Why not ETF's, if the expenses are lower?
Why not ETF's, if the expenses are lower?
Why not ETF's, if the expenses are lower?
My portfolio is dirt simple.
It's a 60/40 portfolio consisting of:
40% Total Stock
20% Total International
40% Total Bond
If you look at the expenses using Vanguard Funds, you get the following:
Investor Shares
0.19% - Total Stock Market Index (VTSMX)
0.48% - Total International Stock Index (VGTSX) (includes 0.16% extra 'cost' of not being able to take the foreign tax credit)
0.20% - Total Bond Market Index (VBMFX)
0.252% Total Portfolio Expenses
However, my portfolio is large enough that I can have Admiral shares in two of the funds (Admiral shares not available for Total International), which will reduce the expenses even further:
Admiral Shares
0.09% - Total Stock Market Index Admiral (VTSAX)
0.48% - Total International Stock Index (VGTSX) (no Admiral shares available)
0.11% - Total Bond Market Index Admiral (VBTLX)
0.176% Total Portfolio Expenses
And ETF expenses are even lower than Admiral Shares:
ETF Shares
0.07% - Total Stock Market ETF (VTI)
0.25% - FTSE All-World ex-US ETF (VEU)
0.11% - Total Bond Market ETF (BND)
0.122% Total Portfolio Expenses
Giving us the total portfolio expenses of:
0.252% - Investor Shares
0.176% - Admiral Shares
0.122% - ETF Shares
ETF shares look to be the least expensive, with a 0.054% cost advantage over Admiral Shares.
Now that, of course, doesn't count brokerage costs. Based on my current investing, I figure I make a purchase about every other month, or 6 a year. Now figuring another 2 for year-end rebalancing, and 2 more just in case, I think that I could easily get by with 10 trades per year in a brokerage account with ETF's.
Taking Schwab's commission rate of $12.95 (which I figured to be sort of middle of the road as far as cost), those 10 trades would cost $129.50.
Dividing that $129.50 by the 0.054% cost advantage of the ETF's, gives me a $239,815 break-even portfolio size, at which point the Admiral shares and ETF shares are even, cost-wise, including the ETF commissions.
My portfolio is larger than that break-even number, so it looks like ETF's are a winner cost-wise.
Now, of course, I could go with Wells Fargo instead of Schwab, and reduce my commissions to zero. And, as some may have noticed, while I included commissions in the calculations, I didn't include the spread on the ETF's. The spread would probably increase the break-even number. But still, even with the commissions and the spread, there is some number where, from then on, ETF's will simply be less expensive.
So I guess my question is this; If your portfolio is large enough to where ETF's are at a cost advantage - even after all expenses - why would one not go with ETF's, rather than funds?
Cheers,
Fred
My portfolio is dirt simple.
It's a 60/40 portfolio consisting of:
40% Total Stock
20% Total International
40% Total Bond
If you look at the expenses using Vanguard Funds, you get the following:
Investor Shares
0.19% - Total Stock Market Index (VTSMX)
0.48% - Total International Stock Index (VGTSX) (includes 0.16% extra 'cost' of not being able to take the foreign tax credit)
0.20% - Total Bond Market Index (VBMFX)
0.252% Total Portfolio Expenses
However, my portfolio is large enough that I can have Admiral shares in two of the funds (Admiral shares not available for Total International), which will reduce the expenses even further:
Admiral Shares
0.09% - Total Stock Market Index Admiral (VTSAX)
0.48% - Total International Stock Index (VGTSX) (no Admiral shares available)
0.11% - Total Bond Market Index Admiral (VBTLX)
0.176% Total Portfolio Expenses
And ETF expenses are even lower than Admiral Shares:
ETF Shares
0.07% - Total Stock Market ETF (VTI)
0.25% - FTSE All-World ex-US ETF (VEU)
0.11% - Total Bond Market ETF (BND)
0.122% Total Portfolio Expenses
Giving us the total portfolio expenses of:
0.252% - Investor Shares
0.176% - Admiral Shares
0.122% - ETF Shares
ETF shares look to be the least expensive, with a 0.054% cost advantage over Admiral Shares.
Now that, of course, doesn't count brokerage costs. Based on my current investing, I figure I make a purchase about every other month, or 6 a year. Now figuring another 2 for year-end rebalancing, and 2 more just in case, I think that I could easily get by with 10 trades per year in a brokerage account with ETF's.
Taking Schwab's commission rate of $12.95 (which I figured to be sort of middle of the road as far as cost), those 10 trades would cost $129.50.
Dividing that $129.50 by the 0.054% cost advantage of the ETF's, gives me a $239,815 break-even portfolio size, at which point the Admiral shares and ETF shares are even, cost-wise, including the ETF commissions.
My portfolio is larger than that break-even number, so it looks like ETF's are a winner cost-wise.
Now, of course, I could go with Wells Fargo instead of Schwab, and reduce my commissions to zero. And, as some may have noticed, while I included commissions in the calculations, I didn't include the spread on the ETF's. The spread would probably increase the break-even number. But still, even with the commissions and the spread, there is some number where, from then on, ETF's will simply be less expensive.
So I guess my question is this; If your portfolio is large enough to where ETF's are at a cost advantage - even after all expenses - why would one not go with ETF's, rather than funds?
Cheers,
Fred
I'm starting to think this way as well. I just did this for the FTSE All World Ex-US ETF where I made a lump sum purchase. I was particularly inclined to do this for this fund because in another recent post on this forum a case was made that admiral shares may not be made available for newer Vanguard funds that also have an ETF version.
Regarding the trades at Schwab, you may want to talk to a customer service rep there about the possibility of getting some free trades if you have any substantial amount of money to transfer into your account there. I've done that few times there and I think I got somewhere around 25 to 30 free trades, but they were only good for 45 days.
Take care,
Greg
Regarding the trades at Schwab, you may want to talk to a customer service rep there about the possibility of getting some free trades if you have any substantial amount of money to transfer into your account there. I've done that few times there and I think I got somewhere around 25 to 30 free trades, but they were only good for 45 days.
Take care,
Greg
I agree that if you do the analysis, ETFs can be a better long term deal for many - including me in some of my holdings.
But it looks like the lowest cost combination for you may be admiral shares for total stock market and total bond market, and VEU. That way, you only have commissions and spread for 20% of your portfolio. I wouldn't bother with VTI to save .02% versus the transactions costs.
But it looks like the lowest cost combination for you may be admiral shares for total stock market and total bond market, and VEU. That way, you only have commissions and spread for 20% of your portfolio. I wouldn't bother with VTI to save .02% versus the transactions costs.
- hollowcave2
- Posts: 1790
- Joined: Thu Mar 01, 2007 2:22 pm
- Location: Sacramento, CA
not a bad idea
it's not a bad idea as long as you keep all expenses low and take into consideration how you would emotionally react to different market conditions. Also consider how often you might rebalance and add that cost as well.
There is a psychological effect to seriously consider. Since it's so easy to trade ETF's, you need to assess for yourself how disciplined an investor you are.
Steve
There is a psychological effect to seriously consider. Since it's so easy to trade ETF's, you need to assess for yourself how disciplined an investor you are.
Steve
Re: Why not ETF's, if the expenses are lower?
Just a followup, I think there are 2 important factors to this decision.Fclevz wrote: So I guess my question is this; If your portfolio is large enough to where ETF's are at a cost advantage - even after all expenses - why would one not go with ETF's, rather than funds?
1) Size of each purchase relative to commission. The larger the better obviously. Since the spread's cost will be proportional to your investment size it should not be factored in here.
2) Expected holding period. This is the major factor in my opinion. You have compared a one-time cost versus the yearly expense ratio. You ought to compare the total buy/sell cost (including spread) versus the cumulative expense saving over your holding period (hopefully many years). If the expense ratio difference is significant, and you expect to hold it for 10+ years, you could justify quite large transaction costs.
Total portfolio size is irrelevant (as opposed to transaction size) - and with the opportunity for admiral shares, is actually a negative for the ETFs.
ETF's...to go or not to go?
Schwab is intriguing to me for three reasons:DOA2035 wrote:Regarding the trades at Schwab...got somewhere around 25 to 30 free trades...
- They're not a fly-by-night operation
- The fees, though not the cheapest, are at least reasonable
- They have a bank, so brokerage and banking could be at the same place. Very appealing.
However, as many have mentioned, Wells Fargo meets those criteria as well and offers an even better deal of 100 free trades a year if you have $25k+
True, but for simplicity sake, I would prefer to have all of my holdings at one location. Which is another plus for ETF's, as banking and brokerage could be at the same place if I went with Schwab, Wells Fargo, E*Trade.mas wrote:But it looks like the lowest cost combination for you may be admiral shares for total stock market and total bond market, and VEU. That way, you only have commissions and spread for 20% of your portfolio. I wouldn't bother with VTI to save .02% versus the transactions costs.
Extremely disciplined. I have online access to my current Vanguard accounts, but have never been tempted to do any fast and furious trading or reacting to market movements.hollowcave2 wrote:There is a psychological effect to seriously consider. Since it's so easy to trade ETF's, you need to assess for yourself how disciplined an investor you are.
That's what I'm starting to think as well.deliverer wrote:I agree and have been trying to figure out the negatives if any. The NAV/spread and cost of purchasing is the only one I see. If it's still cheaper, after those expenses, than I'm all for it.
Cheers,
Fred
Withdrawing Money
You discussed the number of investments you would make per year. Will you need more frequent withdrawals later in life? If yes, the costs might get pretty high down the road. It is probably easier to manage annual withdrawals than it is to manage additions but I just wanted to throw this into the mix.
Also, keep in mind the bid/ask spread as an additional cost. It doesn't mean the ETF isn't the best option but it should be considered.
Laura
Also, keep in mind the bid/ask spread as an additional cost. It doesn't mean the ETF isn't the best option but it should be considered.
Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Re: Why not ETF's, if the expenses are lower?
I just checked out the Premium/Discount figures on the Vanguard site and it looks like all of the ETF's in Fred's proposed portfolio are trading at a small premium, which would mean an approximately 0.119% additional initial purchase cost for the ETF's.Fclevz wrote:Giving us the total portfolio expenses of:
0.252% - Investor Shares
0.176% - Admiral Shares
0.122% - ETF Shares
That reduces the appeal of the ETF's, in that it would take approximately 14 months for ETF's lower expenses versus Admiral shares to overcome the initial ETF trading premium cost.
Yes, if you have a big enough portfolio and plan to hold it for a long enough time, the ETF's should come out ahead as far as costs. But it doesn't look like it would be enough of a difference to make the Fund/ETF debate an obvious black and white decision. Especially versus Admiral shares.
Bob
Another thing to consider if is that if you do use ETFs you by definition need a brokerage account. I was consiedering going the ETF route myself but doing so would require an addtional $30 per year to have a brokerage account at Vanguard versus $0 for a mutual fund account. If you already own a brokerage account then this is moot but it still an addtional cost to consider.
--The Dan
--The Dan
To qualify for Vanguard's Flagship status they require atleast 500K in Vanguard mutual funds and greater than 1 million total held by Vanguard. The perks are 12 free stock/etf trades per year, free conversion from fund shares to etf shares, free sale or purchase of transaction fee non Vanguard mutual funds (counts as one of your free stock trades). This 500K requirement in VG mutual funds would prevent using an all ETF portfolio and maintaining Flagship status. Something to consider.
Regards,
Regards,
Best Wishes, SpringMan
Re: Why not ETF's, if the expenses are lower?
My portfolio consists of the same three Total funds, and I too thought about going the ETF route. However, in the end, I didn't. Here's how I looked at it.Fclevz wrote:Why not ETF's, if the expenses are lower?
My portfolio is dirt simple.
It's a 60/40 portfolio consisting of:
40% Total Stock
20% Total International
40% Total Bond
0.09% - Total Stock Market Index Admiral (VTSAX)
0.07% - Total Stock Market ETF (VTI)
0.02% - not much of a difference.
0.11% - Total Bond Market Index Admiral (VBTLX)
0.11% - Total Bond Market ETF (BND)
Zero difference. No cost advantage at all in buying the ETF.
0.48% - Total International Stock Index (VGTSX) (includes 0.16% extra 'cost' of not being able to take the foreign tax credit)
Since this was the most expensive fund of the three, it seemed the most logical place to try and pare down expenses. Since it's a fund-of-funds, the seemingly nonsense tax-code won't let you take the foreign tax credit. But, if you separate it into its Europe, Pacific, and Emerging Markets components, you effectively get back that lost 0.16% a year. As International is 20% of your portfolio, that would effectively be 0.16% x 20%, or 0.032% less of an overall expense ratio. (Assuming it's in a taxable account).
It's actually a little more than the gained 0.16% foreign tax credit because the aggregate expense ratio total of the three funds at their current market weights is 0.294%, versus 0.32% for the Total International (after payment of EM fund purchase fee, that is).
Giving us the total portfolio expenses of:
0.252% - Investor Shares
0.176% - Admiral Shares
0.139% - Admiral Shares with separated International
0.122% - ETF Shares
So the new separated International portfolio would bring your expense ratio down to only 0.017% more than the ETF route. And as the separate Europe, Pacific, and Emerging Market funds get bigger, they may eventually be eligible for Admiral status too, thus further reducing the gap.
True, it increases the number of funds you have to rebalance. But, that's usually pretty painless and only necessary once a year or so.
So in my opinion, it brought the expense ratio down to where the ETF cost advantage ($17 per $100,000 invested) wasn't enough to worry about.
Bob
mas said:
I agree completely.But it looks like the lowest cost combination for you may be admiral shares for total stock market and total bond market, and VEU. That way, you only have commissions and spread for 20% of your portfolio. I wouldn't bother with VTI to save .02% versus the transactions costs.
ETFs are cheaper, in general. That's why my portfolio contains entirely ETFs. I agree with the sentiment that funds vs. ETFs doesn't really matter, but the better choice seems clear and dry cut to me.
A note: The biggest benefits of ETFs is not lower ERs or slightly greater tax efficiency. The biggest benefit of ETFs is the ability to harvest tax-losses.
A note: The biggest benefits of ETFs is not lower ERs or slightly greater tax efficiency. The biggest benefit of ETFs is the ability to harvest tax-losses.
I can think of several reasons why mutual funds are better than ETFs:
1) ETFs have a bid/ask spread, and mutual funds do not.
2) You must pay a commission to purchase an ETF, but not a mutual fund.
3) You must pay a commission to sell an ETF, but not a mutual fund.
4) If you want to rebalance out of one ETF into another, you pay two commissions. (I'm not sure if you have to pay the bid/ask spread twice) So rebalancing becomes more expensive as compared to free with mutual funds.
5) To my knowledge, ETFs don't have the option of automatic reinvestment of dividends, (I could be wrong about this), but mutual funds do.
6) Because ETFs can be bought or sold instantly, there is a greater temptation to make more trades, especially in a turbulent market, whereas mutual funds force you to wait at least one business day to make a transaction, which may allow you to cool down a bit before making the decision to sell. Granted, most on this board have nerves of steel and can fight the temptation, but some don't.
7) If you want to sell an ETF and place the funds in a mutual fund, depending on the time of day when the sell is executed and when you place the order to buy the mutual fund, you may have to wait until the end of the next business day before the buy order of the mutual fund is executed, which means you are out of the market for a day or more, as compared to transferring between mutual funds, this does not happen, the funds transfer simultaneously between funds at the end of the day.
8) If you want to sell one ETF and buy another (rebalance), you have to do it during business hours. This is a very minor inconvenience, but for busy people who occasionally look at their investments on down time (like nights and weekends), it is much easier to initiate a mutual fund transfer order over the internet after hours and "set it and forget it" (to quote Ron Popiel) and the mutual fund transfer automatically takes place from one to the other at the end of the next business day with no further action required. By contrast, with an ETF to ETF transfer, you can place an order to sell after hours, but you then either have to then wait until after hours again to place another order (which means your funds sit out of the market until you get around to placing the next buy order), or, you have to monitor your account during trading hours to place the buy order for the next ETF once the sell order is executed.
1) ETFs have a bid/ask spread, and mutual funds do not.
2) You must pay a commission to purchase an ETF, but not a mutual fund.
3) You must pay a commission to sell an ETF, but not a mutual fund.
4) If you want to rebalance out of one ETF into another, you pay two commissions. (I'm not sure if you have to pay the bid/ask spread twice) So rebalancing becomes more expensive as compared to free with mutual funds.
5) To my knowledge, ETFs don't have the option of automatic reinvestment of dividends, (I could be wrong about this), but mutual funds do.
6) Because ETFs can be bought or sold instantly, there is a greater temptation to make more trades, especially in a turbulent market, whereas mutual funds force you to wait at least one business day to make a transaction, which may allow you to cool down a bit before making the decision to sell. Granted, most on this board have nerves of steel and can fight the temptation, but some don't.
7) If you want to sell an ETF and place the funds in a mutual fund, depending on the time of day when the sell is executed and when you place the order to buy the mutual fund, you may have to wait until the end of the next business day before the buy order of the mutual fund is executed, which means you are out of the market for a day or more, as compared to transferring between mutual funds, this does not happen, the funds transfer simultaneously between funds at the end of the day.
8) If you want to sell one ETF and buy another (rebalance), you have to do it during business hours. This is a very minor inconvenience, but for busy people who occasionally look at their investments on down time (like nights and weekends), it is much easier to initiate a mutual fund transfer order over the internet after hours and "set it and forget it" (to quote Ron Popiel) and the mutual fund transfer automatically takes place from one to the other at the end of the next business day with no further action required. By contrast, with an ETF to ETF transfer, you can place an order to sell after hours, but you then either have to then wait until after hours again to place another order (which means your funds sit out of the market until you get around to placing the next buy order), or, you have to monitor your account during trading hours to place the buy order for the next ETF once the sell order is executed.
- SoonerSunDevil
- Posts: 2000
- Joined: Mon Feb 19, 2007 9:32 pm
- Location: The desert
1. The spreads on many ETF's are no greater than a penny or two per share. While there isn't a visible spread on a mutual fund, the fund is going to pay the spread when it purchases these securities on the open market.mptfan wrote:I can think of several reasons why mutual funds are better than ETFs:
1) ETFs have a bid/ask spread, and mutual funds do not.
2) You must pay a commission to purchase an ETF, but not a mutual fund.
3) You must pay a commission to sell an ETF, but not a mutual fund.
4) If you want to rebalance out of one ETF into another, you pay two commissions. (I'm not sure if you have to pay the bid/ask spread twice) So rebalancing becomes more expensive as compared to free with mutual funds.
5) To my knowledge, ETFs don't have the option of automatic reinvestment of dividends, (I could be wrong about this), but mutual funds do.
6) Because ETFs can be bought or sold instantly, there is a greater temptation to make more trades, especially in a turbulent market, whereas mutual funds force you to wait at least one business day to make a transaction, which may allow you to cool down a bit before making the decision to sell. Granted, most on this board have nerves of steel and can fight the temptation, but some don't.
7) If you want to sell an ETF and place the funds in a mutual fund, depending on the time of day when the sell is executed and when you place the order to buy the mutual fund, you may have to wait until the end of the next business day before the buy order of the mutual fund is executed, which means you are out of the market for a day or more, as compared to transferring between mutual funds, this does not happen, the funds transfer simultaneously between funds at the end of the day.
2. No, you don't have to pay a commission to buy an ETF. Wells Fargo allows you to make up to 100 trades per account and per year if your combined balances in your checking, savings, brokerage, IRA, and mortgage are at least $25,000
3. See #2
4. See #2
5. Many brokers will automatically reinvest the dividends for you (free of charge).
6. Mutual funds can be sold the same day just as ETFs can. I don't see why an investor would be more inclined to sell an ETF over a mutual fund. The act is the same; you click the sell button and enter the amount/shares.
7. You can sell at ETF during the market hours, and then you can immediately use those funds to purchase a mutual fund. The order will execute the same day and you will receive the fund's NAV just like everyone else. However, settlement times vary, and you could sell your ETF on Monday, purchase a mutual fund on Monday, but be unable to sell your mutual fund until as late as Thursday (Violation of this could lead to you being labeled as a pattern day trader under NASD rules, which you could avoid by having at least $25,000 in your account).
Best Wishes,
John
John,
1) the bid/ask spread of the ETF is in addition to the bid/ask spread on the underlying stocks. So you pay TWO bid ask spreads. You only pay it once with a mutual fund.
2) Most people don't use Wells Fargo.
3) see 2.
4) see 2.
5) That's true. But I think there might be a delay in the reinvestment until the end of the business day.
6) I think there is a behavioural finance issue here that you are missing. If the market is choppy in the middle of the day, and I am thinking of selling, but I know that the mutual fund transaction won't occur until the end of the day, or possibly the end of the next day, I might think twice about pulling the trigger in a panic. And I think with some brokers, unfullfilled orders to buy or sell mutual funds can be cancelled after you cool off.
7) go back and read my edited post.
1) the bid/ask spread of the ETF is in addition to the bid/ask spread on the underlying stocks. So you pay TWO bid ask spreads. You only pay it once with a mutual fund.
2) Most people don't use Wells Fargo.
3) see 2.
4) see 2.
5) That's true. But I think there might be a delay in the reinvestment until the end of the business day.
6) I think there is a behavioural finance issue here that you are missing. If the market is choppy in the middle of the day, and I am thinking of selling, but I know that the mutual fund transaction won't occur until the end of the day, or possibly the end of the next day, I might think twice about pulling the trigger in a panic. And I think with some brokers, unfullfilled orders to buy or sell mutual funds can be cancelled after you cool off.
7) go back and read my edited post.
mptfan, those are good points.
But... doing the math leads me to conclude that ETFs are almost always cheaper than mutual funds when held for years. Spreads and commissions (which can be $0, nowadays) are one-time fees. The difference in ERs will make up that cost over time. It will take smaller amounts longer. However, the amount of time it takes still isn't too many years for amounts at fund minimum levels.
If you feel otherwise, could you contrive an example where mutual funds would be cheaper than ETFs?
(note: we're still completely ignoring the issue of tax-loss harvesting, which can save you thousands of dollars in taxes)
But... doing the math leads me to conclude that ETFs are almost always cheaper than mutual funds when held for years. Spreads and commissions (which can be $0, nowadays) are one-time fees. The difference in ERs will make up that cost over time. It will take smaller amounts longer. However, the amount of time it takes still isn't too many years for amounts at fund minimum levels.
If you feel otherwise, could you contrive an example where mutual funds would be cheaper than ETFs?
(note: we're still completely ignoring the issue of tax-loss harvesting, which can save you thousands of dollars in taxes)
Last edited by United on Wed May 16, 2007 6:16 pm, edited 1 time in total.
Another disadvantage to ETFs is that you don't have the option of buying a balanced fund with instant diversification, whereas with a mutual fund, you do. For example, Vanguard's lifestrategy funds, or the target retirement funds, or the Star fund. All of these funds offer instant diversification across many asset classes at low cost, and they offer the average investor a very easy way to get excellent low cost and low maintenance diversification with automatic rebalancing. To my knowledge, no such option is available with ETFs.
mptfan, that's a good point. I typically recommend balanced funds to hands-off investors, and index funds certainly have ETFs beat in that comparison. Even though one can simulate a balanced fund through a collection of ETFs, that completely negates the purpose of choosing a hands-off, automatically-rebalancing balanced fund.
You can harvest losses on mutual funds just as easily
If you use specific identification of lots (which you are allowed to do for mutual funds, although Vanguard won't calculate it for you), you can harvest tax losses on mutual funds just as you can on ETFs. In fact, it is less costly, because you don't pay comissions or bid-ask spreads on the shares that you sell and buy back 31 days later.United wrote:ETFs are cheaper, in general. That's why my portfolio contains entirely ETFs. I agree with the sentiment that funds vs. ETFs doesn't really matter, but the better choice seems clear and dry cut to me.
A note: The biggest benefits of ETFs is not lower ERs or slightly greater tax efficiency. The biggest benefit of ETFs is the ability to harvest tax-losses.
When you sell shares for tax-loss harvesting, you write a letter to Vanguard which says, "Please sell 100 shares purchased 2/1/06 and 500 shares purchased 3/1/06, and transfer the proceeds to my money market account." This identifies the shares for tax purposes, and since you made the sale with a letter, the frequent-trading restrictions won't block you from buying the same fund within 31 days. (Make sure that you are not reinvesting dividends in the fund, or you may have a wash sale.)
The benefit of a Vanguard ETF over the same fund is entirely in the potential for lower costs. Depending on which share class you hold and how you trade, the cost difference may be positive, insignificant, or negative. For the original poster, it appears to be insignificant, and commissions and bid-ask spreads might eat up the benefit.
- SoonerSunDevil
- Posts: 2000
- Joined: Mon Feb 19, 2007 9:32 pm
- Location: The desert
mptfan wrote:John,
1) the bid/ask spread of the ETF is in addition to the bid/ask spread on the underlying stocks. So you pay TWO bid ask spreads. You only pay it once with a mutual fund.
2) Most people don't use Wells Fargo.
3) see 2.
4) see 2.
5) That's true. But I think there might be a delay in the reinvestment until the end of the business day.
6) I think there is a behavioural finance issue here that you are missing. If the market is choppy in the middle of the day, and I am thinking of selling, but I know that the mutual fund transaction won't occur until the end of the day, or possibly the end of the next day, I might think twice about pulling the trigger in a panic. And I think with some brokers, unfullfilled orders to buy or sell mutual funds can be cancelled after you cool off.
7) go back and read my edited post.
Greetings mptfan,
1. If you're saying that I have to pay a spread to purchase an ETF and then "pay" a spread when the fund purchases the underlying securities, then I believe you're correct. I must have overlooked this fact in my earlier post.
2. Perhaps more people should use Wells Fargo. I will be transferring to WF in another month or so, and there have been a few other posters who are heading there as well. For those who think that the WF offer is a bait and switch, their PMA package used to only be available for those with $500,000 in total assets, it was later dropped to $250,000, and now it's only $25,000.
3. See #2
4. See #3
5. Yes, dividends aren't posted the same day for ETF's or funds. There are three dividend dates; record date, ex-dividend date, and payable date for ETF's and mutual funds. This point is moot.
6. If you place a sell order on a mutual fund at noon EST, then you will get your order executed at the end of the day as opposed to that moment with an ETF. I don't see much of a difference here, but I'm not a trader. Perhaps you have a point with respect to the "trading bug" that some "investors" will get.
7. You can't cancel your mutual fund order with Vanguard if you place it online. There's a thread somewhere around here that talks at length about that pesky problem with Vanguard.
Cordially,
John
That doesn't concur with my recent experience.OUJohnNasr wrote:7. You can sell at ETF during the market hours, and then you can immediately use those funds to purchase a mutual fund. The order will execute the same day and you will receive the fund's NAV just like everyone else. However, settlement times vary, and you could sell your ETF on Monday, purchase a mutual fund on Monday, but be unable to sell your mutual fund until as late as Thursday (Violation of this could lead to you being labeled as a pattern day trader under NASD rules, which you could avoid by having at least $25,000 in your account).
I have decided to move my rollover IRA (which was invested in ETF's) to Vanguard and invest in mutual funds. I didn't want to be out of the market so I decided to transfer it to Vanguard 'in-kind' but I also didn't want to open a brokerage account at Vanguard so I decided I would sell the ETFs and buy a Vanguard mutual fund.
That way, if it took them weeks to make the transfer at least I was still in the market.
That was the plan.
After I sold the ETFs I found that I cannot buy a mutual fund with unsettled funds. I can buy more ETFs and I can buy stocks but I cannot buy mutual funds. So I have to wait for it to settle first.
Re: You can harvest losses on mutual funds just as easily
One disadvantage of using a letter to make the sale is that it can take several days before the sale completes so you have less control over the price. This is especially important if you are attempting to harvest losses. You could use an overnight letter, but then that is like paying a commission.grabiner wrote: When you sell shares for tax-loss harvesting, you write a letter to Vanguard which says, "Please sell 100 shares purchased 2/1/06 and 500 shares purchased 3/1/06, and transfer the proceeds to my money market account." This identifies the shares for tax purposes, and since you made the sale with a letter, the frequent-trading restrictions won't block you from buying the same fund within 31 days. (Make sure that you are not reinvesting dividends in the fund, or you may have a wash sale.)
Is it possible to sell shares online and send Vanguard a letter the same day that merely indicates which shares you just sold? Would Vanguard accept that? It seems to be a silly IRS rule anyway because I have never heard of the IRS verifying your transactions with the mutual fund. It doesn't show up on the 1099B. The IRS simply relies on your own record keeping for lot identification.
- SoonerSunDevil
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Hi Malachi,Malachi wrote:That doesn't concur with my recent experience.OUJohnNasr wrote:7. You can sell at ETF during the market hours, and then you can immediately use those funds to purchase a mutual fund. The order will execute the same day and you will receive the fund's NAV just like everyone else. However, settlement times vary, and you could sell your ETF on Monday, purchase a mutual fund on Monday, but be unable to sell your mutual fund until as late as Thursday (Violation of this could lead to you being labeled as a pattern day trader under NASD rules, which you could avoid by having at least $25,000 in your account).
I have decided to move my rollover IRA (which was invested in ETF's) to Vanguard and invest in mutual funds. I didn't want to be out of the market so I decided to transfer it to Vanguard 'in-kind' but I also didn't want to open a brokerage account at Vanguard so I decided I would sell the ETFs and buy a Vanguard mutual fund.
That way, if it took them weeks to make the transfer at least I was still in the market.
That was the plan.
After I sold the ETFs I found that I cannot buy a mutual fund with unsettled funds. I can buy more ETFs and I can buy stocks but I cannot buy mutual funds. So I have to wait for it to settle first.
Perhaps Vanguard doesn't allow investors to do this. When I interned for Scottrade a few years ago, this was allowed with any type of investment. If an investor buys 100 shares of ABC on Monday, and sells 100 shares of ABC on Monday, then the investor may use the proceeds of that sale to purchase a different security, but the new security must be held until the original transaction (100 shares of ABC) has settled. Some mutual funds settle in one business day, most take three. I've never seen any stocks settle in anything under three business days.
Thanks for sharing your experience.
John
Interesting because my rollover IRA is currently with Scottrade. They're the ones who won't let me buy a mutual fund with unsettled cash.OUJohnNasr wrote:Hi Malachi,
Perhaps Vanguard doesn't allow investors to do this. When I interned for Scottrade a few years ago, this was allowed with any type of investment. If an investor buys 100 shares of ABC on Monday, and sells 100 shares of ABC on Monday, then the investor may use the proceeds of that sale to purchase a different security, but the new security must be held until the original transaction (100 shares of ABC) has settled. Some mutual funds settle in one business day, most take three. I've never seen any stocks settle in anything under three business days.
Thanks for sharing your experience.
John
Like I said, I can buy stocks and ETFs just not mutual funds. When I go to the Mutual Fund Order Entry it shows, "Funds Available for CDs, Bonds, & Mutual Funds Purchases," and those funds do not include my unsettled cash.
Perhaps that was a benefit of being an intern there?
- SoonerSunDevil
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Do you have a cash or a margin account? The only reason I could think of that they wouldn't let you purchase a mutual fund is that you have a cash account and not a margin account. Although things may have changed since I worked there (a little over three years ago).Malachi wrote:Interesting because my rollover IRA is currently with Scottrade. They're the ones who won't let me buy a mutual fund with unsettled cash.OUJohnNasr wrote:Hi Malachi,
Perhaps Vanguard doesn't allow investors to do this. When I interned for Scottrade a few years ago, this was allowed with any type of investment. If an investor buys 100 shares of ABC on Monday, and sells 100 shares of ABC on Monday, then the investor may use the proceeds of that sale to purchase a different security, but the new security must be held until the original transaction (100 shares of ABC) has settled. Some mutual funds settle in one business day, most take three. I've never seen any stocks settle in anything under three business days.
Thanks for sharing your experience.
John
Like I said, I can buy stocks and ETFs just not mutual funds. When I go to the Mutual Fund Order Entry it shows, "Funds Available for CDs, Bonds, & Mutual Funds Purchases," and those funds do not include my unsettled cash.
Perhaps that was a benefit of being an intern there?
As far as me getting benefits for being an intern, not hardly. I got paid a paltry $7.50 an hour, but I learned how to file papers in the back room when I wasn't answering phones telling people how to log on to their online accounts.
John
Actually, yes, it is a cash account. I bet that's the explanation.OUJohnNasr wrote:Do you have a cash or a margin account? The only reason I could think of that they wouldn't let you purchase a mutual fund is that you have a cash account and not a margin account. Although things may have changed since I worked there (a little over three years ago).
I know what you mean!As far as me getting benefits for being an intern, not hardly. I got paid a paltry $7.50 an hour, but I learned how to file papers in the back room when I wasn't answering phones telling people how to log on to their online accounts.
Er, $130 -- seriously?
My guess is you can save more than that by eating out less, or getting 1 less cable channel
Don't overanalyze, any of the 3 options you listed originally are probably fine.
Don't overanalyze, any of the 3 options you listed originally are probably fine.
Specific lot sales
I asked Vanguard about this issue a few years ago. IIRC they said you can transact online and then call them after the transaction that day to specify shares. Haven't had a chance to test this out yet.Jack wrote: Is it possible to sell shares online and send Vanguard a letter the same day that merely indicates which shares you just sold? Would Vanguard accept that? It seems to be a silly IRS rule anyway because I have never heard of the IRS verifying your transactions with the mutual fund. It doesn't show up on the 1099B. The IRS simply relies on your own record keeping for lot identification.
Oh, hey, I found the E-mail response from 2001.
I knew it was a good idea to print that email out and store it in a binder...Vanguard wrote: If you wish to sell your shares via Access Vanguard to take advantage of the lower commission and still wish to have a "versus purchase" included on your confirmation statement, please call a VBS Client Service Associate at 1-800-xxx-xxxx prior to the settlement date of the sale. Most domestic stocks, bonds, and ADRs settle on the third business day after the trade date.
Please provide the following information to the Client Service Associate:
Your VBS account number.
Your Social Security number.
The date of the original purchase.
The date of the sale.
Apparently things have changed. Upon further investigation I discovered this in the fine print concerning the purchase of mutual funds: "Note: Your account must show cleared funds and settled positions prior to placing your trade. All mutual fund purchases must be paid for from a cash position and may not be bought on margin."OUJohnNasr wrote:Do you have a cash or a margin account? The only reason I could think of that they wouldn't let you purchase a mutual fund is that you have a cash account and not a margin account. Although things may have changed since I worked there (a little over three years ago).
Just FYI.
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Re: Why not ETF's, if the expenses are lower?
What happens if there is a bad stock market crash, and mass redemption of ETFs?Fclevz wrote:Why not ETF's, if the expenses are lower?
So I guess my question is this; If your portfolio is large enough to where ETF's are at a cost advantage - even after all expenses - why would one not go with ETF's, rather than funds?
Cheers,
Fred
In the mutual fund case, Vanguard simply halts redemptions. It has the power to do that, I believe, if it will significantly harm remaining investors in the fund.
(the analogy I make is Franklin Roosevelt closing the banks. This was a key step in stopping the downward spiral the US economy was in at the time)
Can an ETF issuer do the same thing?
I worry about whether Hedge Funds are using ETFs in some of their more complex and highly leverage strategies. An additional force for volatility.
Remember, the UK stock market fell by 90% 1972-73. So near complete market collapse, even in a highly developed country with a 200 year history of stock market trading, is not impossible.
Speaking hypothetically, the morning the Al Quaida detonates a tactical nuclear device in London or New York will not be a good one for stock markets. (several experts have called the probability of AQ obtaining a 'loose nuke' as 'likely'). It won't be the end of the world (although I'll be dead, so it'll be the end of my world ) in the sense that the economy will recover and life will go on.
Fundamentally one holds stocks as a way, using the legal form of a limited liability stockholder owned company, to own a share of the future residual cash flows of an enterprise. It seems to me a mutual fund is a well-established and tested way of doing that. We know what will happen in extreme market circumstances.
One's responsibility to one's family (and one's self) is to make sure the form of ownership will sustain, even through catastrophe. Even for those Jews who escaped central Europe before the Holocaust, retention of proof of ownership has led to compensation (50 or more years later).
I own ETFs, so I am obviously not over worried about the problem, but they are not the majority of my portfolio, which is primarily mutual funds.
Distributions work pretty much the same way as mutual funds. If you elect to reinvest, you get partial shares added to your balance and there are no transaction fees.Pacific wrote:If you have ETFs in your retirement account, what happens when you have to take distributions? Are you charged each time you do this?
Si, that's an incomplete answer. That only applies if you limit yourself to taking dividends as distributions. Considering that the average dividend yield for U.S. stocks is about 1 to 2%, if you can live off of that, then terrific, you are doing very well. But most people need to withdraw more than 2% of their holdings each year in retirement, which means selling shares, which means transaction fees every time you sell.
ETF's vs. Mutual Funds
I just found an excellent comparison tool on the Vanguard site.
It compares a fund versus its equivalent ETF to see which is a better value for you. It calculates in expenses, brokerage commissions, and even spreads!
Bob
It compares a fund versus its equivalent ETF to see which is a better value for you. It calculates in expenses, brokerage commissions, and even spreads!
Bob
Re: ETF's vs. Mutual Funds
Great find, CyberBob. I was just reading this thread and wondering how much time it was going to take me to figure out which was the better option in my situation!CyberBob wrote:I just found an excellent comparison tool on the Vanguard site.
It compares a fund versus its equivalent ETF to see which is a better value for you. It calculates in expenses, brokerage commissions, and even spreads!
Bob
- SoonerSunDevil
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Greetings Malachi,Malachi wrote:Apparently things have changed. Upon further investigation I discovered this in the fine print concerning the purchase of mutual funds: "Note: Your account must show cleared funds and settled positions prior to placing your trade. All mutual fund purchases must be paid for from a cash position and may not be bought on margin."OUJohnNasr wrote:Do you have a cash or a margin account? The only reason I could think of that they wouldn't let you purchase a mutual fund is that you have a cash account and not a margin account. Although things may have changed since I worked there (a little over three years ago).
Just FYI.
Thanks for the info regarding Scottrade and their "new" mutual fund policy with respect to settled funds. I don't know when they implemented this policy, but it was obviously after I left the company.
I'm thinking that mutual funds can not be bought on margin at Scottrade and this is why they don't allow mutual funds to be purchased with unsettled funds, but of course, I could be wrong on that account as well.
Thanks again!
John