Mutual Fund Replication – Death of Closet Indexers? by Wesley R. Gray, Ph.D., Alpha Architect
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.”
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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.
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