top of page
  • Writer's pictureRebecca Herbst

Building a 3-fund portfolio: A comparison across banks

One of my all time favorite students, Maddie, reached out to me recently and asked the following question:


“Do you have advice on diversifying which index funds you invest in? I have been dumping money into Vanguard Index Funds for a few years now. Curious if it's worth mixing it up to de-risk further or if you continue to rely on one solid institution?”


Maddie’s question is not so much about the bank operations itself – like using its platform or how she feels about its customer service – but mostly about the type of investments she has access to if she only banks in one place. I think this is a GREAT question, so much so I asked her if I can make a blog post out of it! (BTW, you can read Maddie's student story here! Together, we explored the financials of her taking a gap year!)


In the Learn to Invest & Build Wealth course, I encourage investing in a 3-fund index portfolio composed of US stocks, international stocks, and US bonds. This is rooted in the Bogleheads investing strategy which encourages us to diversify, invest with simplicity, and choose index funds whenever possible. So rather than picking individual stocks or bonds, you should invest in funds that represent the total market to diversify your risk as much as possible. I also encourage you to keep it simple by banking with a low-cost provider such as Vanguard, Charles Schwab, or Fidelity who will easily let you build a simple 3-fund portfolio with low expense ratios.


If you have gone ahead and built this portfolio, then well done! You’re in a great place. But to answer Maddie’s question, we have to look into the details a bit more. And we’ll see that not all funds and not all banks are created equal. There are loads of talking points here, but I’ll speak to the following two ideas that I think matter most when picking funds. First, the schedule at which a fund makes a payout. Second, the fund's holdings, or the specific assets that the fund owns within its portfolio.


Funds payout dividends at different times


Index funds typically distribute dividends periodically, but the frequency of those payouts can vary. Many index funds pay dividends quarterly, meaning they distribute dividends to shareholders every three months. However, some stock index funds may pay dividends annually or semi-annually. And if a fund hold bonds, they may likely have a monthly schedule too. Below are the banks and their respective 3-fund portfolios we discuss in the Learn to Invest & Build Wealth course, as well as their coinciding payout schedules.


Source: Morningstar, Dec 31, 2023


So, why does payout schedule matter? Well, if you are trying to live off of your investments like I do as an early retiree, then when you get paid might have an impact on your financial plan. It’s like taking a job that pays you a flat salary bi-weekly vs. taking a role that is commissions-based every quarter. You have to plan your saving and spending accordingly so you don't run out of money before your next "paycheck" comes.


For what it’s worth, I mostly get paid quarterly dividends, while my husband Joe gets paid annually. Both work fine for us, we just have to plan ahead. I will say I like getting my money sooner, and so I prefer quarterly payouts. It just gives me that little extra peace of mind.


Not all index funds are created equal


First, I should say that all the aforementioned funds have extremely low expense ratios. So for all intents and purposes, the cost of investing in one fund vs. another is negligible.


Instead, let's talk fund makeup.


Index funds are aptly named as such because they are designed to follow the performance of a certain index, like the S&P 500 (the largest 500 publicly traded companies) or the Dow Jones Industrial Average (30 extremely large companies representing a diverse set of industries).

While index funds aim to replicate the performance of the index they track, they don’t always have the same exact holdings. This is because index funds use “sampling” to simulate the performance on an index, but they don’t always mirror the index exactly due to things like management and operational costs. Following an index like the S&P 500 is pretty simple. It’s an established index and it’s fairly clear who the largest companies are in the US. However, when we extend the index to the total stock market, it gets a little more tricky and costly for fund managers to really capture everything publicly traded.


So in theory, if you are investing in a total stock market fund, your investments would be similar across index funds and banks, but the reality is this isn’t quite the case. To illustrate this, I’ve broken our earlier table down even further – showcasing the total value of assets and number of holdings for total US stock market index funds and the international stock market funds.


Source: Morningstar, Dec 31, 2023


Source: Morningstar, Dec 31, 2023


What do we see? The total value of assets and the total number of holdings definitely varies depending on which fund you choose. In both cases, Vanguard funds are the largest. That alone may make you think they are the most diversified. But that’s not necessarily the case – factors such as the types of stocks in the portfolio, the geographic locations of the companies, the industries with greater concentrations, and the detailed approach the fund takes to indexing, all play a significant role.


I don't want to waste your time by tearing apart each fund and dissecting its performance. We are not economists. We are not fund managers. We're not trying to beat the market. We're just here to save for our future and invest simply. So here's the TLDR. If we take just two of these funds, VTSAX and SWTSX, and look at their performance over time. We see they track very similarly. Even if they are different in terms of size and structure.


The chart above displays the growth of a $10,000 investment in both assets, with all prices adjusted for splits and dividends.


So for the everyday investor, I wouldn't worry about whether you choose to invest in VTSAX or SWTSX. Just invest for your future. Period.


I will say that there are some greater variances when it comes to international funds. This is because it’s much more complex to capture the global markets. Let’s compare Vanguard to Schwab again. SWISX tracks the MSCI EAFE index which includes way fewer countries than the FTSE Global All Cap index which VTIAX tracks. For example, SWISX doesn’t include Korea which is a huge market in Asia, nor does it track any South American or Middle Eastern countries. If you are truly trying to invest globally, then from this alone I would say Vanguard is more expansive. There are a number of other variances between the two funds (like industries, top holdings, etc.) but candidly, it’s not really worth getting into. Because again, they track very similarly.


The chart above displays the growth of a $10,000 investment in both assets, with all prices adjusted for splits and dividends.


In Summary


Don’t sweat too much about this. If you do, you’ll just start sweating other stuff like “Am I invested in developing countries?”, “Should I invest in privately-held assets?”, and “How much crypto should I buy?”. If you invest in a 3-fund portfolio with any of these banks… you’re good. You’re already extremely diversified and paying low investment fees.


A final thought I’d want to offer is that if you like the expansiveness and legacy of Vanguard funds, but you bank with Schwab or Fidelity (or anywhere else for that matter), you can always invest in Vanguard’s ETFs. Remember, the index funds listed earlier are exclusive to each respective bank, but Vanguard’s ETFs are offered across many banks! Below, are the ETF equivalents to their index funds as outlined in the Learn to Invest & Build Wealth course. The ETFs payout at the same cadence as index funds, and the expense ratios remain low!

Vanguard Index Funds:

Vanguard Exchange Traded Fund (ETF) :

Vanguard Total Stock Market Index Fund (VTSAX)

Vanguard Total International Stock Index Fund (VTIAX)

Vanguard Total Bond Market Fund (VBTLX)

Vanguard Total Stock Market ETF (VTI)  

Vanguard Total International Stock ETF (VXUS) 

Vanguard Total Bond Market ETF (BND) 



 

Disclaimer:

The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.


Commentaires


Les commentaires ont été désactivés.
bottom of page