Wednesday, January 27, 2016

Comparing Six Vanguard Funds

Comparing Six Vanguard Funds


This post compares the performance, both return and risk, of six investment funds created by Vanguard.

The six funds differ widely in their asset composition, investment philosophy, cost structure and their realized rate and return.    The attributes of the six funds are summarized in the chart below.

Fund Symbol
Fund Description
Origination Year
Cost
VFIAX
The Fund Invests in 500 of the largest U.S. companies
2000
0.05%
VMGRX
An actively managed fund that invests primarily in mid-cap firms chosen by fund managers
1997
0.46%
VITSX
Designed to provide exposure to the entire U.S. stock market.
1997
0.04%
VEIEX
The fund invests in stocks of companies located in emerging markets around the world, such as Brazil, Russia, India, Taiwan, and China.
1994
0.33%
VWELX
Fund is around 2/3 stock and 1/3 bonds. It is broadly diversified and invests in all economic sectors.
1929
0.26%
VBLTX
VBLTX is a diversified bond fund containing investment grade U.S. bonds with maturities more than 10 years.  60/40 Corporate/U.S. government
1994
0.20%


The list contains four funds, which invest entirely in equity.   Two of the funds are passively managed.   One fund is devoted to emerging markets.   One fund specializes in mid-cap stocks.  One fund has a mix of stocks and bonds.   One fund is devoted purely to bonds.

Method of comparing funds: The primary method used in this post to compare funds recognizes the existence of uncertainty about the fund purchase and sale date.   I assume the fund is purchased on one of 12 dates in the year that it is purchased and one of 12 dates in the year that it is sold. The chosen dates are the first trading date of each month.

The use of 12 possible purchase dates and 12 possible sale dates results in 144 possible profit outcomes.   These multiple sale and purchase date combinations allow us to estimate both the mean and standard error of fund profits.  

Typically, investment funds choose to present arbitrarily chosen holding periods often with the same end date.   The presentation of holding period returns does not allow us to measure potential risk due to daily fluctuations in asset prices.

A previous post described this method of evaluating fund performance in substantial detail.


Results

The first chart presents an assessment of returns for the six funds over the period stemming from 2001 to 2014.   The chart looks at performance and risk when there are 12 possible purchase dates and 12 possible sale dates for the securities.

A second chart looks at annualized returns between two dates December 2014 and January 2016.

A third chart conducts an assessment of returns for funds bought on 12 possible dates in 2007 and sold on 12 possible dates in 2009.   This chart is the financial stress test for funds during the financial crisis.




Chart One:
 Statistics on Profits for Funds 12 Purchase Dates in
 2001 and 12 Sale Dates in 2014
Fund Symbol
Mean
  Profit
Std Profit
Min Profits
Max Profits
VFIAX
11129
1823
6608
15592
VMGRX
15559
3724
8549
24750
VITSX
11230
1782
6888
15681
VEIEX
32033
4656
21731
45627
VWELX
16361
1037
13942
18868
VBLTX
15346
1364
12032
18270



Chart Two:
Returns December 2014 to January 2016
VFIAX
-7.8%
VMGRX
-12.0%
VITSX
-9.4%
VEIEX
-28.6%
VWELX
-4.6%
VBLTX
-2.5%



Chart Three: 
 Statistics on Profits for Funds 12 Purchase
Dates in 2007 and 12 Sale Dates in 2009
Fund Symbol
Mean 
Profit
Std
Profit
Min
Profits
Max
Profits
VFIAX
-$3,254
$911
-$5,092
-$1,538
VMGRX
-$2,895
$992
-$4,968
-$772
VITSX
-$3,488
$860
-$5,215
-$1,967
VEIEX
-$2,460
$1,962
-$6,272
$1,752
VWELX
-$1,445
$933
-$3,256
$268
VBLTX
$1,166
$620
-$11
$2,337



Observations:

·      The Vanguard Emerging markets fund did well over the 2001 to 2014 time period.  But since 2014 emerging markets have collapsed.

·      The mid-cap fund beat the S&P fund in returns from 2001 to 2014.   But since 2014 mid-caps have collapsed much more than the S&P.

·       In 2007 to 2009 mid-caps beat the S&P 500.

·      None of the four pure equity funds did well in the 2007 to 2009 financial crisis.   The emerging market fund had higher average returns than the S&P 500 fund but risk for this fund was really high.

·      The best performers and only survivors in 2007 to 2009 were VWELX with the 60/40 equity/bond mix and VBLTX pure bonds.

Concluding Remarks:  Emerging markets do not reduce risk through diversification.  In fact, the emerging market fund performed best when the U.S. market does well.   Investment grade bonds were a good hedge in the 2007 to 2009 time period.   But interest rates are lower now and long-term debt may not do the trick next time or should I say this time.  Is cash now king?

Author's Note:

I have used the profit data from two funds discussed in this post to illustrate tests on whether data is normally distributed.   People interested in this topic should go to my math blog.

http://dailymathproblem.blogspot.com/2016/01/are-investment-fund-profits-normally.html


Nine Essays on Debt and Your Retirement


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