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By Francis Bayes, WCI Columnist
My wife and I own Vanguard index funds and ETFs in our retirement accounts, and I think Jack Bogle deserves a museum. Vanguard is a good brokerage of choice for many people. In fact, The White Coat Investor and Physician on Fire have Vanguard accounts, and their columns on tax-loss harvesting and Donor-Advised Funds (DAF) feature screenshots from the Vanguard website.
But Vanguard does not always have the best financial product for your specific circumstance or financial plan. You might find my recommendations below for other kinds of products to be helpful if:
- You are interested in opening a DAF in the future.
- You want to have a single ETF or mutual fund for stocks and bonds.
- You prefer ETFs over mutual funds.
- You want to have the same asset allocation for every account.
- You want to have your banking and investing accounts in one place.
Read on for some of my (though not necessarily WCI's) suggestions for non-Vanguard products that you could use to become successful in your financial life
(As a disclaimer, I use all of the following financial products, and I have received no financial incentives other than payment from WCI for writing this column.)
Want to Open a DAF? Try Every.org
When you consider using a DAF rather than donating to individual charities, you need to weigh the pros and cons. With a DAF:
- You donate to multiple charities from a single website.
- You get a single tax receipt.
- You stay anonymous so that you do not receive (e)mails soliciting donations.
- You can donate appreciated assets.
- You can contribute for one year and distribute over subsequent years (but don’t be a “jerk” about it!)
But for those of us who are trainees or new attendings and do not have sizeable taxable assets to donate, a DAF would not be appropriate because:
- The minimum initial contribution is $25,000 with Vanguard ($0 with Fidelity) and $5,000 for subsequent contributions.
- The minimum donation to a charity is $500 with Vanguard ($50 with Fidelity).
- An AUM fee is 0.6% for the first $500,000 in the account and 0.3% for the next $500,000.
- You cannot avoid the AUM fee because the alternative is a minimum balance fee of $250 if you have less than $25,000 in the account (Fidelity does not have a minimum balance but charges a minimum fee of $100). You can minimize your AUM fee to $12, but it will take a minor effort.
An alternative with the same advantages of a DAF is every.org. Founded by Garrett Camp, a Canadian billionaire entrepreneur, and a team of software engineers, every.org is a 501(c)(3) organization that is supported by donations so that anyone can donate directly to charities or contribute assets that can be disbursed later–for free! You can see all your charities in one place but also discover new ones. By inviting others to use the website, you can see which charities your family members, friends, or colleagues support (but not how much they give).
If your 501(c)(3) nonprofit organization of choice is supported on every.org (if not, you can ask them to add it), you can set up a recurring or one-time donation. You can contribute your assets, such as stocks, in two ways: (1) donate directly to the charity, or (2) fund your account balance and disburse from the balance instead of your bank account. Every.org also prevents you from being a jerk because if you choose option No. 2, your account balance will not increase; it will be the value of your donated assets when every.org receives them.
Even if you support multiple charities, you still get one annual tax receipt from every.org. Every.org disburses your donations to the nonprofit organization without sharing your personal information, but you can elect to share it if you'd like. I chose to share my information with a couple of charities that I had not supported before, and eventually, I received updates and promotional emails from the organizations. So, you know it works.
Every.org has two downsides compared to a DAF. If it cannot disburse to your charity even after you requested it to be added, you cannot send a check to the charity via every.org just as you might with a DAF. You would have to contribute to the charity directly. Moreover, if you want to donate stocks and other assets, you have to send an electronic transfer request to your brokerage. This process is much more cumbersome than using a DAF, and it could delay any contributions that you intended for the current year, thereby complicating your end-of-year tax planning. Nonetheless, every.org offers every advantage of a DAF at no cost to you or your charities, and I hope every.org becomes the go-to platform for givers at all stages of life.
Want to Use an All-In-One Fund? Try WisdomTree Efficient Core Family
Simplicity is often the key to financial independence. If you have one fund in your portfolio, you might be less tempted to tinker and more likely to stick to your financial plan. For example, Mike Piper, aka the Oblivious Investor, uses an all-in-one fund, even though he is more than capable of creating a DIY portfolio. All-in-one funds like the Vanguard LifeStrategy fund or target date funds are “funds of funds” that have three or four underlying asset classes.
But because of the low yields of bonds (and, more recently, because of rising inflation), some DIY investors wonder whether they need to change their allocation to bonds. More often than not, they should not. But with a little more risk, a strategy called “return stacking” can help you maintain the same allocation to bonds while freeing up your cash for other diversifying assets. Jason Zweig of the Wall Street Journal has written about the strategy, and Bogleheads threads have discussed the WisdomTree 90/60 US Balanced Fund (NTSX) that uses this strategy.
This is how NTSX and its siblings in the WisdomTree Efficient Core Family work. For every $100 you invest, $90 buys the 500 largest US stocks (similar to the S&P 500) using no leverage. The remaining $10 in cash is used as collateral to buy $60 of US Treasury (UST) futures (with an average duration of 7-7.5 years), which are more tax-efficient than UST bonds. By using a 1.5x leverage, NTSX increases your exposure to stocks and bonds without moving up the risk curve, compared to the 60/40 portfolio of stocks and bonds: 90/(90+60) = 60; 60/(90+60) = 40. But instead of buying $100 of NTSX, you can buy $67 of NTSX to have $60 and $40 allocated to stocks and bonds (67*0.90 = 60; 67*0.60 = 40), respectively, and still have $33 that can be invested in real estate, inflation-protected I bonds, and others (see Table 1).
The WCI website and forum have had extensive discussions of leverage, and depending on your risk tolerance, you might be reluctant about any form of leverage. But the risk of using leverage to buy UST futures is lower than using leverage to buy stocks, and 90% of NTSX is not collateralized. For the first time since the fund launched (2018), we have a bear market looming in the setting of inflation and rising UST yields, so we do not know how NTSX would perform relative to the traditional 60/40 portfolio moving forward. Granted the short timeframe, the worst-case scenario might have been the start to 2022 when NTSX returned -20.10% compared to -13.84% for a Vanguard 60/40 fund (VBIAX) and -15.17% for S&P 500 (YTD, as of May 2022).
However, if one bought $67 of NTSX and $33 of I-bonds on the first day of the year, their YTD return (-11.12%) would be better than that of either VBIAX or S&P 500. The purpose of NTSX is further diversification with the same amount of cash without “stretching for returns.”
Personal finance is more personal than finance, but I have thought of several cases where NTSX might be better than a Vanguard all-in-one fund:
- If you already have a 60/40 allocation, you might consider having 67% of your taxable assets in NTSX and 33% in alternative assets.
- If you are saving for a down payment (or an expensive investment) in two years or more, NTSX allows you to keep 33% of every dollar safe in cash while allocating the rest to stocks and bonds.
- If you prefer to have your bonds in a taxable account, UST futures in NTSX give you a similar exposure to UST. But rather than receiving income distributions at the ordinary income tax rate, any gains on the futures are taxed at 60% long-term and 40% short-term capital gains rates.
Want to Use ETFs Instead of Mutual Funds? Try Fidelity
I hate having idle cash in my accounts, especially my retirement accounts. Fidelity allows you to buy fractional shares of stocks and ETFs, but Vanguard does not. If I want to purchase a small-cap value ETF (e.g., AVUV, SLYV, IWN) with my Roth IRA contribution, every dollar can be invested on day 1 of contribution instead of waiting to have enough cash to buy a share. But speaking of ETFs . . .
Want to Have the Same Asset Allocation for Every Account? Try M1 Finance
M1 Finance might be better than Fidelity and Vanguard if:
- You prefer ETFs over mutual funds AND
- You want to have the same asset allocation for every account. In other words, you want an 80/20 allocation in your 401(k), HSA, Roth IRA, and taxable accounts regardless of tax efficiency because you desire simplicity AND
- You are not interested in tax-loss harvesting AND
- You do not want or need a financial planner or a human advisor from either brokerage.
M1 Finance provides additional simplicity, because once you create a “pie” of ETFs, it will invest your initial and recurring contributions according to your desired allocation. That is, you do not have to calculate how much of your recurring contributions need to purchase VTI vs. VXUS vs. BND. All you have to do is set up a recurring transfer. If you want to rebalance without a new contribution (presumably in your IRA), you only have to click a button.
If you want to tax-loss harvest, you should not use M1 Finance. It is not designed for trading specific tax lots. Unless your entire slice of ETF has a negative return, you cannot sell specific shares of the ETF in order to buy an alternative.
Another downside (or upside depending on how you look at it) is that unless you upgrade to a premium account (“M1 Plus”), you only have one trading window in the morning. All your shares are purchased at the same time, just as index funds are purchased (or sold) at the end of the day. But unlike index funds, you might be purchasing the ETFs at a premium to the NAV. Yet for long-term investors, paying a small premium due to volatility could be a worthwhile price for convenience.
Want to Have Banking and Investing in One Place? Try Bank of America and Merrill
Vanguard does not have banking services. Charles Schwab does (including unlimited ATM fee rebates), but you might prefer a more “traditional” bank. If you already have a checking, business, and/or a credit card account with Bank of America, you should consider having a taxable or an IRA account with Merrill or transferring some of your assets to Merrill. Doing so will qualify you for one of its three preferred rewards tiers, which is worthwhile beginning at the platinum tier ($50,000 minimum).
I find it convenient that I can see my checking account when I log into Merrill and vice versa. Merrill does not charge fees for trading stocks or ETFs and does not have account minimums (even for a non-preferred rewards client). But Merrill might not be suitable for your financial plan. You cannot buy some ETFs (e.g., NTSX), and you cannot buy low-cost Vanguard (or Fidelity) index funds. Customer service for Merrill is subpar compared to that of other brokerages (and the same can be said for its credit cards). You should consider whether the benefits of investing with Merrill are worth the hassle of switching banks and/or using different investment vehicles (e.g., VTI rather than VTSAX) for $50,000-$100,000 of your portfolio.
These products have helped me to spend, save, and give better, because for every additional step (i.e., having another account), I can eliminate two or more steps (e.g., less calculations). I hope these recommendations can be a reference for various threads on the WCI forum and Reddit that are related to the above recommendations: charitable giving, saving for a down payment, or choosing between different ETFs. Many roads lead us to financial independence–we can VTSAX and relax or be a masterful spreadsheet organizer. But I think these products will make my road a little less time consuming, more comfortable, and–if I stay the course–shorter.
Have you used any of these “alternative” investing products? How has it worked out for you? Do you have others that you'd recommend? Comment below!