Pity the poor Vanguard investor trying to make sense out of the mutual fund landscape. With the recent launch of not just one or two, but 16 new Standard & Poor’s and Russell ETFs and over 150 existing funds, finding the right picks is more confusing for 401k investors and mutual fund investors than ever.
But make no mistake about it: While lists of the “best funds to buy now” remain strong sellers on the newsstand, these “best of” lists aren’t exactly the best way to go about building a Vanguard fund portfolio. In fact, these lists, which are generally based on performance for a single calendar period, have no predictive value at all.
So let’s take a closer look at the “best” funds of the third quarter at Vanguard, and see what’s under the hood.
Precious Metals & Mining (MUTF: VGPMX), Up 23.2%
Sell. Putting a Sell on this fund isn’t good enough. I should probably label it “Toxic.” It’s not that I don’t have a high regard for the manager, Graham French, or Vanguard’s parsimonious, low-cost ethic. I just can’t find the long-term investment glitter in gold, which is the main driver of this slightly more diversified metals fund. Despite the occasional glimmers of hope and bursts of outperformance that come when every other financial asset in the world is sinking, precious metals have not, on the whole, been good investments.
Is the fund a “store of wealth” or a safety valve? Not really. Remember the stock market meltdown from 2007-2009? While Vanguard’s Total Stock Market Index (MUTF: VTSMX) chalked up a new maximum cumulative loss (MCL) of 50.9% over 16 months, Precious Metals fell a whopping 68.9% in just 6 months!
And, don’t forget, there’s one other consideration you have to make here. Exactly how big a portion of your portfolio are you willing to allocate to this fund or sector of the market? Unless you make a major bet here, the outperformance on the upside probably won’t make a big difference in your short-term returns, and losses could well hurt your long-term performance. Precious Metals & Mining also charges a 1% back-end load when you redeem shares held less than one year, which really hurts if you are selling the fund at a loss. I say stay away.
World ex-US SmallCap ETF (NYSE: VSS), Up 21.7%
Buy. This fund is providing some strong competition for International Explorer (MUTF: VINEX), which had the foreign, small-cap arena to itself for a long time. Tracking the FTSE Global SmallCap ex-US index, this fund holds over 2,500 stocks with more than half its assets in companies in Canada, the U.K., Japan, Taiwan and Australia.
As is true in the U.S., smaller companies can be faster growers, and hence are a good component in a growth-oriented portfolio. Another important factor is that, along with Emerging Markets Index and International Explorer, it has one of the lowest correlations with U.S. markets out of all of Vanguard’s funds. That improves our diversification and lowers our risk over the long haul.
Should International Explorer remain in a relative performance funk, this ETF could be just the ticket to finding high growth rates outside our shores. Bonus: Now that Vanguard is offering free trades in all its ETFs, you can avoid not only the 0.75% front- and back-end loads (Vanguard calls them “purchase” and “redemption” fees) on this fund’s Investor shares (VFSVX, up 20.2% in Q310), but also brokerage commissions.
European ETF (NYSE: VGK), Up 21.2%
Hold. The problems in Europe’s smaller and satellite countries are legion, but Germany’s growing, and France, believe it or not, is also.
European Index tracks an MSCI index that pretty much covers the continent. More than two-thirds of this fund’s assets are invested in Europe’s four largest markets: the U.K., France, Germany and Switzerland. Big markets and big companies dominate here.
If you want to bet on the benefits of European unification, this is one way to do it, but remember that the relationship between the dollar and the euro will have an impact on your returns. The euro�s gains certainly worked to investors� advantage in 2009 and the last few months. Whether that�s the case going forward is another story entirely.
Also, the Investor share class (VEURX, up 20.3% in Q310) has a 2% back-end load (Vanguard calls it a “redemption fee”) for shares held less than 2 months. If you want this fund, the ETF shares (VGK), which have no back-end load and trade free at Vanguard Brokerage, are more economical than the Investor shares, but I’d leave my Europe over- and underweights to an active manager.
International Growth (MUTF: VWIGX), Up 19.8%
Buy. I always considered this fund’s former lead manager Richard Foulkes one of the best of the breed among international investors. Since he retired in late 2005, Virginie Maisonneuve has taken over Foulkes’ approximately 45% portion of this $15 billion portfolio. With a few bumps along the way International Growth has consistently outperformed the EAFE Growth index.
The fund has three managers, with Baillie Gifford handling another 45% of assets and M&G Investment Management handling about 10% or so. What’s encouraging about this trio is that the portfolio hasn’t exploded to hold hundreds of stocks�it currently has about 180 or so, despite the fact that it, at one time, had over 200. Also, while concentration among the top stocks has declined with the addition of managers, it isn�t at index fund levels, with the top 10 holdings representing about 17% of assets.
With growth stocks presenting some decent opportunities, this fund is a good option as a core foreign holding, particularly given its almost 25% stake in emerging markets, where the managers boosted holdings as prices there tumbled. That kind of contrarian thinking should make the fund a long-term winner.
Emerging Markets ETF (NYSE: VWO), Up 19.7%
Buy. It’s risky, and volatile, with a maximum cumulative loss of 62.7% over 16 months during the latest bear market and a more than 90% rally from the market bottom, but the emerging markets are the growth engines of the global economy, showing increased economic firepower, hungry consumers and the ability and willingness to take advantage of newly aggressive importers, exporters, manufacturers and entrepreneurs.
The index this fund tracks has changed over the years with countries added and eliminated. Stocks in Brazil, China, India, South Korea and Taiwan represent more than 65% of the fund’s assets at present.
And foreign “big-oil” is a major influence on the index, with major producers among the top holdings. In fact, this fund provides tremendous exposure to the energy business without having to invest in an energy sector fund.
Remember, if you buy this fund’s Investor shares (MUTF: VEIEX, up 18.7% in Q310), you pay a 0.50% front-end load. If you sell it, you will also pay a 0.25% back-end load, so you had better really want this fund before you buy in. The ETF shares (VWO) are a superior alternative for those with larger sums to invest, or if you buy through Vanguard Brokerage, where it’s free.
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