Monthly Archives: May 2014

College Finances I – What Does It Cost Today (05/29/2014)

In the past several years there has been a public outcry about escalating costs of college tuition. Obama administration even announced a plan last year to force universities to slow down cost increases or risk losing federal student aid. I have decided to take a closer look at the data in a three-post series. The first one will show how much it costs to get an undergrad degree now; then examine how fast it has grown over the past 30 years or so; and conclude with analyzing whether this growing investment in your future still makes financial sense.

Throughout the series I plan to focus on three schools: University of Michigan since it’s my Alma Mater (Go Blue!), University of Arizona as it is my adopted home school in Tucson (Go Cats!); and Harvard because, well, it’s Harvard!

So let’s take a look at what the current “sticker prices” are. Exhibit 1 shows tuition costs for 20-school sample of leading public universities. They are ranked by Out of State tuition, which basically varies from $20,000 to $40,000 a year. In State costs are much more reasonable ranging from $6,200 to $17,000. Out of State students typically pay about three times as much as their In State classmates, with a broad range from 1.5x in MN to 4.6x in FL. In the past ten years the In State costs more than doubled (+7.4% annualized), while non-resident tuition increased by 83% or 6.2% annually.

Exhibit 1 9-1

Exhibit 2 has the same data for the Ivy Leagues schools – I use this group to represent elite private universities. I don’t mean to snub Stanford, small liberal arts schools and other great choices but this is the data I have. The average sticker price for Ivies is still 44% higher than out of state rates for their public competition. However, the rates have been increasing much slower at “only” 3.8% per year.

Exhibit 2


There are several reasons for rapidly rising costs at public universities (administrators galore!). Chief among them is the declining support from their respective states. Exhibit 3 show a graphic from University of Michigan’s website. In 1960’s the state footed almost 80% of the bill but that has dropped to only 16% in 2013. The situation is quite similar in most other states and it has been exacerbated by the “Great Recession” and resulting deterioration in state finances all across the country.

Exhibit 3 9-3Source: University of Michigan

Real Costs

Don’t forget that these numbers do not include room and board, which currently runs $12,000 to $15,000 a year. Thus, four-year non-resident bill at a quality public university can easily top a quarter million dollars!

Now, there is quite a difference between the “sticker price” and what the students end up paying out of pocket. All universities have tuition assistance programs for lower and middle income families. Ivy League schools have made a big effort to make their education affordable. Given their huge endowments (relative to competition) they are able to offer much more assistance than the public schools. As shown in Exhibit 4, on average the students pay less than half of the headline price out of pocket. In fact, for many middle income families sending a kid to Harvard will cost much less than Michigan!

Exhibit 4


Next time we’ll take a look at longer term college cost inflation and compare it to other important metrics.

Index Mix & Match? I think not! (05/08/2014)

Last time we looked at Broad Market index options. If you thought that was confusing, wait till we look at the landscape for ETFs based on company size. Let’s say you want to overweight mid and small cap because you have learned that they outperform large caps over the long run (albeit with increased risk). Besides, you want to be able to see the underlying portfolio blocks and rebalance between categories.

CRSP (Vanguard’s index provider) has done a great job describing various ways to split the market into size groups. Basically, you can slice the total market into either Two-Tier: Large + Small or Three-Tier: Large + Mid + Small. Of course ever-obliging ETF providers responded to investor demand by offering midcap options for even two-tier indexes. This and the sheer number of market cap ETFs created a confusing mess that we’ll attempt to decipher below.

Introducing the Field

Exhibit 1 shows available index funds with important characteristics to compare them. I described the metrics in the Broad Market Index post but also added Annual Turnover % as a proxy for tax-efficiency and other hidden costs. Naturally, broad index funds have the lowest turnover while small and midcap ones make a lot of portfolio changes due to fluid nature of those categories. I also calculated the stats for a sample combination of large & small indexes for each family. This way you can compare the resulting portfolio to the corresponding total market fund.

Exhibit 1 – Major Family Index Offerings by Market Cap


Exhibit 2 puts the same line-up into visual form to see how they jive together. It is built to scale based on a number of holdings in each ETF (3,500 being the highest – so we have 35 “notches” of 100 stocks each). One caveat is that the number of companies in the fund doesn’t reflect its true diversification. For example, ITOT’s 1,500 holdings is only 40% of VTI’s 3,700 stocks yet it covers approximately 90% of the U.S. market capitalization.

Exhibit 2 – Market Cap Combinations


Now, let’s review the line-up for each family.

Vanguard – CRSP US Total Market Index

Vanguard fields four market cap funds. CRSP describes this combined logic on their website:

The combined-size approach constructs indexes that function effectively in both building block scenarios. For the two-tier approach, an investor can combine CRSP Large + CRSP Small, or if a three-tier approach is preferred, the investor can use CRSP Mega + CRSP Mid + CRSP Small.

The one potential point of caution: If investors combine CRSP Large + CRSP Mid + CRSP Small, they have an overweight position in mid-cap stocks since large is already made up of Mega + Mid.

This point in bold is very important. I have seen this combination in quite a few portfolios. Let’s say if your goal was to overweight smaller companies and you allocated 60% to large, 25% to mid and 15% to small cap Vanguard funds. The resulting portfolio would double up on midcaps and actually be 55% large, 37% mid and only 8% small.

Note that Vanguard’s high turnover ratio has to do with them switching from MSCI to CRSP benchmark in 2013 and it should be lower in the future.

Schwab – Dow Jones U.S. Broad Stock Market Index

This is a solid offering, but once again you have to be careful with midcap component (Exhibit 2). It actually overlaps both large and small funds and is not necessary to create a total market portfolio. At my firm we typically use 75% SCHX / 25% SCHA for domestic equity – it’s very cheap (5 basis points for the combo), funds are very sensibly constructed and there are no transaction costs at Schwab.

iShares – Russell Index

Despite being the most expensive option, this is another popular stable of funds with great market coverage. Midcap fund is once more superfluous and completely overlaps with Russell 1000. Unique to this line-up, Russell offers a micro-cap option if you are interested in the very smallest public companies out there. Be careful though as IWC has a high expense ratio and can run into liquidity issues with some of their holdings.

Vanguard – S&P Index

This is an elegant two-fund solution that covers the TOTAL stock market with the highest number of holding in our combinations. It’s also quite cheap and has very low turnover.

iShares – S&P Index

S&P index scheme is probably the best-known to the general investing public. It’s a clean three-tier option and is a decent choice despite the relatively low number of holdings. Interestingly, turnover is much lower here as the indexes membership is managed by committee and not quantitative rules. Also note that SPDR has competing offering with SPY, MDY and SLY but not a total market option.

 Mix & Match – DON’T DO IT

You wouldn’t believe how many times I have seen real-life portfolios that mix funds from different providers in an attempt to cobble together “total market” exposure. People look at the fund names and assume that large, mid and small funds are exactly that and are interchangeable. Exhibit 3 shows couple examples of this creative splicing. Clearly there are lots of gaps and overlaps!

Exhibit 3 – Examples of Creative Splicing


Source: Index provider websites, PlanByNumbers

The second example is a very common one – after all SPDR S&P 500 (SPY) and iShares Russell 2000 (IWM) are synonymous with large and small cap stocks, respectively. In fact, among all ETFs they are number one (112 million shares per day) and number three (48 million) by average trading volume (EEM is number two in case you were wondering). So let’s take a quick look at the results of combining these two instead of using Russell 1000 and Russell 2000 together (Exhibit 4). You would miss out on a number of well-known names such as Las Vegas Sands, Tesla and LinkedIn (although you might be happy to be out of TSLA today (5/8/14) as the stock is down about 10% on earnings). Moreover, the top names in S&P 500 would be overweighed relative to Russell 1000.

Exhibit 4 – Mixing SPY and IWM



1)      Know if your index uses two or three tiers so you don’t overlap categories

2)      Do not mix index providers, pick one and stick with it

3)      Pay attention to expense ratios of your fund combination, number of holdings and turnover