Mutual Fund Replication–Death of Closet Indexers?

///Mutual Fund Replication–Death of Closet Indexers?

Mutual Fund Replication–Death of Closet Indexers?

By | 2014-12-23T09:40:42+00:00 December 23rd, 2014|Uncategorized|6 Comments
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(Last Updated On: December 23, 2014)

Want to identify how to replicate an expensive, tax-inefficient mutual fund with ETFs?

Interactive Brokers has a pretty cool tool that does exactly that!

Check out their “Mutual Fund Replicator.”

In the example below, the IB system examines the Janus Perkins Small Cap Value Fund, highlighting that it can be synthetically replicated with a portfolio consisting of 58% SCHB and 42% PSCF.

We went ahead and tried the system out on a random large cap value fund: The Fidelity Value Discovery Fund (FVDVX).

FVDVX is a 900mm large cap value fund with 92 holdings spread across mega-cap holdings ($10B and higher).

The fees aren’t ridiculous (80bps), but the fund can be replicated with a high degree of precision by simply investing 91% in Vanguard’s Value ETF and 9% in the iShares Residential Real Estate ETF.

 

mutual fund replicate

 


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.