A final look at why a ‘core’ fund in a structured portfolio could be a great call.
This is the fourth in a series of articles about using structured portfolios to minimize the negatives and maximize the positives of indexing. You can find the first three articles here, here and here. A version of this article originally appeared on Advisor Perspectives here.
We now turn our attention to another way in which structured portfolios can add value over index funds; namely, by creating “core funds.”
Core portfolios combine multiple asset classes into one fund. The following provides a good example of why a core approach is superior to a component approach, and is the most efficient way to hold multiple asset classes.
The Russell 3000 can be broken down into four components: the stocks that make up the Russell 1000 Growth index; the stocks that make up the Russell 1000 Value index; the stocks that make up the Russell 2000 Growth index; and the stocks that make up the Russell 2000 Value index.
I once observed a case where an institution held all four components in exactly the same market-cap weighting as did the Russell 3000. In other words, they owned the same stocks in the very same proportions as the Russell 3000, only in four funds instead of one.
This makes no sense. When the indexes reconstitute each June, each of the four component index funds will have to sell the stocks that leave the index and buy the stocks that enter the index. That incurs transactions costs, which can be particularly large when the entire market knows you have to trade. This is especially so for smaller stocks. In short, the benefits of owning the single fund are obvious.
A second example of a core fund is the Vanguard Total International Stock ETF (VXUS | B-100), which combines holdings in developed and emerging markets. This is a significant improvement for investors who previously were forced to hold the two components separately.