech..

                                Let the criticism roll.... :lol:
                                 
                              • bradgator2

                                bradgator2 1/29/17 half marathon - 1 hour, 34 min, 2 secs
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                                This is listed in the profile for my Blue Chip. The symbol is JIBCX.

                                Key Statistics (as of 12-31-18 unless noted§)¤
                                Number of Holdings: 126
                                Sharpe Ratio: 0.80
                                Beta: 1.12 (S&P 500 TR USD)
                                R²: 78.48 (S&P 500 TR USD)
                                Turnover (annualized)§: 25.00
                                Net Assets: $3.4 billion
                                Underlying fund expense ratios:
                                • Gross* 0.84%
                                • Net* 0.84%
                                Market Cap (millions): 122492.30

                                What do all those mean? I get # of assets and net asset value. Also interesting, the expense ratio listed for this fund is listed at 0.35%.... so what is the underlying fund expense ratio?
                                 

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