VG Mutual Fund vs VG ETF: Same ER, Which Is Better? Why?

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tripleb
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VG Mutual Fund vs VG ETF: Same ER, Which Is Better? Why?

Post by tripleb »

My two primary equity holdings are VG TSM and VG Total International Equity admiral shares funds. I noticed today that the ETFs have the same ERs as the admiral funds.

Given that the costs are the same, is there any benefit to using one or the other? I am currently using 100% tax deferred space as I have $0 in taxable savings.

Here are some thoughts points I have. Others please add your own.

1) The mutual fund may be "safer" or more stable than the ETF. Since ETFs fluctuate in price throughout the day, whereas mutual funds only adjust once per day, in the event of a black swan event that causes massive redemptions, the Mutual Fund may be safer.

The only example I can think of might be if a nuclear bomb drops and 50% of the fund holders decide to redeem their money by turning in units/blocks of the ETF. The ETF may have to liquidate underlying holdings to get the cash as the fund self-dissolves. Imagine that 2 hours later, it's revealed the nuclear bomb was really just an accident, and not WW3. People buy back the stocks, and the ETF is forced to recreate new units/blocks of shares.

Whereas the mutual fund would wait until the end of the day, and net out the deals and have less movements to make, and be more stable. Then again, I am not sure how "linked" the ETF is to the Mutual Fund, and it could be that any problems in the ETF are immediately transferred to the Fund too if they pool their underlying assets and holdings.

2) The ETFs trade on a spread. You may have to pay slightly more than it's worth to buy the ETF. Or you might get to pay a slight discount. Depending on the ETF, it may fluctuate back and forth.

3) If using a taxable account, the ETFs may be better. I keep hearing about VG changing their fund redemption/tracking tools because they have historically been very poor. With ETFs, I imagine it's much easier for someone in a taxable account to track blocks of shares sold for tax purposes and really get to decide on their own what they are selling.

I believe this would empower an investor to avoid having to choose LIFO or FIFO in mutual fund sales, and instead get to change his mind at any time what is the best stock block to sell depending on circumstances at that time.

My conclusion is for my personal situation, I should keep my IRA money in the admiral funds, because there's no compelling reason to change to the ETF.

However, when I eventually exceed my annual contribution limits (of 401k/IRA/i-Bonds, etc) and still have taxable money to save, I should do so in VG ETFs, commission free, within the VG Brokerage account so that I can have greater control over tax liability on sale.
wakeboardermike
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Re: VG Mutual Fund vs VG ETF: Same ER, Which Is Better? Why?

Post by wakeboardermike »

tripleb wrote:
1) The mutual fund may be "safer" or more stable than the ETF. Since ETFs fluctuate in price throughout the day, whereas mutual funds only adjust once per day, in the event of a black swan event that causes massive redemptions, the Mutual Fund may be safer.

The only example I can think of might be if a nuclear bomb drops and 50% of the fund holders decide to redeem their money by turning in units/blocks of the ETF. The ETF may have to liquidate underlying holdings to get the cash as the fund self-dissolves. Imagine that 2 hours later, it's revealed the nuclear bomb was really just an accident, and not WW3. People buy back the stocks, and the ETF is forced to recreate new units/blocks of shares.

Whereas the mutual fund would wait until the end of the day, and net out the deals and have less movements to make, and be more stable. Then again, I am not sure how "linked" the ETF is to the Mutual Fund, and it could be that any problems in the ETF are immediately transferred to the Fund too if they pool their underlying assets and holdings.
APs would engage is arbitrage and the value of the ETF would become close to the NAV, not a huge problem. Especially in a ETF with a high volume trading.

tripleb wrote: 2) The ETFs trade on a spread. You may have to pay slightly more than it's worth to buy the ETF. Or you might get to pay a slight discount. Depending on the ETF, it may fluctuate back and forth.
Correct

tripleb wrote: 3) If using a taxable account, the ETFs may be better. I keep hearing about VG changing their fund redemption/tracking tools because they have historically been very poor. With ETFs, I imagine it's much easier for someone in a taxable account to track blocks of shares sold for tax purposes and really get to decide on their own what they are selling.

I believe this would empower an investor to avoid having to choose LIFO or FIFO in mutual fund sales, and instead get to change his mind at any time what is the best stock block to sell depending on circumstances at that time.

My conclusion is for my personal situation, I should keep my IRA money in the admiral funds, because there's no compelling reason to change to the ETF.

However, when I eventually exceed my annual contribution limits (of 401k/IRA/i-Bonds, etc) and still have taxable money to save, I should do so in VG ETFs, commission free, within the VG Brokerage account so that I can have greater control over tax liability on sale.
VG ETFs are just another asset class to the mutual funds, they are the same you just hold them differently, get charged a spread, and pay brokerage fees. Generally you get ETFs because they have a lower ER, if they are the same then most people would say to go with the mutual fund.
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TrustNoOne
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Post by TrustNoOne »

The tracking error (diff between ETF market price and fund NAV) can become rather large at times. Such was the case in late 2008 with many of the bond ETFs. It eventually corrected, but either made at bad time even worse, or presented a buying opportunity depending on your circumstances.

I use the Vanguard ETFs since most of my money is at Fidelity and their competiring funds are not as good.
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nisiprius
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Post by nisiprius »

Read this admirably concise summary, originally authored by livesoft, on ETFs vs Mutual Funds.

It mostly boils down to personal taste. Anybody who says it's a great big deal is blowing smoke. It's like arguing about which is better, beer in bottles or beer in cans.

"Hands-on" investors who like having more control, like placing orders in real time during market hours, and think they may sometimes be able eke out a small advantage by doing so, tend to prefer ETFs.

Lazy investors like me who don't care much, prefer to place their orders when convenient, don't want to watch the ticker during the day, like to use "automatic" purchases/withdrawals/exchanges, tend to prefer traditional mutual funds.
Last edited by nisiprius on Thu Aug 04, 2011 9:53 am, edited 1 time in total.
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JimHalpert
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Post by JimHalpert »

there is no doubt that mutual funds are better than etf's (may 6, 2010) but, putting all the disadvantages aside, even if they were an equal investment i'd still go with the mutual funds for a very simple reason...

by virtue of being on this board the members have an above average interest and knowledge of investments. however, half of us will die before our spouse. how knowledgeable is your spouse? during the withdrawal phase lets say they need $1,000 a month. would they best be served by withdrawing $1,000 a month from the mutual fund - even setting this up to happen automaically OR do they want to figure out how many shares of the etf to sell to equal $1,000, decide on the tax lot, and set up the appropriate sell limits (may 6, 2010)? i think i know which of the above is preferable for the individual who has no interest in financial matters.
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Taylor Larimore
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Mutual funds or ETFs ?

Post by Taylor Larimore »

I agree with nisiprius; especially his way with words:
Anybody who says it's a great big deal is blowing smoke. It's like arguing about which is better, beer in bottles or beer in cans.
Be sure to use his link to our WIKI.
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gkaplan
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Post by gkaplan »

Beer is better in bottles than in cans.
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Doc
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Post by Doc »

gkaplan wrote:Beer is better in bottles than in cans.
It's even written on the stone tablets.
livesoft
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Post by livesoft »

JimHalpert wrote:there is no doubt that mutual funds are better than etf's (may 6, 2010) but, ....
You have written this many times, but I made money on May 6, 2010 because I was able to buy ETF shares at a substantial discount during the 15 minute flash crash that no mutual fund investor could have done. In the face of that fact I can write there is no doubt that ETFs are better than mutual funds.

Anyways, the flash crash may be your reason to avoid ETFs, but it is one of my reasons to embrace ETFs. Go figure.
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nisiprius
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Post by nisiprius »

livesoft wrote:
JimHalpert wrote:there is no doubt that mutual funds are better than etf's (may 6, 2010) but, ....
You have written this many times, but I made money on May 6, 2010 because I was able to buy ETF shares at a substantial discount during the 15 minute flash crash that no mutual fund investor could have done. In the face of that fact I can write there is no doubt that ETFs are better than mutual funds.

Anyways, the flash crash may be your reason to avoid ETFs, but it is one of my reasons to embrace ETFs. Go figure.
Maybe we need to update the Wiki article.

Pros of ETFs: Opportunity to profit from a "flash crash."
Cons of ETFs: Potential for loss from a "flash crash."
Pros of mutual funds: No potential for loss from a "flash crash."
Cons of mutual funds: No opportunity to profit from a "flash crash."

:)
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livesoft
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Post by livesoft »

Flash crash is already covered in the wiki:
One can take advantage of occasional anomalies and purchase shares at a lower than expected price.
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