ETFs v. Mutual Funds

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ETFs v. Mutual Funds

Postby ResNullius » Fri Apr 27, 2012 2:51 pm

http://finance.yahoo.com/blogs/breakout ... 28621.html

I don't see the difference between mutual funds and ETFs, other than ETFs seem to make it easy to day trade mutual funds. For a reasonably conservative buy and hold investor, I just don't see the big deal, other than possibly a new way to mask fees.
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ETFs vs. Mutual Funds

Postby Taylor Larimore » Fri Apr 27, 2012 3:03 pm

ResNullius wrote:http://finance.yahoo.com/blogs/breakout/does-state-street-entry-actively-managed-etfs-doom-174828621.html

I don't see the difference between mutual funds and ETFs, other than ETFs seem to make it easy to day trade mutual funds. For a reasonably conservative buy and hold investor, I just don't see the big deal, other than possibly a new way to mask fees.


Hi Res:

It is not a "big deal." It is way down on the list of what's important for investors but there are differences. This is what Rick Ferri, author of The ETF Book posted on this forum:

Should you buy Vanguard open-end funds or Vanguard ETFs?

It depends on three factors: costs, custody, and convenience.

Costs are a three-fold equation:

1. Expense ratio: Both the open-end and ETF have management fees and administrative expenses. For example, VTSMX = 0.19% (Investor shares), VTSAX = 0.09 (Admiral shares), and VTI = 0.07% (ETF shares).

2. Commissions: There are no commission if you buy Investor or Admiral shares directly through Vanguard. However, you will pay a commission if you buy Investor shares, Admiral share or the ETF through a brokerage. At most brokerage firms the commission to buy an open-end mutual fund is higher than buying the dollar equivalent of ETF shares.

3. Trading Spreads: Only applies to ETF shares that trade on an exchange. The spread is the difference between what you pay and the true NAV of the fund at the time you bought it. This can be a few pennies per share to about 25 cents depending on when you buy and the liquidity of what you are buying.

Custody is twofold (where you hold your account):

1. Direct with Vanguard: You have an account with Vanguard directly and invest in their open-end funds. There are no commissions to do this. However, you are limited to trading open-end shares once per day at the end of the day NAV.

2. Indirect with a brokerage firm: VBS, Fidelity, Schwab, Merrill et all. You will pay a commission to buy open-end funds and ETFs. Commission costs vary considerably between firms and are different for mutual funds than for ETFs. Open-end funds still trade once per day at the end of the day at NAV, but you can buy ETF shares anytime during the day at the market price (which should be close to the NAV).

If convenience is a factor:

1. If you want one account with only Vanguard funds and no other investments, then open a Vanguard account and buy open-end funds.

2. If you want one account with Vanguard funds and other investments, i.e. other mutual funds, stocks, bonds, ETFs, etc., then you should custody at a discount brokerage firm that gives you access to all of those investments.

IMO, here is how this all shakes out, IMO:

1. If you plan to buy only Vanguard funds - go directly to Vanguard. This is the least expensive option for Admiral Share class investors, and, for Investor Share class investors, this also a low cost option if you are buying multiple funds in a diversified portfolio and if you are dollar-cost averaging.

2. If you plan to buy other investments in addition to Vanguard funds and want the convenience of one custodian - choose a low cost custodian and buy Vanguard ETFs rather than Vanguard open-end funds. The commission cost is lower and the expense ratio for ETF are also lower (slightly lower that Admiral shares also). That would provide the convenience and low cost.

3. If you don’t care about having multiple accounts or the inconvenience tracking and trading in different places, and you are investing regularly, then go with Vanguard directly for the Vanguard funds and open a low-cost custodian account for all the other stuff. See #1.

4. If you are buying only a couple of funds one-time, then it is a coin flip. You can go to Vanguard directly or buy ETFs. Cost differences are too close to call. For Investor class shareholder, going through a low-cost broker and buying ETFs is probably the lowest cost option in the short-term, however direct Vanguard investors can convert Investor class shares to Admiral Shares Class when they have reached a certain level of assets.


Best wishes.
Taylor
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Re: Big deal ?

Postby ResNullius » Fri Apr 27, 2012 3:14 pm

Taylor Larimore wrote:
ResNullius wrote:http://finance.yahoo.com/blogs/breakout/does-state-street-entry-actively-managed-etfs-doom-174828621.html

I don't see the difference between mutual funds and ETFs, other than ETFs seem to make it easy to day trade mutual funds. For a reasonably conservative buy and hold investor, I just don't see the big deal, other than possibly a new way to mask fees.


Hi Res:

It is not a "big deal." It is way down on the list of what's important for investors.

Best wishes.
Taylor


Thanks for the reply. I have a number of friends who think that ETFs are the only way to invest, and that MFs are somehow for folks in the Flat Earth Society. I don't bother arguing the point, because I really don't undertand the push towards ETFs, and because everyone knows that the world is flat.
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Re: Big deal ?

Postby Jerilynn » Wed May 02, 2012 2:15 am

ResNullius wrote:
Taylor Larimore wrote:
ResNullius wrote:http://finance.yahoo.com/blogs/breakout/does-state-street-entry-actively-managed-etfs-doom-174828621.html

I don't see the difference between mutual funds and ETFs, other than ETFs seem to make it easy to day trade mutual funds. For a reasonably conservative buy and hold investor, I just don't see the big deal, other than possibly a new way to mask fees.


Hi Res:

It is not a "big deal." It is way down on the list of what's important for investors.

Best wishes.
Taylor


Thanks for the reply. I have a number of friends who think that ETFs are the only way to invest, and that MFs are somehow for folks in the Flat Earth Society. I don't bother arguing the point, because I really don't undertand the push towards ETFs, and because everyone knows that the world is flat.

ETFs are good if you want to buy a couple asset classes, but don't have enough $ to meet the minimums.
Also, the ETFs usually have a lower ER vs. the investor shares.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Big deal ?

Postby bearwolf » Wed May 02, 2012 6:39 am

ResNullius wrote:Thanks for the reply. I have a number of friends who think that ETFs are the only way to invest, and that MFs are somehow for folks in the Flat Earth Society. I don't bother arguing the point, because I really don't undertand the push towards ETFs, and because everyone knows that the world is flat.

I appreciate using ETFs even though I don't like them. My 401K is at Fidelity but I want to own the Vanguard Total Bond Market fund. The ETF BND makes that possible. I know Fidelity has a similar fund, but I prefer Vanguards.

Anyone who has spent time in Colorado knows the world is not flat :D. Thank goodness what would a snowboarder do on a flat earth?

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Re: ETFs v. Mutual Funds

Postby nisiprius » Wed May 02, 2012 7:52 am

They're not a big deal. livesoft likes ETFs, I like mutual funds, neither of us think it is a big deal. livesoft wrote the admirably concise comparison, http://www.bogleheads.org/wiki/ETFs_vs_Mutual_Funds . They're a legitimate small deal. Depending on brokerage fee structures, in some case they can cut fees, or have a lower expense ratio, or allow smaller purchases. People who go in for slice-and-dice investing but don't have access to DFA funds say that in some cases, there are cleanly targeted ETFs that can be used the same way.

The big deal aspect comes from, yes, they are a big deal if you speculate, and IMHO Wall Street is geared for speculation and makes most of its money that way. Evidence that ETFs are about speculation: go to Morningstar and type VTSMX into the "quote" box and it shows you a ten-year growth chart, its default for mutual funds. But type VTI, which is exactly the same thing except for being an ETF, and it shows you a five-day price chart.

IMHO Wall Street pushes them because they're (relatively) new, and Wall Street always pushes new-ness in itself. They want you to believe new is automatically important. Advisors like them because, again, Wall Street is by and large for the most part geared toward stocks, and it is easy and convenient for their data processing to use ETFs because they fit in to the routine.

ETFs are a big deal because the latest, greatest, weirdest, most faddish stuff is available first, or only, as ETFs. Probably because the people who want that weird new faddish stuff want it for speculation.

So, some of the excitement is because there's so much crapola out there that can only be obtained as an ETF.

Evidence that speculation is a driver for ETFs is in the proliferation of geared ETFS--leveraged, inverse, and leveraged inverse ETFs, like KOLD, a 2X inverse natural gas ETF. These vehicles do not work and are dangerous for buy-and-hold investors. I've shown examples where both the long and short leveraged ETFS, bought and held, both went down. They only make sense for very-short-term trading, e.g. by the people who are looking at 5-day charts. The Prospectus for KOLD notes "Shareholders who invest in Geared Funds should actively monitor and manage their investments as frequently as on a daily basis." How could they possibly be clearer than that? The only way they could make it clearer is to say "These ETFS are for speculators who trade them daily."

There don't seem to be any lithium mutual funds, but a broker can call you and say "Have you heard about electric cars? Well, our crack research team says they use 'batteries' and 'batteries' depend crucially on an element called 'lithium.' So, do you think lithium is going to go down? Or up?" The mark says "up." The broker says "Well, then, I have an idea :idea: You just might be interested in this new ETF, LIT, which invests in lithium mining companies all over the world. :moneybag And maybe I can offer you some Lithia Motors to go with that?" And you say "Wow! I am excited by grand visions of wealth! I think I'll take some lithium."
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Re: ETFs v. Mutual Funds ?

Postby Taylor Larimore » Wed May 02, 2012 10:25 am

Nisiprius

Another one of your outstanding posts!

Thank you and best wishes.
Taylor
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Re: ETFs v. Mutual Funds

Postby Random Musings » Wed May 02, 2012 10:28 am

ResNullius wrote:For a reasonably conservative buy and hold investor, I just don't see the big deal.


Neither do I. It comes down to discipline, needs and cost structure.

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Re: ETFs v. Mutual Funds

Postby doublenickel » Wed May 02, 2012 10:30 am

Stick w/ funds and compare your results to your "ETF trading" friends in 10 years or so. Bet you'll see a difference, and it will be in your favor!
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Re: ETFs v. Mutual Funds

Postby af895 » Wed May 02, 2012 10:37 am

Res,
In Canada, we don't have as many choices as our US counterparts so take what I say with that in mind.

An ETF tracking the same index as a comparable mutual fund may have lower MERs.

However, for small portfolios, trading fees added to MERs can make index ETFs more costly to own than index mutual funds that track the same indices. The mutual funds we have access to don't incur commissions to purchase through their originator (TD Waterhouse, for example) and can be bought in fractions of a unit.

More on cost comparisons of Index ETF versus Index Mutual Fund here: http://canadiancouchpotato.com/2010/06/ ... s-or-etfs/
That got me started on "Bogle-style" index investing.

TL;DR: for those of us starting out, index mutual funds are often more cost effective than comparable ETFs.
Last edited by af895 on Wed May 02, 2012 12:09 pm, edited 1 time in total.
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Re: ETFs v. Mutual Funds ?

Postby nisiprius » Wed May 02, 2012 11:59 am

Taylor Larimore wrote:Nisiprius

Another one of your outstanding posts!

Thank you and best wishes.
Taylor
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Re: ETFs v. Mutual Funds

Postby livesoft » Wed May 02, 2012 12:04 pm

doublenickel wrote:Stick w/ funds and compare your results to your "ETF trading" friends in 10 years or so. Bet you'll see a difference, and it will be in your favor!


I think you will find that the folks on this forum that use ETFs are the buy, hold, and rebalance types and do not make any more trades than folks who use mutual funds. I'm not sure where the idea that ETFs tempt one to trade more often came from. I personally believe that if folks were not traders to begin with, then ETFs are not going to turn them into traders.

OTOH, if folks were afraid to tax-loss harvest or rebalance in the past, then maybe ETFs can nudge them.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: ETFs v. Mutual Funds

Postby tomas123 » Wed May 02, 2012 12:13 pm

ETFs are really great for me, because investing in foreign mutual funds (I'm not american) is often not legal, and is at best a complicated tax affair. ETFs on the other hand are treated as stocks, fully legal, and they make tax reporting as easy as, well, owning any other stock.
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Re: ETFs v. Mutual Funds

Postby 555 » Wed May 02, 2012 12:42 pm

livesoft wrote:
doublenickel wrote:``Stick w/ funds and compare your results to your "ETF trading" friends in 10 years or so. Bet you'll see a difference, and it will be in your favor!''

``I think you will find that the folks on this forum that use ETFs are the buy, hold, and rebalance types and do not make any more trades than folks who use mutual funds. I'm not sure where the idea that ETFs tempt one to trade more often came from. I personally believe that if folks were not traders to begin with, then ETFs are not going to turn them into traders.
OTOH, if folks were afraid to tax-loss harvest or rebalance in the past, then maybe ETFs can nudge them.''

The mechanics of trying to execute a trade essentially makes you a trader. You risk either not executing or getting a bad price. You have to trade with all the other traders, even if you do it less often.
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