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Vanguard VFINX [Complete Review]
Vanguard 500 Index Fund (MUTF:VFINX) is one of the best S&P 500 index mutual funds available. In this review, we’ll take a look at the fund performance (share—not stock—historical price, risk, dividend, expense ratio and tax efficiency), and the alternatives (VFINX vs. VOO, VFINX vs. VTSMX, VFINX vs. VFIAX Admiral shares) available to individual investors.
How do we rate VFINX?
We don’t assign star ratings, such as Morningstar, but rather guide individual investors to make a decision based on their investment goals, experience and knowledge of the market.
If you’re a novice in investing, and you’re looking for a broad exposure to the US market, you should give this fund a shot. We give it a triple green.
Reasons for triple-green?
VFINX: 1. Offers diversified exposure to U.S. large-cap stocks; 2. Has relatively low expense ratio; 3. Has done historically well. A low fee and a reasonably representative portfolio make the fund well-positioned to do well in the future.
A word of caution—a triple green doesn’t mean you should invest in the fund now. It has to be right for you. Also, we have no idea what the future will look like for VFINX—and whether S&P 500 is overvalued at this point.
Whom is VFINX right for?
Index funds such as VFINX are ideal for individual investors wanting to get a broad exposure to the US market. VFINX tracks S&P 500, which covers approximately 80% of the investable US equity market (by market capitalization).
The stocks comprising VFINX are weighted by their capitalization, so Apple (AAPL) and Microsoft (MSFT) carry more weight than Starbucks (SBUX) and Costco (COST). Currently, there are a lot of tech companies in S&P 500.
What should I know about the S&P 500 index?
Besides the fact it covers 80% of the US market, you should know that S&P 500 is managed by a committee (not rules). The index has performed similarly to other popular large-cap indexes, such as the Russell 1000. Investing in S&P 500 funds means you’re investing in US large-cap stocks.
S&P 500 stocks must pass profitability screens before they are eligible to be added in the index. But that does not mean that the index will have better performance.
When the committee decides to add or drop a stock, that can significantly move the stock price. In 2010, S&P announced Berkshire Hathaway (BRK.A) would be added to the index, so the stock price appreciated more than 10% over the next week or so.
Does VFINX give investors international exposure?
Many of the fund’s largest holdings are multinational firms, so VFINX has substantial indirect international exposure. About half of S&P 500 companies’ revenue is generated outside of the US.
What are the VFINX sales and distribution costs (expenses)?
VFINX does NOT have the types of fees that make it unattractive to consumers, such as marketing / distribution (12b1), upfront (front-end) sales expenses, or back-end (deferred) sales load (for investors that pull out of the investment early).
How much does it cost to own VFINX?
VFINX investor share class (VFINX) has a 0.14% annual expense fee and requires a $3,000 initial purchase. The average mutual funds expense ratio is 1.09% per Finstead, so VFINX is relatively cheap.
Are there cheaper S&P 500 index funds than VFINX?
Both of these have an expense ratio of 0.04%.
You have to invest minimum $10,000 to qualify for the Admiral shares (VFIAX), which are significantly cheaper than VFINX. You’ll need a minimum investment of $3,000 to buy VFINX.
VOO is an exchange traded fund (ETF) and is traded like a stock. You will need pay brokerage commission if you invest outside of Vanguard (or alternatively, select no-fee brokers such as Robinhood).
Are there cheaper S&P 500 index funds outside the Vanguard family?
Charles Schwab charges 0.03% for SWPPX. This expense ratio applies to all investors, whether they invested $100 or $100,000. Bear in mind that the standard industry practice is to charge less to clients who invested more with them.
IVV will cost you a little more (0.04%), BUT:
You can trade IVV commission free on Fidelity, assuming you have a Fidelity account. A short-term trading fee of $4.95 is charged for any sales that occur within 30 days of the original purchase of the ETF.
If you prefer a Fidelity S&P 500 mutual fund, you can buy Fidelity 500 Index Fund (FUSVX), which has an expense ratio 0.045%.
What about VFINX turnover? And does turnover really matter?
Lower turnover equates to lower costs and smaller taxable capital gains distributions, so it is important. The average annual turnover of the VFINX fund was 6% during the past five years, which is pretty low (median is 55%).
What about VFINX historical performance?
During the last 40 years of existence, VFINX had 33 up years and 7 down years.
The average return over the last 10 years (2007-2016) was 8.63%. This performance is stellar, and you should not expect similar returns by design going forward.
The fund generates its edge from its low cost. Also, it is fully invested (there is no cash sitting on the sidelines at VFINX).
Here is a VFINX chart showing the appreciation of shares over the last five years.
Does VFINX pay a dividend?
Yes.Looking at the dividend history, we’ve concluded that the average dividend yield has been around 2%.
VFINX dividends stem from the underlying stocks and are distributed quarterly.
Great about dividends. Do I have to pay taxes on those?
Generally yes, unless you’re using a tax-deferred account (e.g., 401K) in which case you’ll be taxed later (e.g., when you retire). The tax cost ratio for VFINX is 0.67%. That means your return on the VFINX investment is on average reduced by 0.67% because of the taxes investors have to pay on the distributions (dividends).
What are the top holdings in VFINX?
The top 10 holdings and their percentage weights in VFINX are as follows:
|Company||% of Assets|
|Exxon Mobil (XOM)||1.67%|
|Johnson & Johnson (JNJ)||1.66%|
|JPMorgan Chase (JPM)||1.54%|
|Berkshire Hathaway (BRK.B)||1.47%|
|General Electric (GE)||1.28%|
Those top 10 assets account for 18% of fund’s performance, which is pretty concentrated because of the market cap weights. These 10 assets would account for 2% of an equal weight S&P 500 fund.
Your thoughts on VFINX vs. VOO? VOO vs. VFINX?
Here are the things you should know about VOO (Vanguard 500 Index Fund ETF). VOO is an ETF, which means its price changes while the market is open. Mutual funds’ price changes once day. But for most consumers who invest long-term, it doesn’t really matter how often you trade in any given day.
VOO costs considerably less than VFINX: its expense ratio is 0.04% vs. 0.14% for VFINX.
The historical VFINX performance is slightly lower than VOO’s. That’s because its expense ratio is 0.1 percentage points higher than VOO’s.
You will have to pay a trading commission if you buy VOO outside of Vanguard and no-cost brokerages such as Robinhood.
You may have to pay a transaction fee for buying VFINX outside Vanguard.
VOO does not have a minimum investment requirement.VFINX does—it’s $3,000.
What should I know about ETFs vs. mutual funds when I choose between VOO and VFINX (aside from costs, performance and minimum investment amount)?
Mutual funds allow automatic investing and you can buy fractional shares. So you may decide to invest $500 per month into a mutual fund. You can set it up to be done automatically from your bank account.
ETFs trade like a stock, so you can't buy fractional shares. You can manually add a certain amount, but the exact amount will depend on the share price at that moment.
ETFs are more tax-efficient. You have more control over when a taxable event gets triggered. This is particularly useful in a taxable account.
The tax cost ratio shows you by how much the effective return is reduced as a result of investors paying taxes on distributions.
Mutual funds allow you to automatically reinvest dividends and capital gains. ETFs do not.
So which one would you choose: VOO or VFINX?
If a trading commission is not an issue for you (hint: choose a low-commission brokerage), you may want to go with VOO.
What about VFIAX vs. VFINX? VFINX vs. VFIAX? Which ones is better?
VFIAX is a Vanguard 500 Index Mutual Fund, admiral share class. The initial requirement for a purchase is $10,000, which is significantly higher than the minimum investment required for VFINX ($3,000).
VFIAX costs a lot less (0.04% expense ratio) than VFINX (0.14%). Its performance is also higher (because it charges less).
For both funds you may have to pay a transaction fee outside the Vanguard network.
So, if you have enough money in the bank and you’re trying to decide between the two, go with VFIAX.
What about VTSMX vs. VFINX? Which fund should I choose?
VTSMX is Vanguard’s Total Stock Market Index fund. It’s a passive U.S. stock fund. It holds almost every listed common equity traded on the New York Stock Exchange or Nasdaq in proportion to its market capitalization. This results in 3,600 holdings.
VTSMX arguably captures the full spectrum of the US stock market.
But how did it perform vs. S&P 500 funds?
We think its performance is comparable to VFINX’s; however, over a longer time-frame probably slightly lower.
VTSMX costs a little more than VFINX (0.15% vs. 0.14%).
If you’re deciding between VTSMX and VFINX, it really comes down what you’d like to gain exposure to. If top 500 stocks is your focus, go with VFINX. If you’re trying to buy a market cap weighted basket of the 3600 US stocks, choose VTSMX.
What about VTSAX vs. VFINX: which fund makes more sense?
VTSAX is a lower cost, Admirals share version of VTSMX (Vanguard’s Total Stock Market Index fund). Its expense ratio is 0.04% and requires a minimum investment of $10,000.
So first decide whether you’d like to invest in S&P 500 or the ‘total’ US stock market. If the latter, go for VTSAX if you’re planning to invest minimum $10K.
Are there any segments of the US stock market that have historically performed better than VFINX / S&P 500 over a long run?
Yes. If you look at the last 87 years of the US stock market (since 1930), you’ll notice that both small cap value and large cap value categories have done arguably better than S&P 500 (VFINX, VOO or VFIAX) or Vanguard’s Total Stock Market Index (VTSMX or VTSAX).
Over a shorter period of time, there is always a number of categories / funds that have performed better than S&P 500.
How can I find out the funds that have done better than S&P 500 index funds such as VFINX?
You can get some suggestions on what funds have outperformed VFINX through Finstead’s Idea tool. The tool pops out a couple of fund suggestions (from both the same fund category and overall) that have historically had a higher return and lower volatility (i.e., risk).
For VFINX, the tool suggests American Century NT Mid Cap Value (ACDSX) and SEI Dynamic Asset Allocation A (SDLAX) as an overall fund and a same category fund (respectively) that have had a higher return and lower volatility over the last 5 years. But be careful—do your diligence before investing in those funds!
Who manages VFINX? And are they doing a good job?
Donald Butler and Scott Geiger are the VFINX fund managers as of April 2016. Butler and Geiger co-manage three other Vanguard funds: Vanguard Extended Market (VEXAX), Vanguard S&P 500 Value (VSPVX), and Vanguard Institutional Index (VINIX).
Did VFINX managers also invest their own money in the fund?
No, but that should not be a concern for. Vanguard compensates their managers based on operating efficiency. The managers are incented to keep costs low and minimize tracking errors.
Vanguard has automated much of this investment process and provides the managers with tools to handle flows, corporate actions, and benchmark changes.
What should I know about Vanguard?
Vanguard is one of the most powerful retail investment houses. It has excellent products for individual investors. Its messages to investors are to keep costs low, diversify, and practice investment discipline.
Vanguard’s fund holders own the firm through small investments by each mutual fund, and the firm is known for periodic cost cutting for mutual funds and ETFs.
Is Vanguard becoming more profitable?
We don’t know that—Vanguard is privately held. You might have heard about Vanguard attracting new inflows. That happened because of its aggressive cost cutting measures for individual funds and the emphasis on index investing (as opposed to actively managed funds).
The one thing we know is that Vanguard is gaining market share. Today it has over 20% market share across US mutual funds.
What other questions are on your mind? Send us your thoughts to: hi [at] finstead [dot] com.