ETF vs Mutual Fund (for an Index Fund)

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Dbonz
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ETF vs Mutual Fund (for an Index Fund)

Post by Dbonz »

I will be transferring an account to either Fidelity or Vanguard and place it in to a S&P 500 index fund. What it the difference between a mutual S&P 500 index fund and an ETF S&P 500 index fund?

What are the advantage/cons of each?

Thanks in advance.
livesoft
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by livesoft »

Here you go: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

Also be sure to read the links to the other information provided.
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nisiprius
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by nisiprius »

There's almost no difference.

Vanguard says
Vanguard wrote:Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don't allow for conversions.)
Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.

Keep in mind that you can't convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable.

If you have a brokerage account at Vanguard, there's no charge to convert conventional shares to ETF Shares.
Keeping this in mind, I suggest the following decision process.

1) If you don't want to think about it, start with mutual funds. Then read about it, and think about it, and if you decide you prefer ETFs, convert to ETFs.

2) If you are a beginning investor and haven't done much with either mutual funds or ETFs, start with mutual funds.

3) If you are familiar with mutual funds, but not with ETFs, start with mutual funds.

4) If you are familiar with the process of buying and selling individual stocks and are comfortable with it, then you very likely will prefer ETFs.

5) If you decide to go with Vanguard, their S&P 500 index fund is VFINX, or, if you have more than $10,000 to invest, VFIAX. Their S&P 500 ETF is VOO. If you decide to go with Vanguard, then you almost certainly want Vanguard funds.

If you decide to go with Fidelity, then you probably do not want Vanguard index funds because Fidelity charges a $75 transaction fee to buy them. For a mutual fund, you probably want the Fidelity Spartan U.S. Index Fund (FUSEX, or if you have more than $10,000 to invest, FUSVX). Fidelity doesn't have many ETFs of its own, so for an S&P 500 ETF you probably want IVV, the iShares S&P 500 index ETF, because it's commission-free.

6) But I think I do want to raise a side issue. You should think briefly about whether you want an S&P 500 index fund, which tracks the S&P 500 index, which represents about 80% of the total market capitalization of the U.S. stock market and is a pretty good measure of the market as a whole... or whether you would prefer a "total market index" fund which includes very close to 100% of the total market cap and is thus a really precise measure of the market as a whole.

For a total market index fund at Vanguard: VTSMX mutual fund, VTSAX if over $10,000, VTI for an ETF.
At Fidelity: FSTMX mutual fund, FSTVX if over $10,000, and probably iShares ITOT for an ETF.
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Dbonz
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Dbonz »

Thanks for the excellent info livesoft & nisiprius. That helps!
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by livesoft »

Contrary to the good advice of nisiprius, I will suggest that if you are unfamiliar with ETFs and mutual funds, then start with ETFs because the consequences of changing your mind are less. Think about this:

With ETFs, you can buy just one share or a few shares, so you get the flavor of ETFs from committing under $500 to them. If you sell them, then the tax consequences would be minimal, too. However, with mutual funds one typically needs to commit $3,000 or at least $1,000 at Vanguard.

And there is not much reason to not try out both ETFs and mutual funds. We use both types of investments.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Thesaints »

hdas wrote:The potential pricing dislocation of ETF's during times of market stress are an advantage for the investor that has the right temperament and the time availability. Check the opportunities available on May 6/2010, Aug 24 2015. Cheers.
Is it temperament, or a crystal ball ?

As livesoft's advice is concerned, if $3,000 are a substantial amount for the OP, he should't invest neither in a stocks fund, nor in a ETF.
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livesoft
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by livesoft »

And we might as well ask, why an S&P500 index fund and not a Total US Stock Market index fund instead?
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by triceratop »

Thesaints wrote:
hdas wrote:The potential pricing dislocation of ETF's during times of market stress are an advantage for the investor that has the right temperament and the time availability. Check the opportunities available on May 6/2010, Aug 24 2015. Cheers.
Is it temperament, or a crystal ball ?

As livesoft's advice is concerned, if $3,000 are a substantial amount for the OP, he should't invest neither in a stocks fund, nor in a ETF.
This is incorrect in my view. My initial investment was only $3k, into an index fund, the S&P 500 fund. It was an excellent choice, even though my returns were initially negative. It is also the case that $3k seemed like a substantial sum to me, at the time. Indeed, it was 50% of my net worth. I'm curious as to why you think those starting out investing should not invest. Seems to be a contradiction in terms.

Also, the events on Aug 24, 2015 were well-noticed at the time right here on Bogleheads.org, so it isn't the case that we only recognize these as good opportunities in hindsight.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
coincollector
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by coincollector »

The fee on an ETF can also be lower than a Mutual Fund unless you have $10k to sink into an admiral share. Grant it, the difference is minimal but it does exist. For example VOO has a fee of 0.04% and VFINX has a fee of 0.14%. If you invested $3k into each, your fee for VOO would be $1.20 and VFINX would be $4.20. Not a huge difference but a difference never the less. Fees do matter, no matter how small the difference might be. That was the whole reason why Vanguard was started in the first place.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by livesoft »

triceratop wrote:Also, the events on Aug 24, 2015 were well-noticed at the time right here on Bogleheads.org, so it isn't the case that we only recognize these as good opportunities in hindsight.
Even May 6, 2010 was noticed.
viewtopic.php?p=729879#p729879

Here's a post on 8/24/2015:
viewtopic.php?p=2599520#p2599520

It turns out that one can have alerts sent to their smart phone about debacles, so such things can be easily noticed.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Thesaints »

triceratop wrote:
Thesaints wrote:
hdas wrote:The potential pricing dislocation of ETF's during times of market stress are an advantage for the investor that has the right temperament and the time availability. Check the opportunities available on May 6/2010, Aug 24 2015. Cheers.
Is it temperament, or a crystal ball ?

As livesoft's advice is concerned, if $3,000 are a substantial amount for the OP, he should't invest neither in a stocks fund, nor in a ETF.
This is incorrect in my view. My initial investment was only $3k, into an index fund, the S&P 500 fund. It was an excellent choice, even though my returns were initially negative. It is also the case that $3k seemed like a substantial sum to me, at the time. Indeed, it was 50% of my net worth. I'm curious as to why you think those starting out investing should not invest. Seems to be a contradiction in terms.

Also, the events on Aug 24, 2015 were well-noticed at the time right here on Bogleheads.org, so it isn't the case that we only recognize these as good opportunities in hindsight.
Investing in stocks 100% of one's net worth has now become a good idea ? The same people who support such an adventure here, seem to be absolutely opposed in other threads.

As the events of aug 24th are concerned, most people are blissfully oblivious of risk undertaken. You say "it was obvious", I reply "maybe it was not so obvious and you just got lucky". In finance, by and large, obvious things are obvious to everybody. As my former boss used to say, there are no sharper brains, only more sensitive ears.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by triceratop »

Thesaints wrote:
triceratop wrote:
Thesaints wrote:
hdas wrote:The potential pricing dislocation of ETF's during times of market stress are an advantage for the investor that has the right temperament and the time availability. Check the opportunities available on May 6/2010, Aug 24 2015. Cheers.
Is it temperament, or a crystal ball ?

As livesoft's advice is concerned, if $3,000 are a substantial amount for the OP, he should't invest neither in a stocks fund, nor in a ETF.
This is incorrect in my view. My initial investment was only $3k, into an index fund, the S&P 500 fund. It was an excellent choice, even though my returns were initially negative. It is also the case that $3k seemed like a substantial sum to me, at the time. Indeed, it was 50% of my net worth. I'm curious as to why you think those starting out investing should not invest. Seems to be a contradiction in terms.

Also, the events on Aug 24, 2015 were well-noticed at the time right here on Bogleheads.org, so it isn't the case that we only recognize these as good opportunities in hindsight.
Investing in stocks 100% of one's net worth has now become a good idea ? The same people who support such an adventure here, seem to be absolutely opposed in other threads.

As the events of aug 24th are concerned, most people are blissfully oblivious of risk undertaken. You say "it was obvious", I reply "maybe it was not so obvious and you just got lucky". In finance, by and large, obvious things are obvious to everybody. As my former boss used to say, there are no sharper brains, only more sensitive ears.
I said $3k was 50% of my net worth at the time, not 100%. Furthermore, the problem with making universal statements about the wisdom of making an initial investment into a stock mutual fund is that it fails to consider possible circumstances. For example, prior to making this investment, I may have accepted a position which had guaranteed income for a period of months/years.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by raven15 »

Dbonz wrote:I will be transferring an account to either Fidelity or Vanguard and place it in to a S&P 500 index fund. What it the difference between a mutual S&P 500 index fund and an ETF S&P 500 index fund?

What are the advantage/cons of each?

Thanks in advance.
If use use Fidelity and it is taxable, the mutual fund will be taxed more heavily on short and long term capital gains. So in this case use the ETF. I learned the hard way, fortunately I am still in the capital gain harvesting phase so I can sell in a few months. Surprised no one said that yet.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Thesaints »

triceratop wrote: I said $3k was 50% of my net worth at the time, not 100%. Furthermore, the problem with making universal statements about the wisdom of making an initial investment into a stock mutual fund is that it fails to consider possible circumstances. For example, prior to making this investment, I may have accepted a position which had guaranteed income for a period of months/years.
Not sure how much money were 3k at that time. Today, one should build a several 10's of k's emergency fund, before venturing into stock investments.
"Guaranteed income" it depends on how much income we are talking about. Obviously Steph Curry does not need an emergency fund.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by triceratop »

Thesaints wrote:
triceratop wrote: I said $3k was 50% of my net worth at the time, not 100%. Furthermore, the problem with making universal statements about the wisdom of making an initial investment into a stock mutual fund is that it fails to consider possible circumstances. For example, prior to making this investment, I may have accepted a position which had guaranteed income for a period of months/years.
Not sure how much money were 3k at that time. Today, one should build a several 10's of k's emergency fund, before venturing into stock investments.
"Guaranteed income" it depends on how much income we are talking about. Obviously Steph Curry does not need an emergency fund.
This was 3 years ago.

I take issue with the assertion that one should have $30,000+ in emergency fund before venturing into stocks. I don't know how many Bogleheads would make a statement like that, but usually the advice centers around months of expenses, not fixed dollar amounts. For me, $30,000 (several tens of thousands) was approximately 2.5 years of expenses; this is an absurdly large emergency fund for a period of one's life when one should take maximal risk. Your general advice sounds tailored for someone who has much more expenses, but that is not necessarily the case for someone just starting out investing. We do not know the OP's situation but it may be entirely appropriate to direct an initial investment of $3k into stock funds.

Let's say it was more than $30,000 over a period of 3-5 years (anonymized for security sake).

The point in all of this is that generic advice made into universal rules will fail in some, if not many, individual cases.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Thesaints »

Reducing high expenses is almost always possible. Reducing low expenses is almost always impossible.
I've written elsewhere that planning for a comfortable lifestyle, rather than a frugal one, is not an extravagance but a conservative approach.

Furthermore, as frugal as one can be, unexpected medical expenses cost roughly the same for everybody and a few thousand bucks don't go that far in that respect.

Finally, as large as the risk one can take in financial markets might be, a 3k investment will never amount to real money. Had the OP set his sights on the options market, perhaps I might even agree, although other considerations would push me to advise against such a plan as well.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by livesoft »

Geez, the OP "will be transferring an account ...." Do we have to speculate about the rest? If so, then I speculate they have a $5 million emergency fund already.
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Dbonz
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by Dbonz »

Guess I should have provided more info (I've been away from the computer for a while and just now noticed more responses).

The account I am transferring is an IRA and is a little over $40,000 and was wanting to place it where I would have more control with lower fees. I have a larger amount with my current employer's 401K.
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Re: ETF vs Mutual Fund (for an Index Fund)

Post by watchnerd »

Thesaints wrote:Reducing high expenses is almost always possible. Reducing low expenses is almost always impossible.
I've written elsewhere that planning for a comfortable lifestyle, rather than a frugal one, is not an extravagance but a conservative approach.
link?
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