Index Fund Fees: Avoid Rydex S&P 500 And It’s High Fees

Low Index Fund Fees, An Investors Friend

Are index fund fees taking money out of your pocket?
Are index fund fees taking money out of your wallet? (Photo by rawpixel on Unsplash )

Low cost passive index funds allow investors to get exposure to a diversified basket of assets at a very low cost. Typically the funds track stock or bond indexes such as the S&P 500 Index or the Barclays US Aggregate Bond Index. Two well known funds are the Vanguard Total Stock Market Index and the Vanguard Total Bond Market Index. These Vanguard funds are the cornerstones of many “lazy” low cost portfolios.  Money saved in fees means more money to reinvest and hence increase compounding of returns. Low index fund fees are a friend to passive investors and competition between fund management companies is driving fees even lower.  

The table below shows an example of some low cost index fund ETFs along with their expense ratio and tracking index:

IssuerTickerTypeIndexExpense RatioFact Sheet/Website
Charles SchwabSCHBETFDow Jones US Broad Market Index0.03%SCHB Fact Sheet
VanguardVTIETFCRSP US Market Index0.04%VTI Fact Sheet
Focus SharesFMUETFMorning Star US Market Index0.05%Focus Shares Website

As you can see the fund’s expense ratios are between 3-5 basis points. For an investment of $10,000 a basis point represents a fee of $1 per year. Or $3-$5 per year total for these funds. That is cheap. 

Are All Index Funds Cheap?

Are all index funds cheap? The answer is no. There is at least one we have come across that is outrageously expensive. The product has plenty of cheap competitors and offers no differentiation yet it still carries high fees. That fund is the Rydex S&P 500 index fund from Guggenheim Investments. The fund comes in three share classes of mutual funds:

Mutual Fund Ticker SymbolShare ClassCUSIPExpense Ratio
RSOXClass A78356A6571.58%
RSYXClass C78356A6401.58%
RYSPXClass H78356A6321.58%

In this case the expense ratios are over 1.5% or 150 basis points. To compare apples to apples lets look at some equivalent S&P 500 index funds from competitors.

Mutual Fund Ticker SymbolFund ManagerCUSIPExpense Ratio
VFINXVanguard9229081080.14%
SWPPXCharles Schwab8085098550.03%

The Rydex fund’s expense ratio is 12x higher vs the Vanguard equivalent product and 50x high vs the Charles Schwab equivalent. In fact the Rydex S&P 500 index fund expense ratio is comparable to some actively managed mutual funds. In addition you may be subject to additional fees called “loads” which can be taken at time of purchase or time of sale.

The True Cost of High Fees

1.58% may not seem like a big deal in the grand scheme of things. But the true cost comes over a long time horizon. Assume you invested $100,000 over 20 years and earned 7% per year over that time period. The chart below illustrates in that situation what your investment would be worth and how much you will have paid in fees. The results are staggering!

Investing in the lower cost funds makes you roughly $100,000 richer. You save roughly $50,000 in fees. In addition the money you saved stays invested into the fund. The power of the extra money compounding over the life of the investment is powerful.

Conclusion

Despite how similar the products may appear on the surface not all index funds are created equal. Even if they track the same index. It is critical as an investor that you perform due diligence and know what you are buying.

Can Vanguard REIT funds boost American Tower and Crown Castle?

Vanguard announced a change to their REIT Index fund’s investment objective. The fund has historically tracked the MSCI US REIT Index. Starting mid 2018 the fund will track the MSCI US IMI Real Estate 25/50 Index. Is it possible these upcoming changes present an opportunity?

REIT stock price chart
What will the price chart of these REITs look like with the heavy buying volume from Vanguard?

 

What are the major differences?

There are some big differences between the two indexes. Lets take a look at the top 10 weighted companies of each index:

US REIT (OLD INDEX)Weight %US IMI REAL ESTATE 25/50 (NEW INDEX)Weight %
SIMON PROPERTY GROUP5.87AMERICAN TOWER CORP5.71
EQUINIX4.20SIMON PROPERTY GROUP4.72
PROLOGIS4.08CROWN CASTLE INTL CORP4.25
PUBLIC STORAGE3.87EQUINIX 3.38
AVALONBAY COMMUNITIES2.90PROLOGIS3.28
WELLTOWER INC2.87PUBLIC STORAGE3.11
EQUITY RESIDENTIAL2.85WEYERHAEUSER CO2.48
DIGITAL REALTY TRUST2.78AVALONBAY COMMUNITIES2.33
VENTAS2.64WELLTOWER INC2.31
BOSTON PROPERTIES2.24EQUITY RESIDENTIAL2.29

Let’s take a look at the big changes in top 10 positions. As a result of these changes Vanguard will be making American Tower ($AMT) and Crown Castle ($CCI)  top 10 positions in their fund. American Tower and Crown Castle are highly correlated.  Combined they will account for 10% of the fund. A typical passive index investor would probably prefer to avoid this level of concentration. For our purposes one thing matters. Vanguard will be buying a bunch of stock in $AMT and $CCI.

Can index changes create a trading opportunity?

Yes they can.  Here are some examples:

The Capitalism Distribution – Returns in stocks of the Russell 3000

At CGI Las Vegas I listened to a presentation by John Del Vecchio from Ranger Alternatives. John manages the Ranger short book and has a strong background in accounting forensics. Specifically finding stocks with low earnings quality before the market does and building short positions based on that information.

John referenced some stats from a Blackstar Funds paper on the return distribution of the Russell 3000 index between years 1983-2006. The paper calls this non-normal distribution the The Capitalism Distribution.

Russell 3000 stats 1983-2006

39% of stocks were unprofitable investments

18.5% of stocks lost at least 75% of their value

64% of stocks underperformed the Russell 3000

25% of stocks were responsible for all of the market’s gains

An enterprising investor after reading this might be diligently researching the 25% responsible for all the markets gains. Surely these are the cream of the crop.

What a difference a day makes

The paper also gives us a sampling of some of the best performing stocks during that time period and their performance after the peak:

Best performing stocks after this period.
Russell 3000 best performing stocks.

Thoughts

It would be interesting to see out of the 25% that made up 100% of the gain in 1983-2006, how many companies would still be worth owning today. Looking at that list there are a couple. Of course there are some that would have resulted in a permanent loss of capital and some that are not permanent losses yet but for which the immediate future is not bright. Lets take a quick look at a couple…

GE

If you had bought GE on 01/03/83 at its closing price of 91.75, split adjusted (48:1) each share would be worth around $670 today. I figure thats about 8.3% compounded annual gain. If you had sold that share before the market drop you would have approximately 3x that amount somewhere around 12.5% compounded annually. Not including dividend payments. While GE is a mess today, its fair to say you could of done worse things than buying a share of GE in 1983.

MSFT

If you had bought MSFT when they went public on 03/13/86 at $28, split adjusted (288:1) each share would be worth around $8000 today. Around %29.3 compounded annually. Not including dividend payments.

Conclusion

This data reinforces a couple of points that I need to remind myself of.

1. Don’t fall in love with cigar butts. Size the positions appropriately, sell them when they reaches intrinsic value and take your profit. 

2. Paying a fair price or reasonable premium for a great business with a great moat and management can pay off big over long periods of time. Identifying those companies is extremely hard to do well.

This post was written in November 2009 for my old blog compoundinglife.com. I am working my way through importing the old posts.