Gundecking a Strategy

I never got a straight answer from my advisor on the advantage of Investing in both Value and Growth Funds of the same index versus buying the underlaying index itself. I was just given the pat on the head and an explanation that a few basis points don’t matter and this was the way to hedge against loss. This “strategy” would capture stocks that pass both the growth and value selection criteria. Since these criteria are mutually exclusive, I figured there would be very little overlap. He also warned against a pure indexing strategy which he found to be a disturbing trend. Davey says its a more of a marketing strategy to cover for “closet indexing” AKA: Index hugger.

Just to trust but verify, I went ahead and compared the holdings of VO, VOT, and VOE which are the Vanguard Mid-Cap Index, Growth, and Value funds respectfully. I analyzed the Mid caps because there are just 400 of them versus 500 large cap, and 2000 small cap companies. I got the list of holdings all using my MCCS Library trick. Just click the link, then Morningstar on top. This will allow you to download holdings of every fund under portfolio > summary detail tab > premium detail view:

Then I combined them into a single Excel document VOE_VO_VOT. After simply looking at the list, it turns out my suspicions were correct! There is only an overlap of 8 stocks without any omissions from just owning VO by itself. There is only 7 individual companies (two classes of Liberty Broadband) that overlap when you hold both VOE and VOT. If you are curious, the overlaps are:

Trip Dip Company Name Ticker
Michael Kors Holdings Ltd KORS
Liberty Broadband Corp A LBRDA
Liberty Broadband Corp C LBRDK
Micron Technology Inc MU
Tiffany & Co TIF
United Rentals Inc URI
Cimarex Energy Co XEC
Xilinx Inc XLNX

Regarding companies found only in VO and not VOT/VOE:

Holdings Ticker Shares Owned Market Value in VO
Patterson Companies Inc PDCO 1247 $55,479
Calpine Corp CPN 5307 $54,131
Conduent Inc CNDT 2552 $41,623
Frontier Communications Corp Class B FTR 17313 $32,548
DXC Technology Co DXC 284 $21,397

I figure these companies are either too small and soon to be small caps, or too big and soon to be large caps. Otherwise their weight is less than 1 percent.

So whats the damn point? This strategy also exists in both the small and large cap companies of American Stocks. Why are we paying more than 0.06% for VO in order to buy VOT and VOE at 0.07%? Yes 0.01% is not a lot, but it’s just stupid to make it so complicated. If we expand it out, could just own it all; Value & Growth of all Large, Mid, Small Caps with VTI at almost half the cost at 0.04%.

The uncomfortable truth is the 1.37% paid for this strategy needs to be justified some how, and I think its just your average MS client doesn’t care. I think its better to be wowed by a 19 fund portfolio, rather than put any thought into what it’s made of.


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