VCDAX: So Good It Turns Skies Blue
Summary This mutual fund great for investing long term and short term potential for a bullish market. The fund is focused on cyclical market exposure. Features a low expense ratio and a passively managed index. Mutual funds are a great way to improve an investor’s risk adjusted returns. Investing in sectors of the market which sell goods and services is great if it’s indexed. It’s difficult to predict which sectors are going to outperform others and still be able to get a return higher than just diversifying. The fund I will be looking at is the Vanguard Consumer Discretionary Index (MUTF: VCDAX ) which tracks the performance of the MSCI US Investable Market Consumer Discretionary 25/50 Index. Expense Ratio The expense ratio for VCDAX is .12% which makes sense for being passively managed. If I wanted to go the route of active management then I’d go with specific companies in sectors that have a high sensitivity to economic cycles. In this mutual I’m happy to have it passively managed and just mimic a cyclical index. Yield This index has a distribution yield of 1.44%. If you’re looking for funds with a high yield to live on there are better mutual funds. From a performance point of view for yield plus capital appreciation this fund has been top notch. Diversification The following chart gives the top ten holdings: There are 384 holdings in total and normally I wouldn’t want the top ten to be 38.6%, but with so many power house companies showing up I could make an exception. Initially when I was looking into this index I was worried that Walt Disney (NYSE: DIS ) and Time Warner (NYSE: TWX ) were both in the top ten holdings. After seeing Walt Disney at 5.72% and Time Warner at 1.97% I disregarded my hesitation. Disney has been on an incredible streak and I can’t see it doing anything but continuing with their future plans. Specifically, I’m bullish on the Star Wars franchise and opening a new theme park in China. I’m excited to see just how well the $5.5 billion project will perform. Hong Kong Disneyland in 2014 hit record attendance and had a net profit of $42.3 million. When Hong Kong first opened there were issues with long lines and lack of food supply. Executives said they learned valuable lesson in Hong Kong, which had issues with long lines and food supplies at the start. There’s also some fantastic news about the environment. China plans on clearing more than 150 factories for the Shanghai Disneyland; how many they will close down or just plan to move still isn’t clear. This is great news for Disneyland as it wouldn’t be as magical without blue skies. Time Warner is a good stock to invest in, especially with the stock drop recently giving a good buy-in point. My main reason for massively preferring Disney is Warner Bros.’ notorious ability to make films that flop. Even though Time Warner will do well in the long run I don’t like the anxiety I feel wondering if the movie I’m about to see is going to be amazing or praying Johnny Depp will pull off a miracle. Movies aside, Time Warner has also been making plays in the international markets. Turner Broadcasting and HBO are the majority of Time Warner’s total revenue; expanding the two internationally has shown great profit. Here’s a compelling article showing Time Warner’s continued success internationally. Sector exposure Following chart shows the top ten subsectors of the index: Index is well diversified with no sector over 12%. The goal of this mutual fund is to follow the most cyclical industries within the consumer discretionary sector. The current weightings are well placed to achieve the index’s goal. The industry subsectors may be cyclical as a whole but the top subsectors in the fund are representative of the top ten holdings. These companies will take a bump here and there but they mostly have one thing in common and that’s continued performance. The following graph shows just how well this fund has performed: Conclusion Over the past several years VCDAX has performed well. There’s a lot of upside especially if the market continues to do well. I like the diversification in subsectors and the companies chosen to represent a large portion of the holdings. For a long term investment the fund has a decent correlation to the S&P500. As long as you’re not hunting for funds with high yields this fund has great potential. With all the international exposure the top ten holdings already have and are expanding on, I expect this index to be a good investment. There are some arguments for a short term investment here, but if I wanted to make short plays they wouldn’t be in the consumer discretionary sector unless it was a specific company.