Emerging Markets Fund at Schwab

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o'pinion
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Emerging Markets Fund at Schwab

Post by o'pinion »

Okay, looking for input here to help me decide between two EM funds. My self directed 403b at Schwab allows me to only buy select mutual funds. Sadly, no ETF's allowed (per regulations).

So for my Emerging Markets position at Schwab, I've narrowed my choices between two funds:
SFENX -- Schwab Fundamental Emerging Markets Large Company Index Fund [ER: 0.39, no transaction fees]
VEMAX -- Vanguard Emerging Markets Stock Index Fund Admiral Shares [ER: 0.14, $75 purchase fee]

In my Vanguard taxable, I own the VEMAX fund. My question is which fund to choose at Schwab. Is it worth the $75 commission to buy the VEMAX fund (initial investment would be $25,000). If my math is right, I'll just about break even on the transaction fee with the 25 basis point difference in the expense ratio. Adding to the VEMAX fund/rebalancing would incur more fees, which is a bummer. But as the fund grows, I still might come out ahead over time with the lower ER.

Am I thinking about this correctly? Which would you chose?

Thanks!!!
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typical.investor
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Re: Emerging Markets Fund at Schwab

Post by typical.investor »

I’d be happy using SFENX as I do hold an allocation to value.

If you aren’t, why not hold more VEMAX in taxable and none in the 403b?
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o'pinion
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Re: Emerging Markets Fund at Schwab

Post by o'pinion »

Great question and thinking. I may end up doing that for future contributions. But my employer just rolled out the self directed 403b at Schwab and I already have a good starting balance that I’m transitioning over from the old 403b (with crappy fund options). To shift that much around in taxable would cost me hefty taxable gains.
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grabiner
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Re: Emerging Markets Fund at Schwab

Post by grabiner »

o'pinion wrote: Thu Sep 23, 2021 12:52 am Okay, looking for input here to help me decide between two EM funds. My self directed 403b at Schwab allows me to only buy select mutual funds. Sadly, no ETF's allowed (per regulations).

So for my Emerging Markets position at Schwab, I've narrowed my choices between two funds:
SFENX -- Schwab Fundamental Emerging Markets Large Company Index Fund [ER: 0.39, no transaction fees]
VEMAX -- Vanguard Emerging Markets Stock Index Fund Admiral Shares [ER: 0.14, $75 purchase fee]

In my Vanguard taxable, I own the VEMAX fund. My question is which fund to choose at Schwab. Is it worth the $75 commission to buy the VEMAX fund (initial investment would be $25,000). If my math is right, I'll just about break even on the transaction fee with the 25 basis point difference in the expense ratio.
You'll actually come out ahead. The expense ratio difference is $62.50 every year; the purchase fee of $75 is a one-time cost. Since this fund is intended as a long-term holding, it is better to pay the one-time cost.

Another reasonable alternative would be not to hold emerging markets in your 403(b), and buy the Vanguard fund or a low-cost ETF in your IRA instead. (Or, if you are maxing out retirement accounts, buy it in your taxable account.)
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o'pinion
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Re: Emerging Markets Fund at Schwab

Post by o'pinion »

Thank you! Much appreciated!
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nisiprius
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Re: Emerging Markets Fund at Schwab

Post by nisiprius »

Quick reality check:

SFENX vs VEMAX

Image

Three conflicting thoughts.

1) Unless you have an awfully heavy overweighting of emerging markets in your portfolio, it's unlikely to matter much, so don't stress over it. Try a PortfolioVisualizer backtest using some kind of approximation to your real portfolio.

Let's consider two portfolios, each with 40% Total Stock (US), 26% Total International, 14% emerging market, and 20% Total Bond.

Consider only international stocks, VTIAX is about ¼ emerging markets. If you had put all 40% in Total International, your portfolio would be about 10% EM stocks. Putting 26% in Total International and 14% in EM stocks raises it to 25%-of-26% + 14% = 6.5% + 14% = 20.5%, so you've more than doubled your EM exposure, which is a substantial tilt.

OK. Here are the two portfolios. In one of them, we've used SFENX for our emerging markets stocks, in the other VEMAX.

In the context of a real portfolio with a heavy emerging markets overweight, this is how much the difference between SFENX and VEMAX would have amounted to.

This is what's at stake in your choice. (Again, I encourage you to click the link and enter your own real portfolio into PortfolioVisualizer).

SFENX versus VEMAX in an 80/20 portfolio, half international, with about 2X EM overweight

Image

2) Personally, no, I would not pay a $75 fee to buy Vanguard funds. If I thought Vanguard funds were enough better to care about, then I would just have an account at Vanguard.

If I move from Vanguard to Schwab or Fidelity, I will have a plan for replacing Vanguard mutual funds with products I can buy at zero or negligible fees.

If you really want X's mutual funds or ETFs, the best thing to do is have an account at X's brokerage, where X = Vanguard or Fidelity or Schwab. You can be reasonably sure that X will give its most favorable fee treatment to its own mutual funds and ETFs, access to lower-cost share classes, etc.

3) Fundamental indexing is a gimmick, a once-trendy gimmick that is now passé due to failure so far to achieve the +2% outperformance Rob Arnott promised vaguely hinted at. Since I personally dislike ETFs, I think it's a pity that Schwab doesn't offer its emerging markets "straight" index ETF, SCHE, as a mutual fund as well. As SCHE has tracked closely with VEMAX.

SCHE versus VEMAX

Image
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typical.investor
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Re: Emerging Markets Fund at Schwab

Post by typical.investor »

nisiprius wrote: Sat Sep 25, 2021 8:55 am
3) Fundamental indexing is a gimmick, a once-trendy gimmick...
OK, value has underperformed for quite a while, and fundamental indexes are basically a type of value fund. They differ a little from a traditional value fund in that they will vary their exposure and load more heavily on value when the value-growth spread is larger.

I don't see why weighting on adjusted sales, retained operating cash flow and dividends plus buybacks is gimmicky.

In fact, I think that Bogle would agree that for markets to function, price discovery must happen someplace. I personally believe that one reason value-growth spreads are reaching such large spreads is price insensitive investing through market cap weighted indexes which reinforces the speculation of traders. Nothing wrong with that of course, as if prices are wrong you'd expect them eventually to be corrected. Until then, you'd expect value to not do so great and that funds with value exposure to not do so great.
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o'pinion
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Re: Emerging Markets Fund at Schwab

Post by o'pinion »

Your theory only makes sense if the indexes in question are only buying growth stocks. Now there may be a tiny bit of truth to that, but most indexers buy an S&P 500 fund or a total market fund. So it’s mathematically impossible, under those circumstances, for indexers to create an unnatural value/growth spread in the market. IMO, your observation about the spread can primarily be explained by market momentum.

How many retail investors do you know who actually even remotely consider valuations in individual stocks? I don’t know a single one who’s ever done a detailed company/stock fundamental analysis. I know they are out there, but every stock picker I know invests based on how they feel about a particular company or under some bogus technical analysis. Perhaps I don’t hang out with the right crowd though.
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Re: Emerging Markets Fund at Schwab

Post by Northern Flicker »

Maybe Schwab isn't the best provider for this account? I would not consider a provider that leads me to alter materially the investments I wish to hold as being acceptable.
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typical.investor
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Re: Emerging Markets Fund at Schwab

Post by typical.investor »

o'pinion wrote: Sat Sep 25, 2021 7:41 pm Your theory only makes sense if the indexes in question are only buying growth stocks. Now there may be a tiny bit of truth to that, but most indexers buy an S&P 500 fund or a total market fund. So it’s mathematically impossible, under those circumstances, for indexers to create an unnatural value/growth spread in the market. IMO, your observation about the spread can primarily be explained by market momentum.
If that is a reference to my post, then I think you misunderstood what I wrote. All I pointed out was that when the wallstreetbets crowd or other investors pour into something because everyone else is and it's going up, that index investors also buy at that price. I think you misunderstood my comment.
Topic Author
o'pinion
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Re: Emerging Markets Fund at Schwab

Post by o'pinion »

I did misunderstand your other post about the interaction between speculative trades and indexing. Thank you for clarifying.
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Re: Emerging Markets Fund at Schwab

Post by ruralavalon »

Northern Flicker wrote: Sat Sep 25, 2021 7:57 pm Maybe Schwab isn't the best provider for this account? I would not consider a provider that leads me to alter materially the investments I wish to hold as being acceptable.
+ 1.

Schwab does does not offer a total international stock index fund or an emerging markets index fund, just a developed markets index fund (Schwab International Index [SWISX], MSCI EAFE ex-US index).

Does your employer's 403b plan have other providers available for you to use?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Northern Flicker
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Re: Emerging Markets Fund at Schwab

Post by Northern Flicker »

typical.investor wrote: Sat Sep 25, 2021 8:01 pm
o'pinion wrote: Sat Sep 25, 2021 7:41 pm Your theory only makes sense if the indexes in question are only buying growth stocks. Now there may be a tiny bit of truth to that, but most indexers buy an S&P 500 fund or a total market fund. So it’s mathematically impossible, under those circumstances, for indexers to create an unnatural value/growth spread in the market. IMO, your observation about the spread can primarily be explained by market momentum.
If that is a reference to my post, then I think you misunderstood what I wrote. All I pointed out was that when the wallstreetbets crowd or other investors pour into something because everyone else is and it's going up, that index investors also buy at that price. I think you misunderstood my comment.
I think significant flows into market index funds will tend to keep the value-growth spread less wide, not make it more wide, because it is buying the neutral portfolio with respect to factors, including value.

The index fund investors are buying more shares of value stocks at the lower price, which will be a larger fraction of free float. This counterbalances providing liquidity to growth stocks at the more difficult to sustain higher prices.
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