Mutual fund or ETF?

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Callalily
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Mutual fund or ETF?

Post by Callalily »

With Vanguard now offering commission-free ETFs, would it be a good idea to buy ETFs rather than mutual funds if it's in a Roth IRA?
rustymutt
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Post by rustymutt »

After Vanguards announcementnt yesterday, I'll be using ETF's when the asset class I need is availablele there.
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Post by georgewatkins »

Callalily,

I suggest that you check out the Wiki Page on ETFs. There are several good articles and resources under the "ETF vs. Mutual Funds" heading.

Yesterday's announcement from Vanguard certainly changes the cost equation for many index investors, but switching to ETFs isn't a no-brainer for everyone, as there are many factors involved.

-George
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nisiprius
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Re: Mutual fund or ETF?

Post by nisiprius »

Callalily wrote:With Vanguard now offering commission-free ETFs, would it be a good idea to buy ETFs rather than mutual funds if it's in a Roth IRA?
No other financial decision you make this year will be less important. :)

It's less important than telling the cashier whether to run your ATM card as credit or debit.

Shorter ticker symbols would be a good enough reason to switch to ETFs. Already knowing the five-letter mutual fund symbols would be a good enough reason to stick with mutual funds.

You can save more money by switching from Starbucks to Dunkin' Donuts than by switching from VTSMX to VTI. (Don't trust me on that, do your own math using your own account size, your own coffee-drinking habits, and your own thirty-year forecasts of stock market returns and coffee cost).

If you already know you prefer ETFs for whatever reason, Vanguard has done a nice little thing. As a newsworthy business move, it's right up there with Buick announcing its 2011 paint colors. Pretty interesting--to Vanguard or Buick fans, respectively.

(I prefer mutual funds for completely silly reasons. I could change my mind tomorrow. And change it back the day after. 1) I'm used to them. 2) I like being able to buy or sell arbitrary dollar amounts to the penny (ETFs need to be bought or sold in whole numbers of shares). 3) I like being able to set up automatic monthly withdrawals, purchases and exchanges, not possible with ETFs. 4) The idea that it matters if I place the order at 11 a.m. rather than 10 a.m. weirds me out. 5) The idea that the market price could even be slightly different from the NAV weirds me out. 6) The idea that when I want my dough I have to find someone who wants to buy my shares, rather than selling "to" a fund manager who keeps cash around for just that purpose, weirds me out. Reasons 4, 5, and 6 are especially silly, by the way, just handy rationalizations for what I want to do anyway.)
Last edited by nisiprius on Wed May 05, 2010 9:23 am, edited 2 times in total.
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livesoft
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Post by livesoft »

^nisiprius's words should be at the preface of the wiki page on ETFs. :)

But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
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G-Money
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Re: Mutual fund or ETF?

Post by G-Money »

nisiprius wrote:5) The idea that the market price could even be slightly different from the NAV weirds me out. 6) The idea that when I want my dough I have to find someone who wants to buy my shares, rather than selling "to" a fund manager who keeps cash around for just that purpose, weirds me out. Reasons 4, 5, and 6 are especially silly, by the way, just handy rationalizations for what I want to do anyway.)
I don't think #5 and 6 are silly at all.

ETFs are viewed as nearly identical to mutual funds because the bid/ask spreads are low. That's all well and good, but there is no guarantee that the spreads will always be low, or, more importantly, that the spreads will be low when I need to buy and sell. ETF investors are thus doubly subjected to market forces, first at the NAV level (the value of the underlying securities), and again at the ETF level.

I understand that that authorized participants act as arbitrageurs (is there a cooler word in the English language?) and thus far have helped keep the spreads low, at least on the more popular ETFs. But ETFs as an investment vehicle have only been around since 1993, so I'd like to see a slightly longer track record before I jump in with both feet.

My $0.02.
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Post by Doc »

livesoft wrote:^nisiprius's words should be at the preface of the wiki page on ETFs. :)

But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"?

Regards,

Old Doc
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Post by Random Poster »

I don't pretend to understand all of the distinctions, but I seem to recall Vanguard having a little summary of "whether an ETF is right for you," which compared ETFs to its Index funds.

The big difference (and the determinative factor) to me is that ETFs were not advantageous for those who like to dollar cost average or do regular periodic investments (whatever your term of choice may be). As I do like to do such things, I'll stick with the index funds.

Plus, as nisiprius notes, the fact that the price of the ETF changes throughout the day is something that I can't handle. I prefer to just put my money in every few days and be isolated from the hourly gyrations of the market. It is much easier for me to handle that way.
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Post by Live Free or Diehard »

Doc wrote:
livesoft wrote:^nisiprius's words should be at the preface of the wiki page on ETFs. :)

But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"?
All Vanguard Mutual Fund symbols are of the form ****X, where each * is replaced with a letter (at least the Investor shares are; and I think the Admiral shares are. I'm not sure about Signal and Institutional Shares).

You could say all Vanguard Mutual Fund Symbols are of the form V***X, where each * is replaced with a letter; with the exception of the Small-cap Index fund (NAESX). So, with Vanguard Mutual Funds you only have to memorize 3-letters, plus V and X; and the exception to the rule (NAESX).

Also, some of Vangaurds ETFs are 4-letters now (like VGSH, VMBS, VCSH, VCIT and VGIT). Some of the ETFs are only 2-letters (like VV, VO, VB and VT). So, the memorization rules for ETFs are not so simple.
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Post by nisiprius »

Doc wrote:
livesoft wrote:as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"?
The "X" at the end of every mutual fund ticker symbol, e.g. VFSUX, MRFIX, INSEX, NOBOX, NOFIX, NOMIX, NOTAX, RELAX, etc. :)
Last edited by nisiprius on Wed May 05, 2010 10:48 am, edited 2 times in total.
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theduke
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Post by theduke »

I believe in the KISS principle and that is to stay with mutual funds. I think the ease of the ETF's will probably encourage more market timing. People will think they have a better idea :idea:
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Post by livesoft »

Who cares if other people practice market timing with ETFs? Why does it matter what other people do?
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Post by GammaPoint »

Random Poster wrote: The big difference (and the determinative factor) to me is that ETFs were not advantageous for those who like to dollar cost average or do regular periodic investments (whatever your term of choice may be). As I do like to do such things, I'll stick with the index funds.
Just to be clear for those who might be reading, you can certainly dollar cost average into ETFs. At Vanguard now you would get free trades into Vanguard ETFs so you could dollar cost average freely, and of course WellsTrade gives you 100 free trades/year, so again you could easily DCA even every week if you wanted to.

I currently DCA into ETFs with purchase prices often below $100 (1-2 shares).
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Post by livesoft »

^To be fair, I do not believe that you can set up an automatic investment of $100/$250/$500 a week/month/whatever because you cannot usually purchase fractional shares in an ETF via this method. In this sense, a straight-up mutual fund is more automated.
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Post by GammaPoint »

livesoft wrote:^To be fair, I do not believe that you can set up an automatic investment of $100/$250/$500 a week/month/whatever because you cannot usually purchase fractional shares in an ETF via this method. In this sense, a straight-up mutual fund is more automated.
Okay yeah, that's true. If you really want to put in exactly $100 each month and the price of the ETF fluctuates between $60-$100, you're not going to be buying more shares when the price is lower because you'll always be buying 1.

And for many people, the fact that the transaction happens automatically and they don't have to log on and make an order might be all the difference.
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Post by Doc »

Doc wrote:
livesoft wrote:^nisiprius's words should be at the preface of the wiki page on ETFs. :)

But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"?

Regards,

Old Doc
Ah, Live Free or Diehard and nisiprius,

Perhaps you guys missed my sign off in the prior post:

Old Doc :lol:
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Post by DSInvestor »

I think ETF shares are attractive for those interested in mutual funds that may charge purchase and redemption fees such as Emerging Markets (VEIEX), FTSE All World ex-US small cap (VFSVX). For these funds, you'd save not only the difference in expense ratio but also the 0.25-0.75% purchase fees and redemption fees.

Emerging Markets VEIEX has er=0.40%, purchase fee=0.50%, redemption fee=0.25%
https://personal.vanguard.com/us/funds/ ... IntExt=INT

FTSE All World ex-US small cap VFSVX has er=0.63%, purchase fee=0.75%, redemption fee=0.75%
https://personal.vanguard.com/us/funds/ ... IntExt=INT

ETF shares held at a brokerage will typically offer support for specific share identification to give maximum control of capital gains. This could be a big advantage for those with investments in taxable accounts.
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Post by RobertAlanK »

nisiprius wrote:
Doc wrote:
livesoft wrote:as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"?
The "X" at the end of every mutual fund ticker symbol, e.g. VFSUX, MRFIX, INSEX, NOBOX, NOFIX, NOMIX, NOTAX, RELAX, etc. :)
This thread has brightened my day. Thanks, nisiprius for some inspired silliness.

And someone mentioned NAESX. What's up with that? Does anyone else think it's adopted?
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Post by DSInvestor »

RobertAlanK wrote:And someone mentioned NAESX. What's up with that? Does anyone else think it's adopted?
Barry has the answer here:
http://www.bogleheads.org/forum/viewtopic.php?p=447384
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Post by nisiprius »

livesoft wrote:^To be fair, I do not believe that you can set up an automatic investment of $100/$250/$500 a week/month/whatever because you cannot usually purchase fractional shares in an ETF via this method. In this sense, a straight-up mutual fund is more automated.
Actually I called Vanguard to check. No fractional shares. And, as I thought, no automatic investment of any kind, whether it be purchases, sales, or exchanges. And they say also note that in their presentation Are ETFs Right for You?

And it's not just an issue of transacting whole numbers of shares, because that's one of the four possible options for automatic mutual fund transactions.

Image

If you can automatically purchase 10 shares of VTSMX a month, why can't you automatically purchase 10 shares of VTI a month? I think it just confirms my impression of whose uses what. Mutual fund customers are long-term savers, ETF customers are short-term traders.
Doc wrote:
Doc wrote:
livesoft wrote:But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"? Regards, Old Doc
Ah, Live Free or Diehard and nisiprius, Perhaps you guys missed my sign off in the prior post: Old Doc :lol:
You'd better explain, O Venerable One. Was there a time, known in the lore of the ancients, when it was otherwise? And when did the X appear? Oh, please please tell me it was in the year MCMLX!
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Post by Opponent Process »

livesoft wrote:But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
being required to remember the extra letter could help stave off dementia.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
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Post by theduke »

livesoft wrote:Who cares if other people practice market timing with ETFs? Why does it matter what other people do?
I thought this site was people helping other people.
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Post by livesoft »

This site does help other people with suggestions. One way to help would be to have perfect market timing suggestions.
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Post by Live Free or Diehard »

DSInvestor wrote:I think ETF shares are attractive for those interested in mutual funds that may charge purchase and redemption fees such as Emerging Markets (VEIEX), FTSE All World ex-US small cap (VFSVX). For these funds, you'd save not only the difference in expense ratio but also the 0.25-0.75% purchase fees and redemption fees.

Emerging Markets VEIEX has er=0.40%, purchase fee=0.50%, redemption fee=0.25%
https://personal.vanguard.com/us/funds/ ... IntExt=INT

FTSE All World ex-US small cap VFSVX has er=0.63%, purchase fee=0.75%, redemption fee=0.75%
https://personal.vanguard.com/us/funds/ ... IntExt=INT

ETF shares held at a brokerage will typically offer support for specific share identification to give maximum control of capital gains. This could be a big advantage for those with investments in taxable accounts.
Also, Tax-managed International VTMGX has er=.20%, redemption fee=1% if held less than 5 yrs
https://personal.vanguard.com/us/funds/ ... IntExt=INT
If you buy the ETF version (VEA) you can get around the 5 yr holding period and lower your er to .15%.
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Re: Mutual fund or ETF?

Post by tarnation »

nisiprius wrote:
You can save more money by switching from Starbucks to Dunkin' Donuts than by switching from VTSMX to VTI. (Don't trust me on that, do your own math using your own account size, your own coffee-drinking habits, and your own thirty-year forecasts of stock market returns and coffee cost).
I already minimize coffee cost by drinking at home and hedge my coffee risk with the ETF JO http://www.google.com/finance?q=JO
So does that mean I get a free 11 bps/yr? :)
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Post by tarnation »

nisiprius wrote:
livesoft wrote:^To be fair, I do not believe that you can set up an automatic investment of $100/$250/$500 a week/month/whatever because you cannot usually purchase fractional shares in an ETF via this method. In this sense, a straight-up mutual fund is more automated.
Actually I called Vanguard to check. No fractional shares. [/url]
You can however get fractional shares if you convert. For those who like periodic investments, they could always accumulate in mutual fund share classes and convert when it gets to be a larger lump. The downside is entering in the costs basis for each lot.
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Post by 1210sda »

As with anything in life.....stuff happens and change occurs.

With ETF's you can't do auto investing......"So Far" as Homer Simpson would say.

1210
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Post by burnsh »

I have been pondering this question myself as I am contemplating moving my ROTH IRA to Vanguard. My situation is as follows, I intend to DCA and deposit $100.00 bi-weekly into my ROTH IRA, and I am planning to allocate my money among five or six categories. My ROTH IRA has a balance of approximately $35,000.00. I also have a TSP with approximately $27,000.00 with the following allocation: 40% C Fund, 24% I Fund, 16% S Fund, 10% F Fund, and 10% G Fund. I intend on using similar funds and allocations for simplicity purpose. My questions are as follows:

1. If I go with Mutual Funds, do I have to choose only one fund for that $100.00 deposit to go to and then do a fund transfer as that one grows out of proportion? Or change with frequency which fund the money is going into to rebalance with new deposits? Or can I split the $100.00 deposit into percentages going into all the different mutual funds? (like in a TSP account)

2. If I choose ETF's, do I have the deposits go into a cash account, and then make the purchases monthly or quarterly and choose which ETF to buy to rebalance based on my desired asset allocation?

I would prefer the "TSP" option for simplicity, but if I understand correctly, it cannot be done, as each fund requires a minimum $100 deposit.

Any ideas or suggestions?

Thanks

HMB
Last edited by burnsh on Wed May 05, 2010 3:17 pm, edited 1 time in total.
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Post by DSInvestor »

burnsh, I used to make all my SEP-IRA contributions into a money market fund and then use exchanges from MMF into other funds within the SEP-IRA. The exchanges can be done manually or they can be automated. I suppose you could use a similar strategy with your Roth IRA account.

How big is your Roth IRA account? Keep in mind that Vanguard has a 3K minimum for most mutual funds. Do you need to hold 6 holdings in the Roth? If you have a TSP at work, you could use to the Roth IRA to hold things that may not be available in TSP. You should consider all your accounts as a unified portfolio.

If you're willing to post a little more information about your current portfolio, you may get some better suggestions:
http://www.bogleheads.org/forum/viewtopic.php?t=6212
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Post by GammaPoint »

nisiprius wrote:Actually I called Vanguard to check. No fractional shares.

But you do get fractional shares if you do automatic reinvestment correct?
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Post by DSInvestor »

GammaPoint wrote:
nisiprius wrote:Actually I called Vanguard to check. No fractional shares.

But you do get fractional shares if you do automatic reinvestment correct?
Yes, you will receive fractional shares for reinvested dividends. This is true for ETFs and for individual stocks. Check with your brokerage firm to make sure they support dividend reinvestment of your ETF shares.
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Post by burnsh »

Thanks DSInvestor, I update some stuff on my initial post.
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Post by Visitor »

tarnation wrote:
nisiprius wrote:
livesoft wrote:^To be fair, I do not believe that you can set up an automatic investment of $100/$250/$500 a week/month/whatever because you cannot usually purchase fractional shares in an ETF via this method. In this sense, a straight-up mutual fund is more automated.
Actually I called Vanguard to check. No fractional shares. [/url]
You can however get fractional shares if you convert. For those who like periodic investments, they could always accumulate in mutual fund share classes and convert when it gets to be a larger lump. The downside is entering in the costs basis for each lot.
This isn't a problem if assets are in a tax-deferred account however, so no downside there. I plan to utilize this strategy for my ROTH IRA assets.
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Post by burnsh »

I called Vanguard and got the answer I wanted. Even though additional investments of mutual funds require a $100.00 deposit, if you sign up for the automatic investment plan you can contribute as little as $1.00 per deposit, making it a lot easir to allocate different small amounts through different funds. Mutual Funds win!
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Newbie

Post by lostyankee »

So without the commission fee, what would the advantage be of an open end index mutual fund vs the ETF? The expenses are lower in the ETF, what am I missing? I'm a newbie investor, sure I'm missing something.
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Re: Newbie

Post by GammaPoint »

lostyankee wrote:So without the commission fee, what would the advantage be of an open end index mutual fund vs the ETF? The expenses are lower in the ETF, what am I missing? I'm a newbie investor, sure I'm missing something.
Check out what others have posted in this thread before you to see what some opinions are.
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Post by Doc »

nisiprius wrote:
Doc wrote:
Doc wrote:
livesoft wrote:But they also suggest that as we age, we should prefer ETFs because 3-letters is easier to remember than 4-letters plus an X.
What "X"? Regards, Old Doc
Ah, Live Free or Diehard and nisiprius, Perhaps you guys missed my sign off in the prior post: Old Doc :lol:
You'd better explain, O Venerable One. Was there a time, known in the lore of the ancients, when it was otherwise? And when did the X appear? Oh, please please tell me it was in the year MCMLX!
Ok Nisiprius, by the numbers, but it loses a lot that way.

1) "as we age"
2) "3-letters is easier to remember"
3) "what "X"?"
4) "Old Doc"

Conclusion easily reached by persons not looking for deep financial wisdom all the time (or even Roman lore): Doc is too old to even remember the "X". :wink:

Oh, I get it "nisi prius". Latin. You are involved in dead languages. Unless you were a trial attorney in a prior life.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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