Market Pulse: Index investing
Last week The Wall Street Journal compared the top stock selections from highly regarded money managers to stock picks chosen by dart throws at a financial page. The darts won.
Burton Malkiel, author of “A Random Walk Down Wall Street,” would not be surprised. In his 1973 book Malkiel argued that news and expectations are factored into stock prices so investors can’t consistently outperform the market by good stock selection.
With that in mind, John Bogle founded The Vanguard Group and in 1975 launched their first low-cost index fund. He believed that index funds would outperform most active portfolio managers because of their low fees. He was right. Today, each of the 10 largest mutual funds are tied to an index.
Index funds will continue to grow in popularity. Since most exchange-traded funds (ETFs) are index funds, the increasing popularity of ETFs will drive a lot of the growth.
My favorite index ETFs to hold for the long term are Vanguard Dividend Growth (VIG) and Schwab U.S. Broad Market (SCHB). VIG holds stocks that have a record of growing their dividends year-after-year. Its expense ratio is 0.08 percent.
SCHB is indexed to the entire U.S. stock market, holding both large companies and small companies. The fund owns about 2,400 securities, but it tracks a capitalization weighted index so large-company stocks drive the index more than other stocks. Its expense ratio is an unbelievably low 0.03 percent.
Even traders are turning to index funds. ETFs may track a passive index, but traders can do well by owning the best performing segments. Consider this year, where the Dow is only up 3 percent, the S&P 500 is up 5.5 percent, and the Russell 2000 is up 9 percent. The small-cap stocks that the Russell 2000 index tracks are outpacing the other indexes.
All this doesn’t mean that individual stocks shouldn’t be part of your portfolio. In my managed account program, I’ll hold both index ETFs and individual stocks. For clients seeking income, I’m happy to own Verizon (VZ) with its 4.6 percent yield and AT&T (T), which yields 6.3 percent.
I’m overweighting healthcare with holdings like Amgen (AMGN), Pfizer (PFE), and Becton Dickinson (BDX). They have all performed well and there is no cost of ownership.
There is a place for both index funds and individual stocks in portfolios. For investors seeking growth over income, I’ll rely heavily on index ETFs.
For those seeking income, individual stocks along with preferred stocks and exchange-traded debt are used.
In either case, index funds should play a role most every portfolio.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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