ETF Replacements For Contrafund

February 24, 2014

These Vanguard funds won't work, because Contrafund's low beta to the CRSP indexes implies that replacing Contrafund with either MGK or VUG could add risk.

Of the remaining three funds, the beta on the iShares Morningstar Large-Cap Growth ETF (JKE | B-89) beta looks attractive over the past year, but not over the five-year period. On that basis, I can't recommend JKE as a replacement for the Contrafund.

This leaves two funds, IVW, the iShares S&P 500 Growth ETF (IVW | A-90), and IWF, the iShares Russell 1000 Growth ETF (IWF| A-89).

How shall I choose?

Maybe I don't have to. Contrafund's weighted average market cap sits between IVW's and IWF's. A 50/50 combination of IVW and IWF has a weighted average market cap of $111.1 billion, just like Contrafund's. Also, it turns out the combination portfolio's five-year returns are a great match for Contrafund's.

Annualized Returns: Contrafund Vs. IVW, IWF And A 50%/50% Combination

Return As Of 2-7-14 1 Year 3-Year Annualized 5-Year Annualized
Contrafund 26.56% 14.19% 18.94%
IVW 24.26% 14.37% 18.38%
IWF 24.23% 13.47% 19.31%
520% IVW, 50% IWF 24.24% 13.92% 18.85%

It turns out that the 50/50 IVW-IWF portfolio is the best ETF proxy for Contrafund.

Some years Contrafund would have been the better choice, and in other years the IVW/IWF portfolio would have outperformed. But neither by much.

After taxes, the ETF portfolio probably would have prevailed nearly every year.

Annual Returns: Contrafund Vs. IVW, IWF And A 50%/50% Combination

Sept 2012 - April 2013 2013 2012 2011 2010 2009 2008
Contrafund 34.15% 16.26% -0.14% 16.93% 29.23% -37.16%
IVW 32.48% 14.39% 4.49% 14.85% 31.35% -34.95%
IWF 33.19% 15.03% 2.47% 16.47% 36.93% -38.47%
520% IVW, 50% IWF 32.84% 14.71% 3.48% 15.66% 34.14% -36.71%

Using the fund description, portfolio, historical returns and my knowledge of ETF history, I found substitutes with the same overall goals, the same weighted average market cap and a similar pattern of returns.

With their low costs, tax efficiency and transparency, IVW and IWF have every chance to prove themselves to Contrafund's followers.

So, which big mutual fund Goliaths should I target next?


At the time this article was written, the author held no positions in the securities mentioned. Contact Elisabeth Kashner at [email protected].

 

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