FYI: I must admit, with all that I write about the S&P 500 Index, it looks weird to see it without the last zero, as it is in the title of this article. But that is not as weird as the sustained predicament with that index regarding its “concentration.” That is, the index which holds approximately 500 stocks is essentially ignoring half of them. You see, the S&P 500 is like many indexes (and thus the ETFs and mutual funds that track them) in that its holdings are allocated by the size of the stock (“market capitalization”). That means that as big companies get bigger, as the market as a whole moves higher, and as a few high-flyers emerge into “hot stocks,” the S&P 500 becomes far less democratic.
Regards,
Ted
https://www.forbes.com/sites/robisbitts2/2019/02/14/sp-500-more-like-the-sp-50/#47859ce2136e
Comments
To view the fund's fact sheet click on the link below and then VADAX Fact Sheet PDF.
https://www.google.com/search?q=vadax+fund+fact+sheet&oq=VADAX+Fact&aqs=chrome.1.69i57j0.3802j0j7&client=tablet-android-alco&sourceid=chrome-mobile&ie=UTF-8
https://www.lynalden.com/equal-weighted-index-funds/
From the link here is a recap of the Pros & Cons of Equal Weighted Indices
Although equal weighted ones may or may not have truly better performance, especially when you stick to the broad market or the S&P 500, there are definitely some trade-offs.
Pros:
Under the largest sample sizes, their long-term performance appears to be superior.
They’re more diversified, rather than heavily concentrated into just the largest companies of the index.
They naturally take a value-approach, which some investors prefer.
Cons:
They have higher turnover, which leads to higher expense ratios and generally higher capital gains taxes.
They’re more volatile, and can fall more sharply during recessions.
They’re only available for certain indices, because they’re not as popular yet.
There are some interesting anomalies. For example if Apple were to split into two companies, a cap-weighted index would still have the same amount in it because the two parts would have about the same market cap when added together, while an equal-weighted one would double its exposure to it because it’s now two names and would invest in each equally.
Neutral:
Changing the way the index is weighted changes the sector balance.
If you are buying at a discount to NAV, then there is something compelling there, but I don't think that's possible with an open-ended fund. If you're simply getting a discount on a load, that is not really a discount IMO. Paying any load, is actually paying a premium to NAV.
I've also never heard of buying a mutual fund at a discount unless like @JoJo26 implied, you are saying you don't have to pay loads on A-shares for certain families. If so, that is not unique. A share loads are waved at many brokerages like Schwab, probably Fidelity and probably others.
If you don't mind @Old_skeet, can you explain these terms, wrap fee on an ETF and discounted mutual funds?
Below is by definition what a wrap fee is. It comes from investopedia and is linked below for easy access.
https://www.investopedia.com/terms/w/wrap-fee.asp
On the topic of discount purchases and buying at nav under certain circumstance load funds can be purchased at discounts; and, in some cases at nav. You will have to read the prospectus for these details as they vary from one fund family to another.
In my case in some fund families I can buy at discount and in some at nav. Again, you will have to consult the fund's prospectus for these details.
Not going to read a perspective. If you don't want to explain your "discount " on buying a mutual fund you don't need to.
Breaking Down Wrap Fee
Wrap fees are generally set up to be a percentage of the assets under management and can cover both retirement and non-retirement assets. The wrap fee is intended to provide payment for all the direct services the customer receives, as well as cover the administrative costs incurred by the investment firm, which tend to be a full-service brokerage or affiliated or unaffiliated broker/dealer firms. One advantage of a wrap fee is that a customer can be assured that a broker isn't trying to excessively churn trades to generate commissions. Wrap fee accounts are expected to more than double to $1.1 trillion in the next five years, according to Tiburon Strategic Advisors.
Wrap Fee Criticisms
Wrap fees can be expensive. They can range from around 0.75% to as high as 3%. And certain actions could incur other fees, such as if a broker for a wrap fee client were to purchase a mutual fund that charges an expense ratio. Such high fees can quickly erode returns. Accordingly, wrap fee arrangements have attracted a greater level of scrutiny from regulators as of late.
Wrap fee programs can have a variety of names, such as asset allocation programs, investment management programs, asset management programs, separately managed accounts and mini-accounts. Whatever the name, such an account can be subject to additional disclosure under Rule 204-3(f) of the Investment Advisers Act of 1940. That rule defines a wrap fee as a “program under which any client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other advisers) and execution of client transactions.” In December 2017, the Securities and Exchange Commission released an Investor Bulletin that provides basic information about wrap fee programs and some questions to consider asking an investment advisor before choosing to open an account in a wrap fee program.
Who Is A Wrap Fee Right For?
Paying a wrap fee can be advantageous for investors who intend to utilize their broker's full line of services. For anyone else, it might be cheaper to pay an investment professional for individual services in an unbundled arrangement.
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Related Terms
ETF Wrap
An ETF wrap is an investment portfolio in which an investor, with or without the aid of an investment advisor, invests solely in exchange-traded funds. more
Fulcrum Fee
A fulcrum fee is a performance-based fee that adjusts up or down based on outperforming or underperforming a benchmark. more
Agency Cross
An agency cross is a transaction in which an investment adviser acts as the broker for both his client and the other party to the transaction. more
Performance Fee
A performance fee is a payment made to an investment manager for generating positive returns. more
Double Dipping
Double dipping is when a broker puts commissioned products into a fee-based account thereby unethically earning money from both sources. more
Soft Commissions
A soft commission, or soft dollars, is a transaction-based payment made by an asset manager to a broker-dealer that is not paid in actual dollars. more
I'm hoping your broker isn't giving you incorrect or misguided information for his own gain. Anyone who says there will be "wrap" fees for buying an ETF within your account should be asked why. Again, wrap fees are for pre-set or adviser constructed portfolios, whether using mutual funds, ETFs or individual stocks and bonds. It has nothing to do with purchasing a single ETF on your own. That is what your linked definition is saying also. Maybe you have some contractual fees with your broker that won't allow ETFs without them charging you(?)
OS's note that "under certain circumstance load funds can be purchased at discounts; and, in some cases at nav" apparently refers to partial to fully waived loads on load shares. Unless there are some very rare outliers, there's no such thing as a partial load waiver on A shares at Fidelity, and I assume Schwab.
Whatever broker Skeet's working with now, it sounds like a migration to Fidelity or Schwab would do him a world of good. That's the takeaway I get from this thread.
However, please know that I am an accredited investor and my account(s) have been with my current broker for better than twenty five years. In my taxable mutual fund account I hold a good number of funds from a number of fund families with the biggest being in American Funds and Franklin/Templeton. I pay nothing directly to my broker to hold all of these funds in this consolidated account as this is covered by the 12b1 fees that the funds pay to the broker. Morningstar estimates my expense ratio on this account at 0.76%. Now for me to hold etf's I'd have to open a fee based account that has a fee associated with it based upon the assets held within this account. Thus, I have elected not to hold etfs. I refer to this as a etf wrap account. It is defined in Investopedia by the following description. "An ETF wrap is an investment portfolio in which an investor, with or without the aid of an investment advisor, invests solely in exchange-traded funds." From my perspective, a portfolio can be comprised of one or more funds.
My self directed ira account is set up much the same way as my taxable account as I pay no direct fees to the broker as it's covered by the 12b1 fees paid to the broker form the mutual fund companies. Like the other account it has an estimated expense ratio of 0.76%.
Because of the size of these accounts I can purchase some funds at nav depending on the fund family and others at discounts to their pop based upon how much I and my family collectively hold with the subject fund family.
Also, know that, I am most happy with my arrangement as I can do nav exchanges from one fund to another (within the same family of funds) through a nav exchange program at no direct expense to me.
So, let's not get hung up on how I buy and what I pay because my situation is most likely much different than yours. That is why I suggested you consult the fund's prospectus as how to buy and for purchase discounts, etc.
Thanks again @JoJo26 for your expression of concern. It is much appreciated.
Have a good weekend.
Old_Skeet
"Small fry" pay loads that go largely to brokers for sales and service. But for larger investors, fund families pay for those services out of their own pockets - not from loads. This is common industry practice. In a sense, not only is Skeet getting shares at NAV, but he's getting a kickback in the form of a payment from the fund family to his broker for services.
As Skeet mentioned, ongoing servicing is paid for by trailing fees that come from the ER. So that part of the servicing isn't free. Though when he buys say, TEDIX, in theory at least he gets some service for his ¼% 12b-1 fee. What value does one get for that fee when buying at Schwab or Fidelity? Personally, I'd open an MDISX account directly and save the 12b-1 fee. (I can do that; I'm grandfathered.)
It's nice that people are concerned about DIY's paying a 1% wrap fee to do their own investing. I often wonder, though, where the concern is for DIY's buying class C shares? These shares tack on a 1% annual 12b-1 fee (load) just as surely as wrap accounts tack on a 1% fee for owning a no-load share class.
Just today, someone posted a message in another thread speaking favorably about having owned C class shares of a fund. (The praise was for the fund; ownership of class C was incidental; in other instances people have posted about buying C class shares without paying a front end load.)
This is the setup we have at American Funds. Like Skeet, some of their funds have worked very well for us over the years. The ER at American Funds is typically quite low compared to similar competitive funds, so if you can buy at NAV without a load it's a good deal.
I'm very thankful that my grandparents and parents had the wisdom to become investors many years ago. They we just average working and farming families who decided to put some back from their wages into the stock market. In addition, they sold off some of the family farm land to raise capital for investment purposes. And, as a grandchild I was provided a cut of the land sales which I invested pursuant to their wishes over spending. My first fund was Franklin Income Fund which I still own today.
This early wisdom has now made my life so much easier for me and my family. One of my cousins and I attend the same church that our parents were raised in asked me the other Sunday. He said ... "I know I made more in my working days than you as I was the smarter and made better grades." But, now you seem to have so much more than me. How'd you do it? My answer. The wisdom of our grandparents. Some of us followed it and some did not. I was one of the ones that did. Plus, I live below my means.
Thanks again MFS and Old_Joe for making comment. It is much appreciated.