ETFs vs. Mutual Funds for Young Investor

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traveler90
Posts: 206
Joined: Wed Nov 13, 2013 2:46 pm

ETFs vs. Mutual Funds for Young Investor

Post by traveler90 »

Hello,

I’m new to the site, but have been reading for a few months now. I’m 23, and looking to begin adding some money to my Vanguard taxable account. I have maxed out my Roth IRA and plan to do so every year. I am also contributing more than I need to get my company match in my 401k plan (8% with a 5% match). In both of my retirement accounts I am very comfortable with my AA. I also have my Emergency Savings where I want it.

Regarding my taxable account, I am starting off with roughly $1000 and will sporadically contribute. I won’t be able to put money in it every month, just some months, but I will put an occasional lump sum into the account (bonus, tax return). Overall I would guess I’ll throw a few thousand into it yearly, but I do not want to bump up my 401k contribution % at this time, as this is kind of “leftover” money. I have no plans to use the money in my taxable account any time soon and preferably I won’t touch it until retirement.

So here’s my line of thinking. My plan for the taxable account is to solely buy ETFs (all equity for now with my age). They seem to all have lower ERs and seem like they would be more liquid if anything ever came up. Plus, with the initial amount I am investing, I could not afford some of the Vanguard mutual funds. OR, should I buy the ETFs until I have over $10,000 or so, and then exchange into a mutual fund (or would this cause me to get taxed)? I guess I don’t see the benefit of mutual funds over ETFs? Any help/advice is greatly appreciated. Thank you!
placeholder
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Re: ETFs vs. Mutual Funds for Young Investor

Post by placeholder »

Vanguard ETF->Mutual fund is a taxable event.
CantPassAgain
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Re: ETFs vs. Mutual Funds for Young Investor

Post by CantPassAgain »

Long-term capital gains and dividends are taxed at 0% for those in the 15% tax bracket, correct? If the OP is in that bracket or if he could up his 401K contribution and/or itemize deductions until he gets there, then taxes shouldn't be an issue for equity holdings. Unless the tax law changes, of course.
livesoft
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Re: ETFs vs. Mutual Funds for Young Investor

Post by livesoft »

You have figured out that ETFs will work better for your situation than Mutual funds. Congratulations.

You can always change your mind if/when you want to, so it is really no big deal.

Good luck.
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Toons
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Re: ETFs vs. Mutual Funds for Young Investor

Post by Toons »

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Stacks
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Re: ETFs vs. Mutual Funds for Young Investor

Post by Stacks »

traveler90 wrote:Overall I would guess I’ll throw a few thousand into it yearly, but I do not want to bump up my 401k contribution % at this time, as this is kind of “leftover” money. I have no plans to use the money in my taxable account any time soon and preferably I won’t touch it until retirement.
This is where I am hung up. If you wish not to touch the money until retirement, why not invest it in a tax advantaged account while you can? Otherwise work on some financial goals to put your taxable account to use for future expenses. This is where I am hung up, which you can refer to http://www.bogleheads.org/forum/viewtop ... 1&t=126377 regarding that point.
traveler90 wrote:Plus, with the initial amount I am investing, I could not afford some of the Vanguard mutual funds. OR, should I buy the ETFs until I have over $10,000 or so, and then exchange into a mutual fund (or would this cause me to get taxed)? I guess I don’t see the benefit of mutual funds over ETFs? Any help/advice is greatly appreciated. Thank you!
For most Vanguard funds you only have to put $3k into it in order to actively invest into the fund. Consider the fund that you are most interested in and the minimum amount required to invest in it. At that point you could plan ahead on whether or not an ETF or Mutual Fund is the route to go. If you think you will have $3k at your disposal in the near future, it might be of benefit to wait and invest in a mutual fund rather than go the ETF to mutual fund route.
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Riceman
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Re: ETFs vs. Mutual Funds for Young Investor

Post by Riceman »

If you are in 15% bracket and can harvest capital gains, mutual funds might be more convenient. That's because selling etfs incurs bid ask spread fees, so selling them each year incurs slightly more fees. This is my situation. This consideration is very small though.
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