In My Portfolio: VFH

Dave

In My Portfolio: VFH

VFH is the Vanguard Financials Index Fund ETF. It holds an array of stocks of financial services companies, like banks, credit card companies, insurance companies and investment banks. It’s largest constituents are JPM (9.5%) BRK.B (7.5%) and BAC (6.5%). VFH is market cap weighted, meaning the weighting of each stock in the ETF is determined by the size of its market capitalization relative to the others. To date, my average entry price is $70.56, so with current prices for VFH around $93, my overall gain on the position is about 32%. I began taking this position in March 2020. First we will look at the results of a performance forecast simulation for VFH, then we will discuss some of the more qualitative reasons I have for taking this position.

The results of a Monte Carlo simulation forecasting the performance of VFH are displayed below.

The output of the simulation indicates to me that I can expect to make money on VFH, and I will make more the longer I hold it. It tells me that if I am wrong about what may happen in the future that would be bullish for VFH, I can still make money, since all simulation relies on the future being like the past to be accurate. So if the future is indeed like the past, and none of what I expect to happen comes to pass, I still have a probably profitable position.

I believe my position in VFH will be a good long term investment. I believe over the next decade or two, there will be changes in American society that will drive increased demand for financial and banking services which will increase the value of VFH. I believe the likelihood is high that financial independence will become much more in vogue in the future than it is today. More and more people will prioritize financial independence when making decisions.

I envision more and more people either getting out of debt or avoiding debt altogether. I think one reason personal finance is a big topic of discussion in our culture is that the model of debt-fueled prosperity is failing too many people. American household debt is hitting all time highs. Only about 44% of Americans can pay cash for an unexpected $1000 expense. Those facts together paint a picture of American households that are tapped out financially. They tend to spend what they make with little left over. They work hard to pay back money they already spent via borrowing, with interest. This creates a drag on wealth accumulation.

Paying debt tends to prevent people from saving money. Saving and investing are related in that you can only invest money you have “saved”. You could say the difference between saving and investing is the sort of account in which you store your extra money. Lack of savings contributes to financial insecurity. In 2020, we were exposed to a new risk to our savings: Government mandated cancellation of peoples’ jobs in response to the spread of the coronavirus. At that time, it was government policy to engineer a recession in order to help stop the spread of the virus. Whatever your perspective on that policy choice, it had the effect of destabilizing the finances of millions of people. Government stimulus made up some of the shortfall, but in my opinion we will be seeing the negative effects of that choice for years to come. This presents another reason to accumulate savings and stay out of debt; your job or source of income may not be as secure as you think. Elimination of debt will result in more wealth accumulation, which I believe will redound to the benefit of banking and financial services firms like those in VFH.

In summary, I think the habit of debt-driven consumption and the associated lack of savings of many American households is going to be rejected by an increasing number of people. The consequent financial independence and wealth accumulation will drive increased demand for financial services, banking, and insurance that portends increased profitability for the constituents of VFH, which makes it a good investment today.

Now you may have just read the above disagree with it. Or you may think it makes a great case to invest in VFH. The point is I have explained my reasoning for my investment. There may well be factors I have not considered to this point of which you are aware which cause you to dispute my conclusion. You could even agree with my assessment of the trends in American personal finance, but perhaps using VFH to capitalize on those trends is the wrong way to express that assessment in the market. All of that is OK. This is just my thought process behind this investment. As always, time will tell!