For mutual fund investors at or near retirement, fund fees take on added importance. With so many low-cost mutual funds available, it rarely makes sense for investors, particularly retirees to pay up and embrace erosive fund fees and expenses.
Fortunately, fund fees are declining, adding to the universe of low-cost mutual funds applicable for retirement portfolios. Low-cost mutual funds offer retirees diversity, exposure to multiple asset classes and the potential to generate much-needed income.
“A study Morningstar released last year found that the average annualized return for investors in the cheapest 20% of diversified equity funds was 4.59% in the 10 years ended on Dec. 31, 2016, versus 5.83% for the funds — a gap exceeding 1.2 percentage points,” according to Barron’s.
Here are some solid choices among low-cost mutual funds for retirement investors to consider over the near term.
Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)
Expense ratio: 0.15% per year, or $15 on a $10,000 investment.
As noted above, generating income as an essential in retirement investing. Though not an actively managed fund, the Vanguard High Dividend Yield Index Fund Investor Shares (MUTF:VHDYX) helps retirees with the objective of bolstering their income profiles. With an annual fee of just 0.15%, VHDYX is lower than 85% of competing strategies, according to Vanguard data.
VHDYX does require a minimum investment of $3,000, but another factor in favor of this low-cost mutual fund is that dividend stocks are typically less volatile than non-dividend equivalents. This low-cost mutual fund holds 404 stocks with a median market capitalization of $105.8 billion.
VHDYX is diverse at the sector level with six sectors garnering double-digit allocations. Those include financial services, healthcare, energy and technology.
Dodge & Cox Stock Fund (DODGX)
Expense ratio: 0.52% per year, or $52 on a $10,000 investment.
There are plenty of index funds and exchange-traded funds (ETFs) with lower annual fees than the Dodge & Cox Stock Fund (MUTF:DODGX), but among actively managed funds, this product does qualify as a low-cost mutual fund.
This low-cost mutual fund is focused,with just 68 holdings, but DODGX has a value tilt as highlighted by a price-to-earnings ratio that is well below that of the S&P 500. DODGX’s management is seasoned with an average of almost a quarter of a century of experience at the firm. Additionally, DODGX’s turnover rate is just 8%, which can help minimize investor costs and keep DODGX in low-cost mutual fund territory.
DODGX is significantly overweight financial services and healthcare stocks relative to the S&P 500. Those sectors combine for 48.5% of the fund’s weight compared to just over 28% for the S&P 500.
Vanguard U.S. Minimum Volatility ETF (VFMV)
Expense ratio: 0.13% per year, or $13 on a $10,000 investment.
As its name implies, the Vanguard U.S. Minimum Volatility ETF (CBOE:VFMV) is an ETF, but it certainly does qualify as low-cost mutual fund. Among single-factor and smart beta strategies, an annual fee of just 0.13% is low. VFMV is downright cheap when considering this is not an index fund, but rather an actively managed product.
One of the newest offerings in the Vanguard stable, is a departure from traditional low-volatility ETFs in that it features multiple market capitalization spectra, while older rival funds are usually heavily focused on large caps. The median market value of this low-cost mutual fund’s 196 holdings is $8.6 billion.
Financial services and technology names combined for 42.80% of VFMV’s weight. This low-cost mutual fund has attracted $21.3 million in assets since coming to market earlier this year.
Vanguard Equity Income Fund Investor Shares (VEIPX)
Expense ratio: 0.26% per year, or $26 on a $10,000 investment.
The Vanguard Equity Income Fund Investor Shares (MUTF:VEIPX) is another low-cost mutual fund with an income focus from the Vanguard stable. Though it requires a minimum investment of $3,000, VEIPX is cheaper than about three-quarters of competing funds, according to issuer data.
This low-cost mutual fund’s focus on income “may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility,” according to Vanguard.
With its focus on dividends and low volatility, it is not surprising that VEIPX skews toward large-cap stocks. This low-cost mutual fund’s 190 holdings have a median market value of nearly $112 billion, providing the stability many retirement investors crave. VEIPX is a low-cost mutual fund with a value tilt as its earnings multiples are below those of the S&P 500. The fund allocates nearly a third of its weight to financial services and healthcare stocks.
PIMCO Low Duration Income Fund (PFIIX)
Expense ratio: 0.55% per year, or $55 on a $10,000 investment.
The PIMCO Low Duration Income Fund (MUTF:PFIIX) targets income with reduced interest rate risk, a valuable combination for retirement investors at a time when the Federal Reserve seems intent on continuing to raise interest rates.
Traditional broad-based fixed income benchmarks are heavily allocated to U.S. government debt, which is fine from a risk perspective, but that can also leave investors vulnerable to rising rates and wanting more income. PFIIX is an actively managed, low-cost mutual fund so it is not confined to Treasuries and mortgage-backed securities (MBS).
“While generating attractive current income is a primary goal, the fund also seeks long-term capital appreciation and compelling risk-adjusted returns with a low duration level,” according to PIMCO. “The fund also aims to preserve capital, maintain quality and lower interest rate risk.”
PFIIX has an effective duration of just 1.44 years and almost 30% of the fund’s portfolio is allocated to corporate debt, including junk bonds.
Todd Shriber does not own any of the aforementioned securities.