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.”
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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