Basic ETFs question

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ERMD
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Basic ETFs question

Post by ERMD » Mon Feb 24, 2014 11:43 am

hi all -

i've read the ETFs sections of the wiki several times but still find myself somewhat confused about ETFs. specifically, if a person is a pure buy-and-hold, 3-fund portfolio, rebalance once a year or so kind of guy (or gal), it seems like the only advantage of ETFs over mutual funds is that they may cost a half or a third of the corresponding fund's expense ratio -- at that point (with a starting balance of 200,000k at 7 or 8 percent for 30 years,) the savings amount to about 10 dollars a month at disbursement.

i guess if you live long enough in retirement, that's a few thousand dollars. if that's the case, shouldn't all archetypal bogleheads own similar ETFs instead of total market funds?
between scotch and nothing, i'll take scotch. -- faulkner

livesoft
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Re: Basic ETFs question

Post by livesoft » Mon Feb 24, 2014 11:51 am

ETF expense ratios are the same as the expense ratios of Admiral share class, so … there is no difference in expense ratios as you alluded to.

All archetypal Bogleheads should own Admiral shares or ETFs. Since Admiral shares are hard to get at non-Vanguard places, they would own ETFs if they did not use Vanguard for their broker. Otherwise they would own Admiral shares directly at Vanguard.
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DSInvestor
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Re: Basic ETFs question

Post by DSInvestor » Mon Feb 24, 2014 11:56 am

Most of my portfolio is held at Vanguard. Vanguard's index funds have several share classes - Investor shares, Admiral shares, ETF shares. Investor shares apply for fund positions under $10K. Admiral shares are for fund positions 10K or greater. Admiral shares and ETF shares of the same mutual fund have the same expense ratio.

Here are the expense ratios for Vanguard Total Stock Market:
Investor Shares 0.17%
Admiral Shares 0.05%
ETF Shares 0.05%

Admiral shares of index funds are only available at Vanguard. If you hold your portfolio at an other firm, ETF shares would offer lower expense than Investor shares and may avoid steep transaction fees as Vanguard funds are not included in the No-Transaction-Fee list of funds available at other brokerage firms.
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Re: Basic ETFs question

Post by abuss368 » Mon Feb 24, 2014 12:22 pm

I am not an ETF expert. Rick Ferri has written an excellent book on ETF investing. You may want to look into purchasing this would to become better educated.

If you do purchase it through Amazon, consider clicking on the Amazon link on the left side of the Bogleheads page. I believe Amazon makes a small contribution to the site to help pay for everything.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success." || Buy Total Stock until it hurts. Then find a way to buy even more!

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Re: Basic ETFs question

Post by livesoft » Mon Feb 24, 2014 12:26 pm

I have a signed copy of Rick's ETF book. It is mostly for folks who are going to create ETFs or who want to know more about the guts of an ETF. It is less use for folks who are going to use ETFs in their asset allocation plan.
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ERMD
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Re: Basic ETFs question

Post by ERMD » Mon Feb 24, 2014 4:07 pm

got it. sounds like i should just buy and hold admiral shares of total stock and bond funds when i'm eligible and leave it at that. thanks guys!
between scotch and nothing, i'll take scotch. -- faulkner

kerplunk
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Re: Basic ETFs question

Post by kerplunk » Mon Feb 24, 2014 5:31 pm

One benefit of ETFs:

If I were to buy Vanguard FTSE All-World ex-US Small-Cap Index Fund using the mutual fund option (VFSVX) I would have to pay a 0.25% purchase fee and a 0.25% redemption fee. (These fees were just lowered from 0.5%.) Using the ETF version (VSS), there are no purchase or redemption fees.

Also, if you sell an ETF, you don't have to wait 60 days until you can buy it again (as you would have to with mutual funds).

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Re: Basic ETFs question

Post by abuss368 » Mon Feb 24, 2014 5:34 pm

kerplunk wrote:One benefit of ETFs:

If I were to buy Vanguard FTSE All-World ex-US Small-Cap Index Fund using the mutual fund option (VFSVX) I would have to pay a 0.25% purchase fee and a 0.25% redemption fee. (These fees were just lowered from 0.5%.) Using the ETF version (VSS), there are no purchase or redemption fees.

Also, if you sell an ETF, you don't have to wait 60 days until you can buy it again (as you would have to with mutual funds).
However, with ETF's there is the possibility of an additional cost due to the difference of the bid / ask spread. This is not a factor with traditional mutual funds as much.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success." || Buy Total Stock until it hurts. Then find a way to buy even more!

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Re: Basic ETFs question

Post by livesoft » Mon Feb 24, 2014 5:36 pm

The lack of fees with VSS are not as much of a benefit as one might think. First, VSS will trade a premium to the NAV of about the amount that the fees are. Second, the 60-day thing is easily overcome as discussed elsewhere on the forum. So, for those folks who dislike ETFs or do not want to bother with them, those "benefits" may not be enough to sway them to use the ETF share class.

OTOH, VSS does not come in the Admiral share class, so that the ETF does have a lower expense ratio than the investor share class. ;)
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kerplunk
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Re: Basic ETFs question

Post by kerplunk » Mon Feb 24, 2014 5:54 pm

I wouldn't exactly call the workarounds to Vanguard's frequent trading policy "easy." ;)

At least not as easy as trading ETFs.

But I agree, for most people, use mutual funds.

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Re: Basic ETFs question

Post by runner9 » Mon Feb 24, 2014 6:12 pm

The above is why we are very soon to have VSS as our only ETF, with the rest of our slice and dice all in Mutual Funds.

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Re: Basic ETFs question

Post by kerplunk » Mon Feb 24, 2014 6:18 pm

I imagine that Vanguard FTSE All-World ex-US Small-Cap Index Fund will be purchase/redemption fee free in a few years.

I just wish they would rename it to Vanguard International Small-Cap Index Fund now. (OCD)

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Re: Basic ETFs question

Post by placeholder » Tue Feb 25, 2014 1:42 am

I don't have any interest in using Vanguard as a custodian so the ETFs give me the combination of low expenses and flexibility.

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