James Dean is creating a portfolio of mutual funds. His asset allocation is 40% to US bonds and 60% to US equities. In selecting the funds, he has two considerations: (i) large cap equities are priced more efficiently than the small cap firms, and (ii) Diversification of alphas across strategy and fund managers. James has made two different options and wants you to compare them for him:

Asset Fund Option 1

Large Cap Large Cap index ETF (70%) + large Cap Blend (30%)

Small Cap Small Growth (45%) + Small Cap Value (45%) + Small ETF (10%)

Fund Option 2

Large Cap Value (40%) + Large Cap Growth (40%) + Large Cap Index ETF (20%) Small Cap Blend (60%) + Small Cap Index ETF (40%)

Please explain which fund option is most suited for the investor.