TSP Mutual Fund Window (MFW)

In June 2022, The thrift Savings Plan introduced a new feature: the Mutual Fund Window (MFW). It allows TSP participants to invest part of their account in mutual funds managed by Vanguard, Fidelity, T. Rowe Price, and many other mutual fund providers. There are over 4,000 mutual funds to choose from — a huge number! How are you supposed to know which funds to invest in? Should you even invest in any of them, or just stick to the original TSP Funds? We analyzed the complete list of TSP mutual funds, so let’s take a closer look and answer some questions.

Why invest in the TSP Mutual Fund Window?

In a word: diversification. The original TSP funds (C, S, I, F and G Fund) offer basic options to invest in bonds, U.S. stocks, and foreign developed market stocks. That’s a good start, but it represents only some of the “slices” in a broadly diversified portfolio, which may include:

• Large-cap U.S. stocks
• Small-cap U.S. stocks
• Real estate investment trusts (REITs)
• Foreign developed market stocks
• Emerging market stocks
• Bonds
• Cash, CDs, or other safe fixed income investments

Some investors go further by adding more granular portfolio slices, for example:

• Precious metals
• Commodities and natural resources
• Sectors (for example Utilities)
• Dividend paying stocks
• Municipal bonds (with specific tax benefits)
• Factor exposure (for example tilting the portfolio towards value stocks)
• Digital assets (such as Bitcoin)

Which funds to invest in?

The original TSP funds shine in some of the above categories, namely the C Fund for large-cap U.S. stocks, I Fund for foreign developed market stocks, F Fund for U.S. bonds and the “principal guaranteed” G Fund — all excellent choices for those particular portfolio slices. Now let’s take a look at some of the TSP mutual funds that are available to fill in the gaps:

Emerging market stocks

Emerging markets appeal to investors, because on average these countries have higher population and GDP growth compared to developed markets, and this economic growth is eventually reflected in stock market returns. Emerging market economies such as China, India, Taiwan, Indonesia and Brazil represent approximately 45% of global GDP. But as of 2022, emerging market stocks represent only 10% of the global stock market capitalization.

U.S. and emerging markets stocks have alternated between cycles of relative outperformance — for example, during the 3 decades from 1990 to 2020:

U.S. stocks performed exceptionally well during the 1990s and 2010s, but experienced a “lost decade” during the 2000s. By contrast, emerging market stocks returned ~ 10% per year during the 2000s and under-performed during the other decades. Based on this pattern and the tendency of stock markets to revert to the mean, it would not be surprising if the pendulum swings in the opposite direction during the next 5-10 years, favoring emerging market stocks.

Lack of exposure to emerging markets was arguably the biggest shortcoming of the original TSP fund lineup. Not anymore — the TSP MFW offers over 150 emerging markets stock funds! We sifted through all of them, and these bubbled to the top:

Vanguard Emerging Markets Stock Index Fund (VEMAX): With a low expense ratio of 0.14% and a track record since May 1994, this Vanguard index fund is an excellent option for TSP account holders to invest in emerging markets stocks. When emerging markets outperform, the fund captures those excess returns, for example between 2003 and 2007:

As you can see, the Vanguard Emerging Markets fund performed considerably better during this period.

Other notable emerging market stock funds available in the TSP MFW include: Fidelity Emerging Markets Index Fund (FPADX), which is very similar to the above Vanguard fund but with an even lower 0.07% expense ratio. Investors who prefer actively managed funds can consider Seafarer Overseas Growth and Income Fund (SIGIX) which focuses on investing in companies with sustainable growth and reliable income streams. Another actively managed fund is GQG Partners Emerging Markets Equity Fund (GQGIX) — launched in 2016 by Rajiv Jain, who built up an impressive 10 year track record managing another emerging markets fund.

Small-cap value stocks

Over long durations, small-cap value stocks tend to outperform the broad stock market, so many investors “tilt” their portfolio towards them. The TSP MFW offers over 90 funds in this category, including the Vanguard Small Cap Value Index Fund (VSIAX) with an expense ratio of 0.07%.

Real estate investment trusts (REITs)

Investors are drawn to real estate for its high dividends, predictable cash flows, and protection against inflation. If a large percentage of your net worth is tied up in your home or rental property that you own, then adding REIT exposure to your TSP account may not be necessary. But for TSP investors with little exposure to real estate, REITs are a welcome addition.

Of the 42 REIT funds available to TSP investors, the Vanguard Real Estate Index Fund (VGSLX) is among the low cost leaders (0.12% expense ratio). Another popular option is the TIAA-CREF Real Estate Securities Fund (TIREX). Its performance since inception is almost identical to the Vanguard fund, raising the question of whether the active management adds any value.

Specialized TSP mutual funds

Below, we highlight some of the more specialized funds available in the TSP mutual fund window. Whether or not (or how much) to invest in these funds depends on a TSP participant’s personal circumstances, goals and preferences, and in our opinion most of them should be used sparingly (if at all) — think of them as small, specialized slices in a TSP portfolio:

Gold stocks performed well during previous periods of high U.S. inflation, such as in the 1970s. While the TSP MFW does not offer any passive index funds that invest in gold stocks, there are some actively managed choices, including First Eagle Gold Fund (FEURX), Gabelli Gold Fund Class (GLDIX), and Sprott Gold Equity Fund (SGDIX). There are 12 funds in the “Equity Precious Metals” category. Three of them were available during the 1970s, including the Franklin Gold & Precious Metals Fund (FGPMX). Here’s how its performance compared to U.S. stocks (S&P 500) during that period:

As you can see, gold stocks performed considerably better during this period.

Non-gold commodities are another option to shield against inflation, and the MFW offers 17 mutual funds in this category, including Vanguard Commodity Strategy Fund (VCMDX) and PIMCO Commodity Real Return Strategy (PCRIX).

For TSP investors with a preference for dividend paying stocks, there are options like the Vanguard High Dividend Yield Index Fund (VHYAX) and Vanguard Dividend Appreciation Index Fund (VDADX).

One example of tilting a TSP portfolio towards a specific sector would be to add a small slice of a Utilities fund, such as the Vanguard Utilities Index Fund (VUIAX), which includes stocks of U.S. companies that distribute electricity, water, and gas. Since its launch in 2004, this fund has performed slightly better than the TSP C Fund, with lower volatility and drawdowns during market downturns:

TSP participants can now even buy a mutual fund that tracks the price of Bitcoin: the ProFunds Bitcoin Strategy Fund (BTCFX). Introduced just a few months before Bitcoin’s peak price in late 2021, this mutual fund promptly lost over 73% of its value during the next 4 months, reminding crypto investors just how volatile this cryptocurrency can be:

And controversial. A generation of technologists, believers, investors, and speculators willed Bitcoin into existence and pushed its market capitalization to over one trillion U.S. dollars in 2021, while others referred to it as “rat poison” (Warren Buffett) and “disgusting and contrary to the interests of civilization” (Charlie Munger). Our take is that completely ignoring Bitcoin is also an option, and that a long-term TSP investor can do just fine without this fund and many others offered in the TSP mutual fund window.

Who should invest in TSP mutual funds?

TSP account holders must meet the following requirements to participate in the Mutual Fund Window:

• Minimum TSP account balance of $40,000
• Minimum required mutual fund investment of $10,000
• A maximum of 25% of the account balance can be invested in mutual funds

Using the MFW comes at a cost: $150 in annual administrative and maintenance fees, plus an additional $28.75 for every mutual fund transaction/trade you make. This is on top of the fees charged by the mutual fund company (each individual mutual fund’s expense ratio).

Depending on your TSP portfolio size, those fees can significantly drag down the net performance of your account. For example, consider a TSP investor with an account balance of $40,000 (the minimum required to use the MFW option) who wants to add 3 mutual funds to their portfolio and rebalance once a year. The fees charged by the TSP would introduce a 0.59% per year “drag” on the portfolio, on top of the funds’ expense ratio. TSP investors at the start of their career who seek additional diversification may therefore prefer to buy those additional investments in a separate IRA brokerage account, or even in a taxable account. On the other hand, for a TSP investor with a much larger balance of say $400,000, the above fees would drag the portfolio down by a more acceptable 0.06% plus specific mutual fund expenses (which can be contained by choosing low cost index funds). While even for these investors the cost of TSP mutual funds is still significantly higher than the original low-cost TSP funds (C, S, I, F and G Fund), perhaps it’s an acceptable compromise, to invest in asset classes that were previously not accessible in the Thrift Savings Plan, and which may outperform in future decades.

TSP investors should steer clear of MFW mutual funds with very high expense ratios. There are currently more than 1000 funds with an annual expense ratio over 1%, eighty funds over 2%, and a few over 4% per year! Analyzing the past returns and risk of those funds, we didn’t see any compelling reason to choose them over the lower cost options. There are also hundreds of MFW funds that overlap directly with the original TSP funds, for example the Vanguard 500 Index Fund (VFIAX) which tracks the same index as the TSP C Fund, but is more expensive due to the MFW fee structure, so there’s no point in including funds like that in the lineup.

Final thoughts

TSP investors with a large enough account balance now have an option to diversify their portfolio into emerging market stocks and other asset classes, which should be beneficial in the decades ahead. The high administrative cost of the Mutual Fund Window can be managed somewhat by sticking with lower-cost mutual fund options. It can feel overwhelming to choose from the thousands of available mutual funds, but hopefully this article has sparked some ideas and helped to narrow down the field.