Chapter 17
What if you can’t buy VTSAX? Or
even Vanguard?
Throughout this book I’ve recommended two specific mutual funds:
VTSAX (Vanguard Total Stock Market Index Fund) VBTLX (Vanguard Total Bond Market Index Fund)
These are the funds I own myself. In each case they are the “Admiral Shares” version of those portfolios. As such they have rock bottom expense ratios, but also require a minimum investment of $10,000.
While these “Admiral Shares” versions best fit my needs, they might not fit yours. Perhaps you are just starting out and the $10,000 minimum is still too steep. Or maybe they are not offered in your 401(k) plan.
Vanguard is also the only investment company I recommend or use, and we’ll explore why in the following chapter. But maybe Vanguard itself is hard to access in the country where you live or in the 401(k) you are offered.
Not to worry. In this chapter we’ll explore some alternatives.
Variations on the Funds
The first thing to understand is that VTSAX or VBTLX are each only one fund that holds the Total Stock Market Index and Total Bond Market Index portfolios, respectively. It is the portfolios that matter and Vanguard offers each in other flavors. For example, the exact same portfolio held by VTSAX can be found in six other funds, or what Vanguard calls “classes.”
Below I list them followed by their expense ratios and required minimum investment.
The first three are for us individual investors:
Admiral Shares: VTSAX .05%/$10,000 Investor Shares: VTSMX .17%/$3,000 ETF: VTI .05% (ETF=exchange traded fund)
You can buy ETFs in any amount you want, just like a stock. Note the expense ratio is just .05%, the same as that of the Admiral Shares. For this reason some people prefer to buy the ETF rather than the Investor Shares fund. Makes sense, but be careful. When buying or selling ETFs, just like a stock, commissions and/or spreads are frequently involved. These added costs can offset the savings in the expense ratio unless you have access to free trading.
These next three are “Institutional Shares” and you might find them in your 401(k) or other employer-sponsored retirement plan:
VITPX: .02%/$200,000,000
VITNX: .04%/$100,000,000 VITSX: .04%/$5,000,000
So, when I recommend VTSAX you can substitute any of these if that’s what is available and/or if one of the others better meets your needs. The important thing is that you are buying the Vanguard Total Stock Market Index portfolio.
Similar variations can be found for VBTLX and its Total Bond Market Index portfolio. If you visit www.vanguard.com and search for VBTLX, you’ll find the home page for the fund. At the very top, under the fund name, you’ll find links to the Investor and ETF versions.
When Vanguard isn’t an option in your
employer’s tax-advantaged plan
Vanguard has a very active institutional business serving 401(k) programs and the like. But it very well may not be a part of yours. However, even if your tax-advantaged, employer-offered plan doesn’t offer Vanguard you should still participate, certainly at least up to the amount needed to capture any employer match. Once you leave that employer you can easily roll your investments into an IRA with Vanguard.
So without Vanguard in your plan, the question becomes how to select the best option, which by now you know is a low-cost total stock and/or bond index fund.
The good news is that—due to the competitive pressure from Vanguard —nearly every other major mutual fund company now offers low-cost index funds. Just like the variations you can find in Vanguard of VTSAX, you can in all probability find a reasonable alternative in your 401(k).
Here’s what you are looking for:
A low-cost index fund.
For tax-advantaged funds you’ll be holding for decades, I slightly prefer a total stock market index fund but an S&P 500 index fund is just fine.
You can also look for a total bond market index fund if your needs or preferences call for it. Most plans will also offer these.
TRFs (Target Retirement Funds) are frequently offered in 401(k) plans and these can be an excellent choice. But look closely at the fees. They are always higher than those for index funds, sometimes by a lot. For instance, the TRFs from Vanguard have expense ratios ranging from .14% to .16%, as compared to .05% for VTSAX. Those from other firms can run 5-6x higher.
For my international readers
If you live outside the U.S., Vanguard and its funds may or may not be available. Vanguard is growing rapidly and is now available in many countries outside the U.S. You can check out the list at: www.global.vanguard.com.
If Vanguard simply is not an option, in your fund search you’ll want to follow the same guidelines as described above for tax-advantaged plans.
Also, when I talk about VTSAX or any Total Stock Market Index Fund, these are indexes that mirror the U.S. stock market. As I explained in Chapter 15, this is all those of us in the U.S. really need. But you might find it difficult to access such a U.S.-centric fund.
No worries. Take a look at a global fund like VTWSX (Vanguard Total World Stock Index). This is an index fund that invests all over the globe. In some ways I like it even better than my beloved VTSAX. I don’t recommend it instead only because of its relatively steep expense ratio (.25%) and because VTSAX covers international pretty well for the reasons I describe in Chapter 15.
If you are inclined to go this route, you might consider the lower cost ETF version, VT (Vanguard Total World Stock ETF). Ordinarily, I tend to avoid ETFs (exchange traded funds) because of the possibility of sales commissions and/or spreads. But since the expense ratio on VT is .14% vs. .25%, it is worth exploring. Just be careful of the trading costs when you buy it.
One final caution. Be sure that whatever global fund you choose includes the U.S. market. It is a huge chunk of the world economy and you can’t afford not to own a part of it. Many “international” funds—especially those offered by U.S.-based firms like Vanguard—are “ex-U.S. stocks,” meaning they do not include U.S. based stocks. The reason is that they are designed to supplement the holdings of investors already in the U.S. market with VTSAX and the like. Makes sense, but likely doesn’t suit your needs as an investor outside the U.S.
The Bottom Line
If I didn’t have access to those two specific funds (VTSAX and VBTLX) or to the even lower expense ratio institutional versions, I’d look for the Vanguard variations that delivered the same Vanguard stock and bond index portfolios.
If I didn’t have access to Vanguard, I’d look for similar low-cost funds from whatever sound investment company was available.
And if the future offered me the chance, I’d roll my holdings into Vanguard when I could.