I'm interested in investing in the Vanguard Target Retirement Income Fund in my IRA. That fund is made up of 5 funds:

  1. Total Bond Market II Index Fund Investor Shares (very similar to the Total Bond Market Index Fund)
  2. Total Stock Market Index Fund Investor Shares
  3. Short-Term Inflation-Protected Securities Index Fund
  4. Total International Bond Index Fund
  5. Total International Stock Index Fund Investor Shares

I have enough money in this account that I could invest in all the Admiral share fund equivalents of these investor shares funds (higher minimum investment but lower expenses) and still keep the same allocation as the income fund. What are the pros/cons of doing this? This is what I see:


  1. The expense ratio of the original fund is 0.16% which amounts to about $200/year for me. Replicating the fund with Admiral shares gives me a weighted expense ratio of 0.0993% which would save me about $79/year in fees. The expense ratio of the income fund is just a passthrough expense (from here: Does the expense ratio of a fund-of-funds include the expense ratios of its holdings?) so I'm not saving an extra level of fees by doing this.

  2. If I wanted to change the allocation a bit, I could (although I doubt I'll realy want to.)


  1. Every quarter, six months, whatever I'd have to rebalance my IRA, while Vanguard would do this for the fund of funds without me needing to.

  2. The US bond fund in the target income portfolio is different from the bond fund available to retail investors but it's still mostly the same so this wouldn't be a PERFECT replication technically.

What else? My question is similar to this one (Do I need to own all the funds my target-date funds owns to mimic it?) but it's a little different because I'm not asking if I need all of the funds, just the pros and cons of doing this replication.

2 Answers 2


In your entire question, the only time you mention that this is an investment inside an IRA is when you say

Every quarter, six months, whatever Id have to rebalance my IRA while Vanguard would do this for the fund of funds without me needing to.

Within an IRA, there are no tax implications to the rebalancing. But if this investment were not inside an IRA, then the rebalancing done by you will have tax implications. In particular, any gains realized when you sell shares in one fund and buy shares in another fund during the rebalancing process are subject to income tax. Similarly, losses also might be realized (and will affect your taxes). However, if you are invested in a fund of funds, there are no capital gains (or capital losses) when re-balancing is done; you have gains or losses only when you sell shares of the fund of funds for a price different than the price you paid for them.

  • Youre totally right I barely mentioned that. I made sure to say that in the title now but leave your answer because its still really good info.
    – Michael A
    Jun 4, 2014 at 18:13
  • 1
    The more I think about it the more I realize that this is definitely the mst important point to make about all this. I've thought about replicating funds like this outside of my IRA too and the tax implications are incredibly important.
    – Michael A
    Jun 5, 2014 at 19:07

Mostly you nailed it. It's a good question, and the points you raise are excellent and comprise good analysis.

Probably the biggest drawback is if you don't agree with the asset allocation strategy. It may be too much/too little into stocks/bonds/international/cash.

I am kind of in this boat. My 401K offers very little choices in funds, but offers Vanguard target funds. These tend to be a bit too conservative for my taste, so I actually put money in the 2060 target fund. If I live that long, I will be 94 in 2060.

So if the target funds are a bit too aggressive for you, move down in years. If they are a bit too conservative, move up.

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