EFT Funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

EFT Funds

Post by Tim18 »

I am looking at the Wiki and some the Lazy Porfolios and with all you see info for MUTUAL FUND and ETF FUND (ER).

What is the difference between the two? I have read some definitions and don't have a clear picture. Which one would I buy, and why?

Tim
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: EFT Funds

Post by The Wizard »

ETFs are more complicated so, to simplify things, just use Mutual Funds for now...
Attempted new signature...
User avatar
Rick Ferri
Posts: 9707
Joined: Mon Feb 26, 2007 10:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: EFT Funds

Post by Rick Ferri »

Traditional index funds are bought and sold through a mutual fund company, even if your account is at a brokerage firm. The price you pay or receive is based on the net asset value (NAV) of the fund at the close of business. Everyone buying and selling gets the same price.

ETFs are also mutual funds; however, the shares trade during the day on a stock exchange, and you always buy and sell shares through a brokerage firm. The share prices fluctuate during the day based on market conditions.

There are two extra costs to buying ETFs versus buying direct from a no-load fund company such as Vanguard. They are:

1) Commissions: Like stocks that trade on an exchange, there is a commission to trade ETFs on an exchange (some brokerage firms wave the commission on their own ETF or select third-party ETFs).
2) Trading spread: Like stocks that trade on an exchange, there is difference in ETF price between the bid (sell price) and ask(buy price). This spread varies based on market conditions, time of the day, and how well the underlying securities in an ETF trade.

All things being equal, investing in traditional index funds is simpler than using ETFs.

Rick Ferri
Author of "The ETF Book" and "All About Index Funds"
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Topic Author
Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: EFT Funds

Post by Tim18 »

Got it. And thanks.
Tim
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: EFT Funds

Post by nisiprius »

1) Rick Ferri literally wrote the book on ETFs. That said, there's a useful capsule summary of the practical differences here:
ETFs versus mutual funds.

The capsule summary of the capsule summary is: there's no virtually no difference between an index fund and an ETF, it's the same soda whether it's in a bottle or in a can, and anyone who claims there's any big, important difference is grinding an axe and should not be trusted.

2) In the special case of Vanguard's ETFs, Vanguard actually holds a patent on a system for making mutual funds and ETFs different share classes of the same fund. In most (though not all) cases, Vanguard offers its index funds both as mutual funds and as ETFs, and I believe that in every case the Admiral Shares version of the mutual fund has the same expense ratio as the ETF. And if held at Vanguard, there are no fees for buying or selling either. This makes the difference between Vanguard mutual funds and ETFs very small.

4) An exchange traded fund is an ETF. An eft is something else; this is an eft:
Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: EFT Funds

Post by placeholder »

nisiprius wrote:4) An exchange traded fund is an ETF. An eft is something else; this is an eft
That's newts to me.
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: EFT Funds

Post by nisiprius »

placeholder wrote:
nisiprius wrote:4) An exchange traded fund is an ETF. An eft is something else; this is an eft
That's newts to me.
EFT in capitals can also mean "emotional freedom technique," so its a little bit amphibious.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: EFT Funds

Post by baw703916 »

I was thinking Electronic Funds Transfer. :)

As usual, Nisiprius gives a good explanation of the differences, and their lack of importance. There is at least one case, though, where the Vanguard ETF has a distinct advantage. This is the FTSE all-world ex-US small cap index fund/ETF. Kind of a mouthful, but it invests in small companies in pretty much every country outside the US. There are no admiral shares for this fund, and the investor shares have an 0.45% expense ratio, plus an 0.5% fee both to buy and sell shares. The ETF shares have no such fee (although you might have to pay a commission depending on which brokerage you use), and a much lower expense ratio of 0.25%.

Brad
Most of my posts assume no behavioral errors.
User avatar
Majormajor78
Posts: 910
Joined: Mon Jan 31, 2011 8:13 pm

Re: EFT Funds

Post by Majormajor78 »

Rick Ferri wrote:Traditional index funds are bought and sold through a mutual fund company, even if your account is at a brokerage firm. The price you pay or receive is based on the net asset value (NAV) of the fund at the close of business. Everyone buying and selling gets the same price.

ETFs are also mutual funds; however, the shares trade during the day on a stock exchange, and you always buy and sell shares through a brokerage firm. The share prices fluctuate during the day based on market conditions.

There are two extra costs to buying ETFs versus buying direct from a no-load fund company such as Vanguard. They are:

1) Commissions: Like stocks that trade on an exchange, there is a commission to trade ETFs on an exchange (some brokerage firms wave the commission on their own ETF or select third-party ETFs).
2) Trading spread: Like stocks that trade on an exchange, there is difference in ETF price between the bid (sell price) and ask(buy price). This spread varies based on market conditions, time of the day, and how well the underlying securities in an ETF trade.

All things being equal, investing in traditional index funds is simpler than using ETFs.

Rick Ferri
Author of "The ETF Book" and "All About Index Funds"
If I could tack on one thing to the list:

ETF's can also trade at either a premium or a discount to the Net Asset Value. Typically this premium or discount is very small for the larger liquid ETF's that are traded hundreds of thousand or millions of times a day. The premium discounts can get a little crazy if the ETF is small and thinly traded.
"Oh, M. le Comte, it is only a loss of money which I have sustained... nothing worth mentioning, I assure you."
Post Reply