This is a big day for me. I’m announcing the first in a series of blogs where I give you the “Solin Star Ratings.” You’re probably familiar with my competition. It provides star ratings for many categories of mutual funds. Most of them are actively managed funds, where the fund manager attempts to beat a risk-adjusted benchmark.
My ratings are vastly superior. Let me tell you why.
I feel like a start-up (without venture capital) who has discovered a market ripe for disruption. It’s beyond me why anyone pays attention to my competitor’s “star” ratings.
Typically, funds with stellar recent performance get higher “star” ratings. But relying on past performance is misleading. It has “almost no value whatsoever” as a predictor of future performance.
Even winners of my competitor’s “fund manager of the year” award were unable to demonstrate outperformance in ensuing periods following the award, except for the short-term (3 months) after the award.
A Vanguard study (discussed here) looked at excess returns of funds given a high rating (the coveted “5 stars”) from my competition. It found these funds had a very low probability of maintaining their rating, “confirming that sustainable outperformance is difficult.”
Here’s the argument that finishes off my competition. My highest rated funds are statistically likely to outperform their highest rated funds, particularly over the long term. Here’s one example, among many. For the five-year period ending December 29, 2017, 84.23 of large-cap funds underperformed the S&P 500 index.
Here’s the bottom line: If you’re looking for better performance, you’re better off paying attention to my ratings than theirs.
It’s a no-brainer.
Solin’s 10-star ratings
My ratings go from 1-star (terrible) to 10-stars (the best). Here are my 10-star rated funds for mutual funds that track the U.S. stock market using various indexes. These funds are appropriate for those seeking a broadly diversified portfolio of U.S. stocks. They provide broader diversification than funds that track only the S&P 500 index.
These funds are listed in no particular order.
- Vanguard Total Stock Market Index Fund (VTSMX)
Also available with a higher minimum ($10,000) (VTSAX)
VTSMX has a minimum of $3000.
The management fee for VTSMX is 0.14%.
The management fee for VTSAX is 0.04%.
- Schwab Total Stock Market Index Fund (SWTSX)
This fund has a management fee of only 0.03%. There is no minimum investment.
- Fidelity Total Market Index Fund Premium and Investor Class
Investor Class is FSTMX. Management fee is 0.09% Minimum is $2500.
Premium Class is FSTVX. Management fee is 0.035% Minimum is $10,000.
All of these funds enjoy my 10-star rating because they track a broad index, providing appropriate diversification for those seeking exposure to the U.S. stock market. These fund families are currently engaged in a “race to the bottom” to see who has the lowest fees. As an investor, you’re the beneficiary.
You can’t go wrong with any of these funds.
I will deal with Exchange Traded Funds and will rate index funds in other asset classes in future newsletters.
Resource of the week
Here’s a quote from my competitor that appeared in this article: If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.
My 10-star rated funds have lower expense ratios (management fees) than their actively managed funds.
They are a mega-billion dollar organization with massive resources.
I work alone on my MAC desktop.
I know it’s difficult to believe, but my ratings are likely more helpful than theirs.