Mixing Mutual Funds and ETFs?

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Topic Author
runyanorama
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Joined: Tue May 29, 2018 7:36 pm

Mixing Mutual Funds and ETFs?

Post by runyanorama » Mon Apr 29, 2019 12:01 pm

Good morning!

I'm a long-time Boglehead lurker and novice investor. I have to say, this forum has been one of my greatest discoveries on the Internet. The depth of knowledge and overall level of civility I see here is unparalleled anywhere else online. Thanks for all you do!

My question is this-- Can anyone give me a reason why I should NOT mix some ETFs in with my mutual funds to achieve a higher level of diversification? The total dollar amount of my holdings isn't large enough for me to achieve this with Vanguard's $3,000 minimum investment requirement for mutual funds.

Some background about me-- I'm a 32 year-old Boglehead with a relatively long (30-35 year) investing horizon. Approximately 90% of my assets are held in a Roth IRA with the remainder in a not-so-great, high-expense Roth 403(b) account. Asset allocation is as follows:

ROTH IRA
18% VTSAX Vanguard Total Stock Market Index Admiral Shares
15% VSIAX Vanguard Small-Cap Value Admiral Shares
25% VTMGX Vanguard Developed Markets Index Admiral Shares
13% VEMAX Vanguard Emerging Markets Index Admiral Shares
7% VGSIX Vanguard REIT Index Investor Shares
20% VBTLX Vanguard Total Bond Market Index Admiral Shares
2% IAU iShares Gold Trust ETF

ROTH 403(b)
17% VTSAX Vanguard Total Stock Market Index Admiral Shares
17% VSIAX Vanguard Small-Cap Value Index Admiral Shares
20% VTIAX Vanguard Total International Stock Market Index Admiral Shares
20% VEMAX Vanguard Emerging Markets Index Admiral Shares
6% VGSLX Vanguard REIT Index Admiral Shares
20% VBTLX Vanguard Total Bond Market Index Admiral Shares


Here are some ETFs I'm considering incorporating into my IRA

VB Vanguard Small-Cap ETF
VTV Vanguard Value ETF
VTIP Vanguard Short-Term Inflation-Protected Securities
BND Vanguard Total Bond Market ETF
**** (I'm thinking about changing my bond market mutual fund to a 50/50 split of BND and VTIP)


Any comments or suggestions would be appreciated. Is mixing in some ETFs worth it? Should I just resist the temptation to tamper with a decent set-up? I've got monthly auto-contributions to my IRA and 403(b) set up, and I understand that ETFs don't work with that sort of thing but I'm okay with manually transferring that money over every month.

Thanks!

vu8
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Re: Mixing Mutual Funds and ETFs?

Post by vu8 » Mon Apr 29, 2019 12:04 pm

I have both Mutual funds and ETFs, I bought a bunch of Vanguard ETFs because back in the old days when I was with various brokerages it would be prohibitively expensive to purchase mutual funds at those brokerages. Opened an account at Vanguard and has bought ONLY mutual funds at Vanguard ever since. Loved the simplicity, no trading characteristics of mutual funds. I would suggest you to just stick with mutual funds, you're spending maybe 10-50 bucks a year to save you from a messy asset allocation. Stick with simplicity and hold the course.

Jack FFR1846
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Re: Mixing Mutual Funds and ETFs?

Post by Jack FFR1846 » Mon Apr 29, 2019 12:07 pm

I've got both ETFs and mutual funds. The downside of an ETF to a broker is that you can really easily transfer it in kind to another broker. Not so for some mutual funds.

I think most brokers besides Vanguard have done away with minimums. Fidelity just combined a bunch and tanked the ER for a ton of index funds, Schwab lowered its MF rates to match their ETFs and haven't had a minimum unless it was like $100 and TDAmeritrade has no minimums for anything I've ever bought (all ETFs).
Bogle: Smart Beta is stupid

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Youngblood
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Re: Mixing Mutual Funds and ETFs?

Post by Youngblood » Mon Apr 29, 2019 12:08 pm

I don't see mixing funds with ETFs a problem.
"I made my money by selling too soon." | Bernard M. Baruch

DSInvestor
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Re: Mixing Mutual Funds and ETFs?

Post by DSInvestor » Mon Apr 29, 2019 12:18 pm

You don't need 7 funds/ETFs in each account. Treat all accounts as one big portfolio and then allocate accordingly. If the 403b is much smaller than the IRA, allocate the 403b to the lowest cost investment option and then use the Roth IRA to round out the portfolio.

In the early stages of accumulation, your savings rate will have a much larger impact on the growth of the portfolio than your asset allocation. Say you have 50K in assets today and your portfolio grows 10% or $5K. If you contribute 25K/yr, your new money is providing most of the increase in the portfolio. Compare that to a 1MM portfolio that grows 10% or 100K compared to the same 25K annual contribution. Keep it simple and focus on your savings rate in the early years.

You will find that it is easier to qualify for admiral shares if you consolidate your holdings to fewer funds. Maybe consolidate developed markets and emerging markets to Total International Admiral, for example. You may do just fine with 3 funds (Total Stock, Total international stock and Total Bond Market). Adding more funds doesn't necessary add diversification. Total Stock market holds market weight of large cap, mid cap, small cap and REIT, so there may be no need to hold a small cap or REIT fund unless your goal is to overweight those asset classes.

While my portfolio does have a mix of ETF and mutual funds, I greatly prefer mutual funds which allow for automated transactions. I use ETFs to hold vanguard index funds in non-vanguard accounts before Fidelity started offering competitively priced index funds.
Last edited by DSInvestor on Mon Apr 29, 2019 12:34 pm, edited 1 time in total.
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carmonkie
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Re: Mixing Mutual Funds and ETFs?

Post by carmonkie » Mon Apr 29, 2019 12:25 pm

It looks like you are trying to maintain the same funds and allocations across both of your ROTH accounts. If you look at your accounts as a whole, this is really not needed and you should be able to simplify the number of holdings, but this might be just mental accounting in your part. I stopped using multiple international funds to slice that segment and just went all in Vanguard Total International.

At 32, I do not think TIPS are required. TIPS might be needed when you are near retirement.

What is not so great about your ROTH 403(b), you listed some great funds there. Is it the maintenance expenses?
2% in the Gold ETF is hardly anything to move the needle, I would move that to the Total Stock Market, the Gold components are most likely also part of VTSAX.

I have some ETFs where i did not have the min to use the Fund Version. I like MF because you can add any amount vs whole shares of the ETF.

mega317
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Re: Mixing Mutual Funds and ETFs?

Post by mega317 » Mon Apr 29, 2019 3:20 pm

Mixing mutual funds and ETFs is fine. I DON'T think you should do it as a way around minimums. Think a little more long-term than that. Even if you're committed to having 13 funds, how long is it really going to take for you to get $39k? Use whichever you prefer for other reasons, and if it's mutual funds then just build up one at a time.

Topic Author
runyanorama
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Re: Mixing Mutual Funds and ETFs?

Post by runyanorama » Mon Apr 29, 2019 3:33 pm

carmonkie wrote:
Mon Apr 29, 2019 12:25 pm
It looks like you are trying to maintain the same funds and allocations across both of your ROTH accounts. If you look at your accounts as a whole, this is really not needed and you should be able to simplify the number of holdings, but this might be just mental accounting in your part. I stopped using multiple international funds to slice that segment and just went all in Vanguard Total International.

At 32, I do not think TIPS are required. TIPS might be needed when you are near retirement.

What is not so great about your ROTH 403(b), you listed some great funds there. Is it the maintenance expenses?
2% in the Gold ETF is hardly anything to move the needle, I would move that to the Total Stock Market, the Gold components are most likely also part of VTSAX.

I have some ETFs where i did not have the min to use the Fund Version. I like MF because you can add any amount vs whole shares of the ETF.

The funds themselves offered in my 403b are very good, it's just the fact that I have to purchase them using an insurance company as a custodian that bothers me-- this adds an extra 65 basis points to my expenses. I'm lucky to have decent investment options, since I know a lot of people with 403b accounts get screwed over and placed in annuities. And regarding my gold ETF-- I just read some of William Bernstein's books in which he recommends a slight allocation to gold as a means of achieving lower correlation between assets. That's all I was going for with my gold position. And I'll forego the TIPS until I'm an old guy, as you suggested.

Thanks for the suggestions! I'm thinking I'll probably stick with the MF for the time being, but I look forward to seeing any other thoughts on the subject.

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Duckie
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Re: Mixing Mutual Funds and ETFs?

Post by Duckie » Mon Apr 29, 2019 4:02 pm

runyanorama wrote:Can anyone give me a reason why I should NOT mix some ETFs in with my mutual funds to achieve a higher level of diversification?
Mixing ETFs with mutual funds is fine if that's what you want. However, your premise is mistaken. Holding Total Stock Market, Total International Stock, and Total Bond Market is 99% diversified. Adding all the other funds is not adding diversification, it's adding complication. You are overweighting slices of the market that are already contained in the three total market funds. That's fine if you want to tilt, but you're confusing overweighting with diversifying.
I'm thinking about changing my bond market mutual fund to a 50/50 split of BND and VTIP
You don't need TIPS until you're near retirement age (if at all).

MotoTrojan
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Re: Mixing Mutual Funds and ETFs?

Post by MotoTrojan » Mon Apr 29, 2019 4:30 pm

carmonkie wrote:
Mon Apr 29, 2019 12:25 pm
It looks like you are trying to maintain the same funds and allocations across both of your ROTH accounts. If you look at your accounts as a whole, this is really not needed and you should be able to simplify the number of holdings, but this might be just mental accounting in your part. I stopped using multiple international funds to slice that segment and just went all in Vanguard Total International.

At 32, I do not think TIPS are required. TIPS might be needed when you are near retirement.

What is not so great about your ROTH 403(b), you listed some great funds there. Is it the maintenance expenses?
2% in the Gold ETF is hardly anything to move the needle, I would move that to the Total Stock Market, the Gold components are most likely also part of VTSAX.

I have some ETFs where i did not have the min to use the Fund Version. I like MF because you can add any amount vs whole shares of the ETF.
Agreed. In general I think you should simplify your AA to 3-5 asset classes.

aristotelian
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Re: Mixing Mutual Funds and ETFs?

Post by aristotelian » Mon Apr 29, 2019 4:32 pm

Youngblood wrote:
Mon Apr 29, 2019 12:08 pm
I don't see mixing funds with ETFs a problem.
I also don't see how it increases "diversification". VTSAX and VTI are exactly the same fund.

Topic Author
runyanorama
Posts: 10
Joined: Tue May 29, 2018 7:36 pm

Re: Mixing Mutual Funds and ETFs?

Post by runyanorama » Mon Apr 29, 2019 8:34 pm

Duckie wrote:
Mon Apr 29, 2019 4:02 pm
runyanorama wrote:Can anyone give me a reason why I should NOT mix some ETFs in with my mutual funds to achieve a higher level of diversification?
Mixing ETFs with mutual funds is fine if that's what you want. However, your premise is mistaken. Holding Total Stock Market, Total International Stock, and Total Bond Market is 99% diversified. Adding all the other funds is not adding diversification, it's adding complication. You are overweighting slices of the market that are already contained in the three total market funds. That's fine if you want to tilt, but you're confusing overweighting with diversifying.
I'm thinking about changing my bond market mutual fund to a 50/50 split of BND and VTIP
You don't need TIPS until you're near retirement age (if at all).
I appreciate the correction-- I misspoke (mis-wrote?). As you can see, I've been attempting a tilt toward small-cap and 'value' and was hoping to continue to do so with the Value and Small-Cap ETFs. But after seeing some responses here, I'm going to go with my gut instinct and resist the temptation to tinker with what I have.

Thanks!

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Youngblood
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Re: Mixing Mutual Funds and ETFs?

Post by Youngblood » Tue Apr 30, 2019 3:03 am

aristotelian wrote:
Mon Apr 29, 2019 4:32 pm
Youngblood wrote:
Mon Apr 29, 2019 12:08 pm
I don't see mixing funds with ETFs a problem.
I also don't see how it increases "diversification". VTSAX and VTI are exactly the same fund.
I wasn’t addressing anything about asset allocation or OP's current portfolio. I just don't think that mixing MFs with ETFs is in and of itself a bad thing. It was one opinion and one simple sentence.
"I made my money by selling too soon." | Bernard M. Baruch

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