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By Jason Kephart, CFA | 09-09-2014 10:00 AM

The Cheapest Alternative Fund Gives More for Less

Vanguard Market Neutral has more than low costs going for it.

Jason Kephart: When it comes to alternative funds, the hardest thing to stomach is the high fees. The average fund charge is close to 2%. This week's Medalist doesn't have that problem, though. Vanguard Market Neutral (VMNFX) charges just 25 basis points. That makes it the cheapest fund in the category and gives it a big leg-up versus competitors.

This fund is more than just cheap cost, though. It is run by Vanguard's quantitative equity team, and the team screens for stocks based on five criteria: valuation, growth, quality, momentum, and management. It then bets that within each industry a group of stocks that scores well on those metrics will outperform a group of stocks that scores poorly.

So far, it has worked well for investors. Over the past three years, it has beaten the category by about two percentage points annualized. Market-neutral funds are generally a good way to diversify your bond holdings. So, if you're worried about interest rates, this fund could be a good choice.

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