These Mutual Funds Give ETFs a Run for Their Money

Two of the main benefits that exchange-traded funds offer are tax efficiency and low-cost exposure, particularly to slices of the market on which traditional index funds are less likely to focus.

But ETFs don't always have a decisive edge over traditional mutual funds on these fronts. Sometimes, a mutual fund may be cheaper than an ETF tracking the same index, and you may not have to pay a commission to buy and sell the traditional mutual fund. (Of course, you may not have to pay a commission to buy and sell an ETF, either, given that so many brokerage platforms are offering free trades.) Check out  Morningstar's Cost Analyzer tool to compare costs and trading commission fees to determine how much you'd save by investing in an index fund versus a comparable ETF.)

And while ETFs have mechanisms that can lead to greater tax efficiency than traditional mutual funds, they won't automatically lead to lower tax bills, as Vanguard chief investment officer Gus Sauter points out in this video.

To help investors who are simply looking for a core holding for their portfolios, we sought to find some topnotch mutual fund contenders that hold up on both the cost and tax-efficiency front against similar ETFs. As such, we recently screened both our large-blend and foreign large-blend categories to identify some worthy choices.

First, the large-blend group: Using the  Premium Fund Screener, we started by focusing on no-load funds in the category. We then set the expense cutoff at 0.28%, which is the top end of the cheapest third among large-blend ETFs. To home in on large-blend funds with a history of good tax efficiency, we screened on those with tax-cost ratios of 0.72% or lower, which means they've been at least as tax-efficient as prominent large-blend ETFs. Moreover, we kept the minimum initial purchase to no more than $10,000. Eliminating all but the distinct portfolios of noninstitutional funds that were open to new investments, the screener yielded 10 offerings. We highlight two of those below. Premium users can  click here to replicate the screen.

 Bridgeway Blue-Chip 35 Index  
This fund charts its own course, keeping a concentrated portfolio of just 38 of the largest blue-chip companies. Management's strategy involves keeping the portfolio broadly diversified across sectors (only four of its holdings can be in the same industry) while keeping a lid on capital gains taxes, trading costs, and expenses to boot. As long as this offering is flanked by other supporting players, the fund could serve as a suitable core holding in an investor's portfolio.

 Schwab Total Stock Market Index (SWTSX)
This fund offers investors affordable and easy access to the Dow Jones U.S. Total Stock Market Index. For a low $100 investment minimum and the ultralow annual expense ratio of just 0.09%, investors can gain exposure to much of the U.S. stock market universe. While a majority of its assets are invested in blue chips, its coverage of mid- and small-cap names has given this fund a boost over the S&P 500, outpacing that index in every rolling five-year period from June 1999 to January 2011.

For Those Looking Abroad
To find foreign large-blend candidates that stack up to their ETF competitors on the cost and tax-efficiency fronts, we turned to the  Premium Fund Screener once again. On the fees front, we got rid of load funds and limited the expense ratio to 0.35%, which represents the upper limit expense ratio of the lowest quartile of large foreign blend ETFs. We also required that tax-cost ratios be lower than 0.48%, meaning the funds have been at least as tax-efficient as MSCI EAFE-tracking ETFs. Finally, we eliminated institutional funds and those that were closed to new investments. Below, we've highlighted one option that the screener yielded. Premium users can  click here to replicate the screen.

 Vanguard Tax-Managed International (VTMGX)
Unlike the preceding two large-blend offerings, this isn't technically an index fund, as it uses certain strategies to minimize taxes, such as selling losing holdings to offset capital gains elsewhere in the portfolio. Yet it does provide inexpensive, broad-based exposure to developed foreign markets, hewing closely to the MSCI EAFE index by buying 350 of the largest blue-chip stocks in developed markets outside of the U.S. and Canada. The fund's five-year returns are only middling, as its lack of emerging-markets exposure has held it back relative to its large-blend peer group during the past several years. During the past decade, however, its returns land near its peer group's top third, and its rankings look even better once you factor in taxes. Investors should note that while this fund is suitable as a core holding for a taxable account, they may want to supplement it with other holdings that provide exposure to emerging markets and small- and mid-cap stocks.