Unloaded CSVFX. Now What?

I have long been considering some consolidations of my regular mutual fund investments. What prompted me for making the change was that some funds in my collection (I currently have twelve of them) have seen some dramatic style shifts in recent years and, therefore, no longer meet the overall investment objective. After a recent portfolio checkup, two potential targets were identified: CSVFX and CGMFX, both funds I have owned for nearly five years.

From cost and stability point of view, CSVFX could be a better choice as it has lower expense ratio (ER) and standard deviation. However, my main concern of CSVFX is that it has significant overlaps with my core large-cap holding DODGX (6 out of top 25 holdings between CSVFX and DODGX are identical). Thus, the decision on which to cut loose is quite obvious, though CGMFX has much larger standard deviation and a slightly higher ER.

Last night, I finally pulled the triger to redeem all the CSVFX shares, with a market value of more than $8,100 which will be ACHed to my bank account in a couple of days. With the money coming, where should I put them? Actually, one main reason I wanted to shrink my large-cap funds is to boost my small-cap holdings, which currently account for 20% of the overall investments. I already have two small-cap funds, Buffalo Small-Cap (BUFSX) and T. R. Price Small-Cap (PRSVX), in the small growth and small blend category, respectively, thus, the new addition will be in the small value category and it won’t be another mutual fund but an ETF instead (check out my Model Portfolios Build with ETFs series).

The following is my decision-making process (the 2W+2H approach).

What to invest

After some research, I have two possible choices in my mind (using Morningstar ETF tool): iShares Russell 2000 Value Index (IWN) and Vanguard Small Cap Value ETF (VBR). The head-to-head comparison between these two looks like this:

Again, the choice seems to be quite clear: Vanguard’s VBR is the one to go with. Since the fund will be hold in the taxable account, what matters most is the returns after tax adjustments and VBR is undoubtedly superior.

Where to invest

Since it’s a ETF, which is traded just like a stock, I have to use a brokerage firm to make the investment. Among the four discount brokerages I am using (here’s a review), I certainly will not use ShareBuilder or QQQDirect as the former is basically a planed investment service, while the latter is only good for investing in QQQQ. Then there really isn’t much difference between Scottrade and Firstrade in terms of commissions: one charges $7 per trade and the other $6.95. What I consider a significant difference is that Scottrade doesn’t have free dividend reinvestment, an option Firstrade does offer. Since I want to put every penny earned from this investment (and VBR does have a 1.89% annual yield) into work, Scottrade won’t get my money this time though I have a much bigger account with them.

On the other hand, Zecco certainly looks interesting as it doesn’t charge commission at all. The question for me is: Do I want to open my fifth brokerage account?

How to invest

After my recent study on dollar-cost averaging (DCA), I have concluded that monthly DCA isn’t as good as it was originally believed for mutual fund investments (though I still do it for some of my mutual funds). For ETFs, DCA is even worse due to the transaction fees involved in each trade. To minimize the costs, a lump sum (LS) investment is the only practical way to invest in ETF. And since I plan to hold VBR for a long period of time (if not forever), I couldn’t care less about timing.

How much to invest

For most of my mutual fund investments, I usually put $100 into the fund every month. Since I decide to use LS instead of DCA, an annual contribution of $1,200 makes sense so the small-cap portion won’t get too big very quick, forcing rebalancing.

Now everything seems to be in order. I am just waiting for the money to come in.

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