Uncommon Cents

I certainly can’t speak for all 401(k) or 403(b) plans, but the one I have offers a pretty decent selection of funds; over 20 in all, and many in the same category (for instance, it offers three different international stock funds and two different money market funds). For awhile, I owned a little of just about every fund that was offered, but in the last year I decided to simplify my portfolio and cut down to three funds: a domestic stock market fund, a domestic bond fund, and an international stock fund. Picking the domestic stock and domestic bond funds was easy; I simply chose the Vanguard Total Stock Market Fund and Vanguard Total Bond Market Fund. Unfortunately, my plan doesn’t offer the Vanguard Total International Stock Index Fund, because that would certainly have been my first choice for an international fund. Instead, they offer three international alternatives, none of which is an index fund: the T.Rowe Price International Discovery Fund (PRIDX), the Vanguard International Growth Fund (VWIGX), and the AllianceBernstein Global Research Growth Fund (ABZYX).

To decide between these three funds, I looked at a number of factors: load, annual expense ratio, and performance; if this account was taxable, I’d also look at turnover, but since it’s not taxable, turnover is less important (this is one of the reasons why in a taxable account passively managed index funds tend to be so much better than actively managed funds: the more turnover there is, the more tax consequences for the holder). For purposes of this article, I’m also including the fund I’d really want, the Vanguard total International stock Index Fund (VGTSX).

First, these funds have one thing in common: thankfully (and probably due to Vanguard being the plan host), none of these funds have a load. One other thing that sticks out when looking at these funds: ABZYX has a huge minimum to invest of $250,000! That means that it’s about impossible that Mr. or Ms. Average Investor will have a stake in this one outside of a 401(k) or 403(b) or equivalent fund.

Beyond that, let’s look at the expense ratio, turnover, yield, and performance of each fund over one, three, and five years:

Fund   Expense   Yield   Turnover   1 year   3 year   5 year
ABZYX     1.20    0.44      80.00    15.64    16.11    17.07
VWIGX     0.51    1.75      41.00    22.13    21.47    26.70
PRIDX     1.24    0.51      82.00    21.58    26.02    31.47
VGTSX     0.32    1.92       2.00    21.87    23.16    26.70

As you can see, both Vanguard funds lead the pack in terms of expenses; interestingly, they also lead in terms of yield and turnover–the former is often overlooked but is a part of the total return of the fund; the latter, as mentioned above, would be very important in a taxable account, but is not all that important here. The T.Rowe Price fund has been the leader in performance up to this year, where it’s lagging–but by only a small bit–behind the Vanguard funds. However, if you calculate in the effect of the expense ratio and yield into the total return, the Vanguard funds do even better–particularly the index fund (there’s a theme here–it’s very hard to beat the index, especially when expenses, yield, and the tax effects of turnover are taken into account).

In the end, I chose the PRIDX fund when I did this comparison; this was a few months back when it was performing slightly better than the Vanguard funds. I mostly did this based on its five year performance. Still, VWIGX was a solid competitor for it with an expense ratio less than half of PRIDX and a considerably higher yield; had this been a taxable account with the same limited options, I may have opted for it, given its considerably lower turnover. ABZYX was not much of a competitor given how its performance had been, with expenses nearly equal to and a yield even lower than PRIDX.

Still, when I look at this chart, all I can think is, “I wish I could just go with the index.” The considerably lower expense of the index fund, with its comparatively higher yield and performance that is very close to even the best performing of the actively managed funds mentioned here and almost non-existant turnover shows once again that, repeat after me, “It’s really hard to beat the index.”

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