S&P 500 long-term investment: Mutual Fund vs. ETF?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 11:39 am

This is a follow-up thread to my upcoming low six-figure investment into a S&P 500 Index Fund and then let it sit for about 20-25 years. Also, I will start automatic investments of about $2K monthly into this S&P 500 fund ($20K-25K/yr). My portfolio is posted in the original thread: viewtopic.php?f=1&t=214084.

Which product may be better suited for my investment in Fidelity's S&P 500 Index Fund: their mutual fund (FUSVX) vs. the ETF (IVV)? The ETF is sold by Fidelity but is not managed by them.

Their one-year graphs appear identical. Makes sense since they both replicate the S&P 500.

The mutual fund FUSVX has 24.91% annual return while the ETF has a 52-week price-performance of 16.41%. Difference due to dividends? I don't need to maximize dividend income, which would be subject to income taxes while I own this investment. Advantage ETF?

The Fidelity mutual fund (FUSVX) has an expense ratio of 0.045% while the ETF's is slightly lower at 0.04%. Advantage ETF.

The ETF gives the buyer the ability to sell-off anytime during the market day. I won't be selling during years 1-15, even in a market crash. In years 15-24, I will consider reallocating a certain percentage from stocks to bonds. But in year 18, for example, I'd like the ability to sell-off all of my S&P 500 shares mid-morning if the S&P is dropping rapidly. Unfortunately the mutual fund FUSVX price wouldn't be determined until the market closes. Advantage ETF.

What other factors should I consider when deciding between the mutual fund vs. ETF for S&P 500 Index Fund investment?

User avatar
nedsaid
Posts: 8707
Joined: Fri Nov 23, 2012 12:33 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by nedsaid » Mon Mar 20, 2017 11:47 am

If you can reinvest the dividends in the S&P 500 ETF for free, the choice between a fund and an ETF would be a wash.

If I wanted an S&P 500 ETF, I would probably choose the SPDR S&P 500 which trades with very high volumes and is very established. It has a 0.10% expense and I wouldn't quibble over that. You want an ETF that is in high demand and trades a lot. ETF's can go out of business.

My choice would be the mutual fund. Personally, I own both Index Funds and ETF's and I like them both. With mutual funds, there is normally no transaction fee.
A fool and his money are good for business.

User avatar
jhfenton
Posts: 2170
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by jhfenton » Mon Mar 20, 2017 11:49 am

The wiki has some information: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

And there is essentially zero difference in performance between FUSVX and IVV. Over 10 years, $10,000 would have grown to $20,981.96 in FUSVX and $20,939.12 in IVV.

Image

Unless I were day-trading, I would not choose SPY. It's older structure does not allow internal reinvesting of dividends between dividend dates, resulting in a slight drag in excess of the higher ER. It would have finished the last decade at $20,857.41. Not a big deal, but an unnecessary shortfall.
Last edited by jhfenton on Mon Mar 20, 2017 11:52 am, edited 1 time in total.

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 11:51 am

nedsaid wrote:If you can reinvest the dividends in the S&P 500 ETF for free, the choice between a fund and an ETF would be a wash.

Thank you for your reply. Fidelity currently offers both the mutual fund (FUSVX) and the ETF (IVV) with no trading/reinvestment charge. That could change anytime in the future.

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 11:57 am

jhfenton wrote:Unless I were day-trading, I would not choose SPY. It's older structure does not allow internal reinvesting of dividends between dividend dates, resulting in a slight drag in excess of the higher ER. It would have finished the last decade at $20,857.41. Not a big deal, but an unnecessary shortfall.


Thank you for the information. Is SPY referring to the ETF or the mutual fund?

User avatar
David Jay
Posts: 3981
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by David Jay » Mon Mar 20, 2017 11:58 am

S17C wrote:
nedsaid wrote:If you can reinvest the dividends in the S&P 500 ETF for free, the choice between a fund and an ETF would be a wash.

Thank you for your reply. Fidelity currently offers both the mutual fund (FUSVX) and the ETF (IVV) with no trading/reinvestment charge. That could change anytime in the future.


You need to check the bolded text - can you re-invest dividends for free? That was one of the reasons I chose MF over ETF. MF has auto-reinvest and purchasing in dollar amounts. Dollar amounts make rebalancing easy (Sell $10,000 of a stock mutual fund, purchase $10,000 of a bond mutual fund - Vanguard even provides direct exchange).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
David Jay
Posts: 3981
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by David Jay » Mon Mar 20, 2017 12:00 pm

I was in VOO before I moved from ETFs to Mutual Funds. It was not uncommon for it to outperform the SP500 (by a miniscule amount) due to trading methodologies.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 12:02 pm

nedsaid wrote: You want an ETF that is in high demand and trades a lot. ETF's can go out of business.


If an ETF goes out of business, could the investor lose some or all of their investment?

User avatar
jhfenton
Posts: 2170
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by jhfenton » Mon Mar 20, 2017 12:04 pm

S17C wrote:
jhfenton wrote:Unless I were day-trading, I would not choose SPY. It's older structure does not allow internal reinvesting of dividends between dividend dates, resulting in a slight drag in excess of the higher ER. It would have finished the last decade at $20,857.41. Not a big deal, but an unnecessary shortfall.


Thank you for the information. Is SPY referring to the ETF or the mutual fund?

I'm sorry. SPY is the SPY SPDR S&P 500 ETF that nedsaid mentioned. It is old and huge and incredibly liquid. For traders, it is a logical choice. For investors, I would go with any of the 5 bp and under S&P 500 ETFs or mutual funds (or the equivalent total stock market ETFs or mutual funds).

If an ETF goes out of business, could the investor lose some or all of their investment?

If an ETF shuts down and you don't sell out before the final day of trading, your investment is liquidated and you receive the final day's NAV. In other words, you get sold out of it.

It is not a concern with any of the ETFs we've been discussing (or Vanguard's VOO). They're all large, liquid, and stable.

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 12:25 pm

David Jay wrote:
S17C wrote:
nedsaid wrote:If you can reinvest the dividends in the S&P 500 ETF for free, the choice between a fund and an ETF would be a wash.

Thank you for your reply. Fidelity currently offers both the mutual fund (FUSVX) and the ETF (IVV) with no trading/reinvestment charge. That could change anytime in the future.


You need to check the bolded text - can you re-invest dividends for free? That was one of the reasons I chose MF over ETF. MF has auto-reinvest and purchasing in dollar amounts. Dollar amounts make rebalancing easy (Sell $10,000 of a stock mutual fund, purchase $10,000 of a bond mutual fund - Vanguard even provides direct exchange).


I just called Fidelity and they confirmed the ETF they offer (IVV) has automatic dividend re-investment option and no transaction fee, but this could change in the future. If it does change, then Fidelity's current equity trading fee is $4.95.

The Fidelity investment desk representative was unable to offer me advice on whether to invest in their mutual fund FUSVX or the ETF (IVV). Said it was my decision or I should consult with a personal financial advisor.

User avatar
nedsaid
Posts: 8707
Joined: Fri Nov 23, 2012 12:33 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by nedsaid » Mon Mar 20, 2017 12:29 pm

S17C wrote:
David Jay wrote:
S17C wrote:
nedsaid wrote:If you can reinvest the dividends in the S&P 500 ETF for free, the choice between a fund and an ETF would be a wash.

Thank you for your reply. Fidelity currently offers both the mutual fund (FUSVX) and the ETF (IVV) with no trading/reinvestment charge. That could change anytime in the future.


You need to check the bolded text - can you re-invest dividends for free? That was one of the reasons I chose MF over ETF. MF has auto-reinvest and purchasing in dollar amounts. Dollar amounts make rebalancing easy (Sell $10,000 of a stock mutual fund, purchase $10,000 of a bond mutual fund - Vanguard even provides direct exchange).


I just called Fidelity and they confirmed the ETF they offer (IVV) has automatic dividend re-investment option and no transaction fee, but this could change in the future. If it does change, then Fidelity's current equity trading fee is $4.95.

The Fidelity investment desk representative was unable to offer me advice on whether to invest in their mutual fund FUSVX or the ETF (IVV). Said it was my decision or I should consult with a personal financial advisor.


I would go with the fund. Free is rarely forever.
A fool and his money are good for business.

User avatar
whodidntante
Posts: 2193
Joined: Thu Jan 21, 2016 11:11 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by whodidntante » Mon Mar 20, 2017 12:43 pm

Fidelity provides free dividend reinvestment for any stock or ETF. Buy IVV.

User avatar
triceratop
Moderator
Posts: 3610
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by triceratop » Mon Mar 20, 2017 12:53 pm

You didn't mention whether this is in an IRA or a taxable account. That should make a difference for your decision if it is a taxable account; FUSVX has regular capital gains distributions while ETFs, especially iShares', are generally more tax efficient.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 12:55 pm

triceratop wrote:You didn't mention whether this is in an IRA or a taxable account. That should make a difference for your decision if it is a taxable account; FUSVX has regular capital gains distributions while ETFs, especially iShares', are generally more tax efficient.


Taxable account.

The mutual fund FUSVX has 24.91% annual return while the ETF has a 52-week price-performance of 16.41%.
What might account for this large discrepancy between two funds that both invest in the S&P 500 index? Is the mutual fund higher due to dividends/taxable distributions? In good times, does the ETF raise its price (NAV) instead of paying dividends?

This matters because I don't need dividends to maximize income. Instead I'd rather minimize annual taxable dividends during growth years while I own this investment. Is the ETF the right investment for me to minimize taxes during periods of growth?

avalpert
Posts: 6193
Joined: Sat Mar 22, 2008 4:58 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by avalpert » Mon Mar 20, 2017 12:59 pm

Since you don't seem to understand what an ETF is I would suggest you are better off keeping it simple and using the mutual fund. Or you can do a little reading to understand ETFs and decide if that works for you. For example, Fidelity isn't selling the ETF, the ETF is traded openly on stock exchanges - which means you need to make a trade on the exchange to buy/sell shares.

For what it is worth, I prefer ETFs for myself though I own both as appropriate.

User avatar
triceratop
Moderator
Posts: 3610
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by triceratop » Mon Mar 20, 2017 1:03 pm

S17C wrote:
triceratop wrote:You didn't mention whether this is in an IRA or a taxable account. That should make a difference for your decision if it is a taxable account; FUSVX has regular capital gains distributions while ETFs, especially iShares', are generally more tax efficient.


Taxable account.

The mutual fund FUSVX has 24.91% annual return while the ETF has a 52-week price-performance of 16.41%.
What might account for this large discrepancy between two funds that both invest in the S&P 500 index? Is the mutual fund higher due to dividends/taxable distributions? In good times, does the ETF raise its price (NAV) instead of paying dividends?

This matters because I don't need dividends to maximize income. Instead I'd rather minimize annual taxable dividends during growth years while I own this investment. Is the ETF the right investment for me to minimize taxes during periods of growth?


You should select IVV, then. As mentioned FUSVX is less tax efficient, though how much less efficient depends on one's tax situation (compare to VOO).

The appropriate comparison is not mutual fund annual return vs. ETF price return since price-return ignores both the paying of dividends and the appreciation of reinvestment. You can compare performance properly with Morningstar by starting with the mutual fund page and comparing to IVV (not the reverse; that would show you price return because Morningstar is silly ;) ). See this link

I agree one should learn more about ETFs before using them; however, strictly from the theoretical point of view there is no question that the ETF is better in this situation.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 3:03 pm

I've spent the last hour reading about ETFs vs. mutual funds. Here is a downside I discovered about ETFs:

ETF purchases can't be fractional like mutual funds. An automatic monthly purchase of $2000 at $239.44 share price would buy 8 shares and the remaining $84.48 wouldn't be invested yet. The investor could have to manually execute an additional purchase of a full share with another $155. Or the investor could just let the remaining cash build up each month until there is enough to buy a full share, but that idle cash misses out on S&P 500 growth potential in the meanwhile.

Also, regarding the (semi-undesirable) taxable capital gains distributions of Fidelity mutual funds vs ETFs:

Assuming the S&P goes up linearly over the next 25 years (*huge assumption*): I will have received more taxable distributions from the mutual fund than with the ETF. But...then when I sell all shares S&P 500 in the 25th year, won't the taxable capital gains be very sizeable for the ETF compare to the mutual fund? Seems like it might be better to be subjected to smaller yearly capital gains with the mutual fund versus one large capital gain with the ETF.
Last edited by S17C on Mon Mar 20, 2017 3:11 pm, edited 1 time in total.

User avatar
triceratop
Moderator
Posts: 3610
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by triceratop » Mon Mar 20, 2017 3:10 pm

S17C wrote:I've spent the last hour reading about ETFs vs. mutual funds. Here is a downside I discovered about ETFs:

ETF purchases can't be fractional like mutual funds. An automatic monthly purchase of $2000 at $239.44 share price would buy 8 shares and the remaining $84.48 wouldn't be invested yet. The investor would have to manually deposit another $155 and then execute a trade to buy one share. Or the investor could just let the remaining cash build up each month until there is enough to buy a full share, but that idle cash misses out on S&P 500 growth potential in the meanwhile.

Also, regarding the (semi-undesirable) taxable capital gains distributions of Fidelity mutual funds vs ETFs:

Assuming the S&P goes up linearly over the next 25 years (*huge assumption*): I will have received more taxable distributions from the mutual fund than with the ETF. But...then when I sell all shares S&P 500 in the 25th year, won't the taxable capital gains be very sizeable for the ETF compare to the mutual fund? Seems like it might be better to be subjected to yearly capital gains with the mutual fund versus one massive one with the ETF.


There are no automatic purchases of ETFs anyway, so one might as well purchase 9 shares at $239.44 in the first place. One can argue, correctly, that the lack of an automatic investment option is a deficiency of the ETF. The rest of the example doesn't really hold anymore.

However, you don't really have any other optimal options at Fidelity. At Vanguard, one would do automatic purchases of VFIAX, a mutual fund with superior tax efficiency due to the dual-share-class status of VFIAX/VOO (read the boglehead wiki on this point).

It is true that you will have received more distributions from the mutual fund than from the ETF, which has the effect of raising the cost basis of your investment. However, you paid taxes (at perhaps a higher rate than in the future, in retirement!) on those capital gains, money which otherwise could have been invested. If you do the math properly you will find that this hurts your investment returns after-tax. This is before one considers that it may be possible to harvest those gains while one is in a 0% LTCG bracket (assuming no future changes in tax policy).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Jack FFR1846
Posts: 5738
Joined: Tue Dec 31, 2013 7:05 am

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by Jack FFR1846 » Mon Mar 20, 2017 3:23 pm

I don't know that it's worth all of this analysis.

I own all of what you're talking about, more or less and just consider it all as Total US Stock. For me, it includes:

these 3 follow nearly exactly
VTI (Vanguard total US Stock ETF at TDAmeritrade)
SCHB (US Broad market ETF at Schwab)
FSTVX (Total US market MF at Fidelity)

these are very close, and follow each other exactly
SCHX (US Large Cap ETF at Schwab)
FXSIX (S&P 500 MF at Fidelity)

Any one of these would be fine. They're all 0.05% to 0.03%. Any can reinvest dividends free. All are no-transaction-fee.
Bogle: Smart Beta is stupid

User avatar
triceratop
Moderator
Posts: 3610
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by triceratop » Mon Mar 20, 2017 3:30 pm

Jack FFR1846 wrote:I don't know that it's worth all of this analysis.

I own all of what you're talking about, more or less and just consider it all as Total US Stock. For me, it includes:

these 3 follow nearly exactly
VTI (Vanguard total US Stock ETF at TDAmeritrade)
SCHB (US Broad market ETF at Schwab)
FSTVX (Total US market MF at Fidelity)

these are very close, and follow each other exactly
SCHX (US Large Cap ETF at Schwab)
FXSIX (S&P 500 MF at Fidelity)

Any one of these would be fine. They're all 0.05% to 0.03%. Any can reinvest dividends free. All are no-transaction-fee.


You are mistaken; in a taxable account the true costs of each fund are the expense ratios plus the tax efficiency of the fund. It is the latter figure that dominates any small difference in expense ratio.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

goingup
Posts: 2773
Joined: Tue Jan 26, 2010 1:02 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by goingup » Mon Mar 20, 2017 3:35 pm

OP-
Use mutual funds. They are easier. You can't set up an automatic investment with ETFs.

Here's more ETF v. Mutual Fund differences as listed on the forum Wiki: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 3:40 pm

triceratop wrote:It is true that you will have received more distributions from the mutual fund than from the ETF, which has the effect of raising the cost basis of your investment. However, you paid taxes (at perhaps a higher rate than in the future, in retirement!) on those capital gains, money which otherwise could have been invested. If you do the math properly you will find that this hurts your investment returns after-tax. This is before one considers that it may be possible to harvest those gains while one is in a 0% LTCG bracket (assuming no future changes in tax policy).


Thank you for your replies. One plan is to cash-out of this S&P Index fund before retirement in about 20 years (when my income is potentially the highest). Thus, I don't plan to be in/under the 15% tax bracket (LTCG 0%) when I eventually sell it all and move into more conservative investments. Given this information, is ETF still more (hypothetically) tax-efficient over the full 20 years?

User avatar
triceratop
Moderator
Posts: 3610
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by triceratop » Mon Mar 20, 2017 3:51 pm

S17C wrote:
triceratop wrote:It is true that you will have received more distributions from the mutual fund than from the ETF, which has the effect of raising the cost basis of your investment. However, you paid taxes (at perhaps a higher rate than in the future, in retirement!) on those capital gains, money which otherwise could have been invested. If you do the math properly you will find that this hurts your investment returns after-tax. This is before one considers that it may be possible to harvest those gains while one is in a 0% LTCG bracket (assuming no future changes in tax policy).


Thank you for your replies. One plan is to cash-out of this S&P Index fund before retirement in about 20 years (when my income is potentially the highest). Thus, I don't plan to be in/under the 15% tax bracket (LTCG 0%) when I eventually sell it all and move into more conservative investments. Given this information, is ETF still more (hypothetically) tax-efficient over the full 20 years?


Yes it is.

However your plan is ill-advised for other reasons: including that there's a question of when you're selling and what you're buying with the proceeds: i.e. Are you market timing? Most recommend a gradual reduction in risk as your need and willingness to take risk decreases. Why njit direct new investments to bonds? Or change asset allocation without tax consequences in an IRA?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

S17C
Posts: 208
Joined: Wed Jan 18, 2017 1:05 pm

Re: S&P 500 long-term investment: Mutual Fund vs. ETF?

Post by S17C » Mon Mar 20, 2017 4:14 pm

Yes, gradual reduction and/or future redirection are possibilities in the future. Sounds like ETFs win for taxes in my situation regardless.

Post Reply