Choosing Specific Funds for Your Portfolio

Choosing funds might seem intimidating, but it really is pretty straightforward. Sometimes, for example in an employer-offered account, we’re going to have pretty limited choices. In an individual brokerage account, we have unlimited choices, so we just go with funds from our favorite family (aka company aka Vanguard). You might have funds from 2 or 3 companies if you’re very particular or have some limited employer-offered accounts, but once you have a couple fund families that you like, you just look for their version of whatever index you’re looking to add to your portfolio.

Choosing a Fund Family

This is easy. Whenever I have the chance, I use Vanguard. I get no money for recommending them, they don’t have an affiliate or referral program, and I never stop singing their praises. They are the best option, when available. That being said, they aren’t always available. I’ve had employers with plans that did not include Vanguard index funds, so we’ve held some with Fidelity and TIAA as well. Both are fine. If you have a choice, though, I’d go with Vanguard. Regardless, you can follow the steps below to evaluate the funds available to you.

How to Research a Fund

Honestly, I don’t put a lot of thought into this. I typically just use the website of whichever provider I’m working with. In other words, I just use the research tool of whatever brokerage I’m in at the time. (For more on choosing a brokerage, please visit this page.) The information I care about is so basic, it is available anywhere that has fund information, and I don’t need any special tools or visualizations to look at it. If you want to dig into the full scope of a fund, you can look at the prospectus. It’ll have the same information as the fund profile on the brokerage website, plus a lot of extra jargon. Personally, I don’t generally bother with the prospectus unless I have some particular question I’m trying to answer. I can’t remember the last time I looked at one.

The screenshots below are taken from a combination of Vanguard and Questrade, but every brokerage has similar information on funds. For the Vanguard screenshots, I’ll use the mutual fund version of a popular US stock index (VTSAX) and for the Questrade screenshots, I’ll use the ETF version (VTI) of that same fund.

Example 1: Mutual Fund from Vanguard

I’m looking for three main pieces of information.

  1. What index or market is this fund mirroring?
  2. What are the fees?
  3. What other restrictions are there?

In the screenshot below, you can see where I find each of these pieces of information:

  1. The summary tells me the fund strategy — this fund offers “exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks”. In other words, this fund attempts to mirror the US stock market as a whole, which makes it a perfect fit for the US stock part of our asset allocation.
  2. The expense ratio is just .04%, which is great. That doesn’t tell the entire fee story, but it’s a good start.
  3. The minimum investment is $3000. This is one of the limitations that you sometimes run into with mutual funds (as opposed to ETFs). If I wanted to invest less than $3000, I’d go for the ETF version. Note that the $3000 is just an initial minimum. Once you hold $3000 in the mutual fund, you can invest small amounts as additional investments.
  4. I wanted to highlight, if you really want to go into the weeds in fund information, you can look at the prospectus. In the early days of the internet, I used to do this, but nowadays I almost never do — the research summaries are good enough.

Note two things I am not looking at: price and performance. These simply do not factor in to an index investment strategy. When markets are high, I invest. When they are low, I invest. Similarly, I don’t pay attention to the price and performance of investments that I hold, other than to do rebalancing (for more information, see the page on asset allocation). I must confess, though, after we hit $1,000,000 in investments, I did start checking our balances a bit more often. There’s just something incredible about seeing that number…

Example 1: Mutual Fund from Vanguard – Fees

I want to be sure I have a full picture of the fees, so I would also look at the Fees & Minimums tab. If I click that and scroll down, I see this:

Perfect. The purchase fee is another way of saying “front-end load” and the redemption fee would be a “back-end load”. As I said earlier I would never invest in a fund with a load, nor trust any advisor who recommended one. The 12b-1 fee is an annual marketing fee that is typically folded into the expense ratio. The desired value for all three of these is 0.

Example 2: ETF at Questrade

OK, I realize now that I spoke to soon. The ETF research information at Questrade is not really what we’re looking for. Here’s what I see when I look up VTI (the ETF version of the mutual fund above) in the Trading area.

Just to be clear — I love Questrade. They are great discount brokerage option for folks in Canada. However, this doesn’t tell me anything I want to know. It focuses on lots of numbers I don’t care about (mostly around price and performance) and tells me nothing about the fees or the strategy of the fund. This type of data is aimed at day traders (you can tell by the chart showing the volume and price in 5 minute intervals). This has nothing to do with me.

Example 2: ETF at Questrade at Vanguard

Just to be crystal clear — I wholeheartedly support BUYING this ETF at Questrade. I just wouldn’t bother researching it there. So let’s jump back over to the Vanguard site and see what we can see.

OK, so this is similar to what we saw with the mutual fund version, but there are some differences.

  1. The strategy is written differently here, but it tells us the same thing. Here, they name the index (whereas they didn’t in the summary of the mutual fund) but that isn’t particularly important. This tells us it invest in the total US stock market, which is what we’re looking for (assuming, of course, that we’re looking for a fund to fit that part of our asset allocation).
  2. The expense ratio here is even lower: .03% That’s fantastic.
  3. For more info, again, we could dig into the prospectus.

One thing to note is that there’s no minimum. That’s to be expected with an ETF. Let’s check the Fees, just to be safe.

There’s not a lot of additional info on the Fees tab (because there are no additional fees) but note that Vanguard ETFs can be bought and sold commission free through a Vanguard brokerage account. This is a great option for US-based investors. In Canada, we can use Questrade to buy them commission free, but we will have to pay a small commission when we sell them.

One more thing I want to highlight about the ETF version. This isn’t particularly important in terms of it’s influence on my decision about whether or not to invest in a fund, but it does have a logistical impact. For ETF’s, you might need to be aware of the price. Ultimately, it depends on whether or not your brokerage allows fractional ETF shares. If you hold your Vanguard ETF at Vanguard, you can hold fractional shares, so if you want to invest $2000 you can just buy $2000 worth of VTI. However, if you hold your Vanguard ETF at Questrade, you cannot hold fractional shares — you have to buy whole shares. Thus, if I want to invest $2000, and VTI costs $211.92, then I can buy 9 shares, effectively investing $1907.28 and leaving $92.72 in cash. This is kind of annoying but, again, ETFs have lower fees. Ultimately, the option you choose will be a combination of personal preference and the types of funds and accounts are available to you.

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