Yet another ETF premium/discount discussion

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xb7
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Yet another ETF premium/discount discussion

Post by xb7 » Tue Jul 09, 2019 12:45 pm

Apologies if this strikes anyone as the start of a redundant thread, but I have searched and found multiple discussions on this topic over the years on this site, but nothing seemed to get quite at what I'm looking for --- or possibly I just didn't understand something that did!

Background:

I'm heading towards a 4-fund portfolio, currently using traditional mutual funds rather than ETFs --- flagship versions of total: domestic stock, international stock, domestic bond, and international bond. These are (in that same order) VTSAX, VTIAX, VBTLX, and VTABX.

And of course there are ETF equivalents, same order: VTI, VXUS, BND, and BNDX.

I see that now all four ETF equivalents have a lower expense ratio than the open end fund equivalents. The differences (subtracting one from the other) in the same order are: 0.01%, 0.02%, 0.015%, and 0.02%. Of course this doesn't amount to a ton of money, but as assets grow over time and assessing the higher expense ratios year after year, I think it could be significant.

And I understand that I can make a one-time (one direction only) conversion of these funds on a tax free basis to the equivalent ETF.
Exception: according to Vanguards FAQ on this topic, VBTLX (Total Bond) is an exception, so at least on the taxable side that would be a taxable event for me to 'convert' (i.e., sell all shares of one and buy the other with the proceeds).

Okay, so now to the question:

Can we get some sense of either or both of the typical case and some reasonable worst case scenario of how the premium/discount that ETFs trade at could cost me over the years from rebalancing --- and then put that into context of what I would be saving with the lower expense ratios of the ETFs ?

My current thinking:

It really depends on what assumptions you make about 'typical' vs. 'worst case' scenarios. If one were to posit that I save .02% in expense ratio, but could perhaps lose 0.2% --- ten times as much --- from selling at some future date at a reduced premium --- then it's certainly possible that this premium/discount thing could conceivably make it better to stay with open end funds. But of course it can go the other way, and on balance I suppose one might assume that over time unless a person were pretty unlucky that the sometime gains from changes to the premium/discount would offset other losses from same.

More importantly I think is to realize that in any given year I'm only talking about selling (to generate living expenses) or rebalancing a relatively small percentage of overall holdings, whereas the reduced expense ratio applies annually to the entire portfolio.

So my tentative conclusion is that an easy, "boglehead" approach to this might be to just recognize that the savings in expense ratios over time will likely be greater than net (if any) premium/discount 'costs' from rebalancing, and that I could therefore choose to just completely ignore the whole premium/discount thing, just pay attention to market price rather than NAV and "don't worry, be happy". Does this strike others here as being true?

Since this would be a one-time conversion --- "no backsies" without tax ramifications for the funds that I hold on the taxable side --- I want to be slow in making this decision. Last time I looked at this I think that only some of the ETFs offered lower expense ratios, and I had concluded at that time that I didn't want to mess with it. Now I'm leaning the other way.

Any insights on the above would be appreciated, TIA !

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Re: Yet another ETF premium/discount discussion

Post by Shallowpockets » Tue Jul 09, 2019 12:50 pm

Explain what you mean by premium discount costs. This seems to be a sticking point.

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Re: Yet another ETF premium/discount discussion

Post by whodidntante » Tue Jul 09, 2019 12:55 pm

The equity indexes you mentioned are all really easy to hedge, so the premium/discount will not drift very far from NAV. That's because there are market participants who will try to profit from the imbalance, including the APs. Most likely any friction due to unfavorable premium/discount when you trade is going to be negligible. Sometimes you'll win and sometimes you'll lose but on average you'll be OK.

At most you might want to look before you trade, especially early in the day or after big market moving news. Even that probably isn't needed for the largest equity index ETFs. I've never met anybody who managed to buy during a flash crash anywhere near the chart bottom. Probably it is an artifact of stop loss orders becoming market sell orders.

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Re: Yet another ETF premium/discount discussion

Post by livesoft » Tue Jul 09, 2019 1:00 pm

I don't care about the premium / discount for equity ETFs because I think the NAV is just plain wrong since it is never calculated accurately in real-time.

As far as bond ETFs go, I do realize that sometimes there is a disconnect between what the bond ETF is selling for and the NAV based on the mutual fund and other things. In such cases, I will be a net buyer of the bond ETF and not sell. I can do that because I own both bond ETFs and bond mutual funds. Thus, I don't see any real chance of the discount to NAV losing me any money. Instead I will take advantage of any discounts.
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Re: Yet another ETF premium/discount discussion

Post by vineviz » Tue Jul 09, 2019 1:07 pm

xb7 wrote:
Tue Jul 09, 2019 12:45 pm
It really depends on what assumptions you make about 'typical' vs. 'worst case' scenarios. If one were to posit that I save .02% in expense ratio, but could perhaps lose 0.2% --- ten times as much --- from selling at some future date at a reduced premium ---
A premium or discount of 0.2% is literally an order of magnitude higher than any reasonable expectation for the kinds of ETFs you are discussing.

The vast majority of the time (and I mean like 99.9999% of the time), these four ETFs are going to trade within 0.025% of their actual NAV. In fact, when the ETF price differs from the reported NAV it's far more likely that the reported NAV is stale (aka "wrong").

Taking any reasonable precautions (avoid non-marketable limit orders, avoid entering trades in the first or last 30 minutes the market is open), you'll never be at risk of a 0.2% gap between your trade execution and fair market value.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Yet another ETF premium/discount discussion

Post by xb7 » Tue Jul 09, 2019 1:16 pm

vineviz wrote:
Tue Jul 09, 2019 1:07 pm
A premium or discount of 0.2% is literally an order of magnitude higher than any reasonable expectation for the kinds of ETFs you are discussing.

The vast majority of the time (and I mean like 99.9999% of the time), these four ETFs are going to trade within 0.025% of their actual NAV. In fact, when the ETF price differs from the reported NAV it's far more likely that the reported NAV is stale (aka "wrong").

Taking any reasonable precautions (avoid non-marketable limit orders, avoid entering trades in the first or last 30 minutes the market is open), you'll never be at risk of a 0.2% gap between your trade execution and fair market value.
Of the four funds that I'm focused on, looking right now on Vanguard's website, BNDX currently trades at $57.57 per share, which is a premium of $0.14 to NAV. That's a 0.24% premium.

I'm not claiming that represents any sort of norm, but via my public library I can log on to the Morningstar site and see premium/discount history for various ETFs, including these four. BNDX often trades at a substantial premium, but historically the premium has come down sometimes and once was even briefly trading at a discount, not all that long ago if I recall correctly.

I take your meaning, and am not disagreeing, but it's to some degree about psychology. I guess I'm trying to think of a "relatively worst case" (not absolute worst case), heading towards this idea that it's reasonable for me to just ignore the premium/discount.

Which I think is what you're suggesting too.

And I do recognize that really really understanding premium/discounts can be tricky and subtle, especially so with international funds.

Thanks for the feedback!

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Re: Yet another ETF premium/discount discussion

Post by vineviz » Tue Jul 09, 2019 1:36 pm

xb7 wrote:
Tue Jul 09, 2019 1:16 pm
And I do recognize that really really understanding premium/discounts can be tricky and subtle, especially so with international funds.
Indeed it can be a tricky subject, and many investors may very well feel like they are better off having things like bid/ask spread and premiums/discounts to NAV hidden from them (as they are when they invest in open-end mutual funds) than having them be visible (as they are in ETFs).

That doesn't mean they actually ARE better off mind you: the same costs and risks exist through either mechanism.

The takeaway message, IMHO, is that the default assumption should be that the premium/discount data you see at Morningstar or wherever for these four ETFs is much more wrong than right. And, as a result, that data should not be relied upon to make investment decisions.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Yet another ETF premium/discount discussion

Post by ohai » Tue Jul 09, 2019 1:39 pm

Usually, funds with large discount or premium to NAV will stay that way for a long time. This is often the case with bond funds, since it is difficult to replicate the fund's actual holdings. For example, there are some PIMCO funds that have persistent 5% ish premiums to NAV, since there isn't much other way that investors can get the same exposure. For stocks, it is much easier to arbitrage away these differences, and every bank has a trading desk that does this.

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Re: Yet another ETF premium/discount discussion

Post by schooner » Tue Jul 09, 2019 2:05 pm

vineviz wrote:
Tue Jul 09, 2019 1:36 pm
xb7 wrote:
Tue Jul 09, 2019 1:16 pm
And I do recognize that really really understanding premium/discounts can be tricky and subtle, especially so with international funds.
Indeed it can be a tricky subject, and many investors may very well feel like they are better off having things like bid/ask spread and premiums/discounts to NAV hidden from them (as they are when they invest in open-end mutual funds) than having them be visible (as they are in ETFs).

That doesn't mean they actually ARE better off mind you: the same costs and risks exist through either mechanism.

The takeaway message, IMHO, is that the default assumption should be that the premium/discount data you see at Morningstar or wherever for these four ETFs is much more wrong than right. And, as a result, that data should not be relied upon to make investment decisions.
I don’t think the data backs this up. Intraday price movements account for almost none of the market’s return. The bid/ask is just a tiny commission you pay to play in the sunlight, reducing your returns.

Source:
https://www.nytimes.com/2018/02/02/your ... ading.html

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Re: Yet another ETF premium/discount discussion

Post by Shallowpockets » Tue Jul 09, 2019 2:18 pm

Sounds like your general idea of discounts and premiums is the difference you observe between the real time ETF level II quotes verses the NAV valued at end of the day of a fund of the same sort.
You take your chances on the NAV or else you pay the ETF in real time with a limit order, which is what you feel you would pay.
The discount is only there if you are talking the variable price over one day. Could maybe not even be a discount. If you are looking at real time ETF prices may be better to look at the trend over a longer time frame. Or look at open verses close prices.
Mmmm. Market timing?
The spread on bid ask for VTI and SPY is usually about .01 cents. But right now the difference on todays total price VTI is approx. 53 cents. That is a large difference. Depends on when you pulled the trigger.
OP is your concern that the NAV end of day may leave you less or cost you more than trading real time? And you do not want that uncertainty.

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Re: Yet another ETF premium/discount discussion

Post by vineviz » Tue Jul 09, 2019 2:32 pm

schooner wrote:
Tue Jul 09, 2019 2:05 pm
I don’t think the data backs this up.
Actually, it does.
schooner wrote:
Tue Jul 09, 2019 2:05 pm
Intraday price movements account for almost none of the market’s return.
Sorry, not true either. Also irrelevant.
schooner wrote:
Tue Jul 09, 2019 2:05 pm
The bid/ask is just a tiny commission you pay to play in the sunlight, reducing your returns.
The bid/ask spread is not a commission. It's a cost of investing, and you pay it whether you use ETFs or open-end fund shares. The only differences are whether you have it explicitly detailed (as in ETFs) versus concealed (as in mutual funds) and whether you pay only your own costs (as in ETFs) versus subsidize the trades of other more frequent traders (as in mutual funds).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Yet another ETF premium/discount discussion

Post by schooner » Tue Jul 09, 2019 2:47 pm

vineviz wrote:
Tue Jul 09, 2019 2:32 pm
schooner wrote:
Tue Jul 09, 2019 2:05 pm
I don’t think the data backs this up.
Actually, it does.
schooner wrote:
Tue Jul 09, 2019 2:05 pm
Intraday price movements account for almost none of the market’s return.
Sorry, not true either. Also irrelevant.
schooner wrote:
Tue Jul 09, 2019 2:05 pm
The bid/ask is just a tiny commission you pay to play in the sunlight, reducing your returns.
The bid/ask spread is not a commission. It's a cost of investing, and you pay it whether you use ETFs or open-end fund shares. The only differences are whether you have it explicitly detailed (as in ETFs) versus concealed (as in mutual funds) and whether you pay only your own costs (as in ETFs) versus subsidize the trades of other more frequent traders (as in mutual funds).
Do you have any citation to support the claim that a bid/ask spread is “concealed” in the NAV and that mutual fund investors pay this phantom cost.

I’ve cited a specific study published in a newspaper of record. I’ll admit I’m wrong but I need to see some countervailing proof

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Re: Yet another ETF premium/discount discussion

Post by xb7 » Tue Jul 09, 2019 3:04 pm

Shallowpockets wrote:
Tue Jul 09, 2019 2:18 pm
OP is your concern that the NAV end of day may leave you less or cost you more than trading real time? And you do not want that uncertainty.
I'm unconcerned about the premium/discount on a day-to-day basis, and I live just fine with uncertainty in general. I just want to get a sense for how much a "worst case" (or maybe just "bad case") scenario might reasonably cost me due to the premium/discount thing from infrequent transactions --- annual rebalancing, and/or selling shares because I want to generate cash for living expenses.

I'm just recognizing that switching to ETFs exposes me to a new risk of losing minor amounts of money, and my guess at this point is that what I save in lower expense ratios will in most reasonable scenarios more than cover a worst case (or maybe reasonable "bad case") scenario from, say, buying shares at a premium and selling later at a discount.

That's the input I seek --- does it seem reasonable to others to just ignore the premium/discount issue on the theory that the overall lower expense ratios will still leave me a winner by switching to ETFs ? From running some sample numbers my intuition says that this makes sense, and I'm hoping here for the good version of "group think" to help clarify my own thinking.

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Re: Yet another ETF premium/discount discussion

Post by vineviz » Tue Jul 09, 2019 3:51 pm

schooner wrote:
Tue Jul 09, 2019 2:47 pm
Do you have any citation to support the claim that a bid/ask spread is “concealed” in the NAV and that mutual fund investors pay this phantom cost.
"Concealed" implies an intent which may or may not be present, but it's an endemic feature of mutual funds for transaction costs to be buried deep in regulatory filings.

Nonetheless, it should be obvious that mutual fund managers must buy and sell securities on the market. It should be equally obvious that they will pay both a bid/ask spread and trading commissions to do so, with neither of these costs included in the reported expense ratio.

Investopedia is a bit "pop" but they do point it out:
Mutual Fund Transaction Costs
The average annual transaction cost for a mutual fund in the U.S. was 1.44%, according to a study by Edelen, Evans and Kadlec. The first of these costs is brokerage commissions from when a fund manager buys or sells a stock. Lower-turnover funds will pay less brokers' fees, though they may pay more than individual investor. A large mutual fund may also incur market impact costs, where the fund's sizable purchase of stock artificially drives the price higher. Some managers diminish these costs by spreading their purchases over longer periods of time. Last, the mutual fund will encounter spread costs, which can be greater when the manager trades stocks across global exchanges or those with less liquidity.


Most index funds will have much lower transaction costs than these, but they are never zero.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Yet another ETF premium/discount discussion

Post by schooner » Tue Jul 09, 2019 4:14 pm

vineviz wrote:
Tue Jul 09, 2019 3:51 pm
schooner wrote:
Tue Jul 09, 2019 2:47 pm
Do you have any citation to support the claim that a bid/ask spread is “concealed” in the NAV and that mutual fund investors pay this phantom cost.
"Concealed" implies an intent which may or may not be present, but it's an endemic feature of mutual funds for transaction costs to be buried deep in regulatory filings.

Nonetheless, it should be obvious that mutual fund managers must buy and sell securities on the market. It should be equally obvious that they will pay both a bid/ask spread and trading commissions to do so, with neither of these costs included in the reported expense ratio.

Investopedia is a bit "pop" but they do point it out:
Mutual Fund Transaction Costs
The average annual transaction cost for a mutual fund in the U.S. was 1.44%, according to a study by Edelen, Evans and Kadlec. The first of these costs is brokerage commissions from when a fund manager buys or sells a stock. Lower-turnover funds will pay less brokers' fees, though they may pay more than individual investor. A large mutual fund may also incur market impact costs, where the fund's sizable purchase of stock artificially drives the price higher. Some managers diminish these costs by spreading their purchases over longer periods of time. Last, the mutual fund will encounter spread costs, which can be greater when the manager trades stocks across global exchanges or those with less liquidity.


Most index funds will have much lower transaction costs than these, but they are never zero.
True, but I was only speaking to the OP portfolio of large Vanguard funds.

To the OP's question, I don't know if the bid/ask spread effect is greater than the difference in expense ratio. It would be great if Vanguard published some research on the subject.

My hunch is they are the same and the difference in expense ratio reflects that.

But I do know that market returns during the day have been nil, while virtually all of the market return has occurred overnight.

Why risk open market transactions with an ETFs when you can just purchase a MF at NAV?

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Re: Yet another ETF premium/discount discussion

Post by alex_686 » Tue Jul 09, 2019 4:38 pm

schooner wrote:
Tue Jul 09, 2019 4:14 pm
My hunch is they are the same and the difference in expense ratio reflects that.

But I do know that market returns during the day have been nil, while virtually all of the market return has occurred overnight.

Why risk open market transactions with an ETFs when you can just purchase a MF at NAV?

No - the expense ratio and the issues with pricing lay on different dimensions.

Vineviz has the right of it. I have struck the NAV of a fund and there is nothing magical about it. NAVs are a accountants estimate, and the inputs and models are less clean then tou think.

To the OP, there are issues surrounding pricing. Most are very small. They are also very hard to quantify. I think ETFs have a edge when the market is under stress. But overall I think it is a wash.

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Re: Yet another ETF premium/discount discussion

Post by schooner » Tue Jul 09, 2019 4:44 pm

alex_686 wrote:
Tue Jul 09, 2019 4:38 pm
schooner wrote:
Tue Jul 09, 2019 4:14 pm
My hunch is they are the same and the difference in expense ratio reflects that.

But I do know that market returns during the day have been nil, while virtually all of the market return has occurred overnight.

Why risk open market transactions with an ETFs when you can just purchase a MF at NAV?

No - the expense ratio and the issues with pricing lay on different dimensions.

Vineviz has the right of it. I have struck the NAV of a fund and there is nothing magical about it. NAVs are a accountants estimate, and the inputs and models are less clean then tou think.

To the OP, there are issues surrounding pricing. Most are very small. They are also very hard to quantify. I think ETFs have a edge when the market is under stress. But overall I think it is a wash.
I’m fine with that but where is the actual data to back up the switch from MFs to ETFs.

Not a finance guy, but I get queasy hearing things like “wash”.

The bid/ask spread is a tangible cost. A cost of greater liquidity for the investor.

My point is what benefit are you actually getting from that liquidity? Is it worth the cost?

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Re: Yet another ETF premium/discount discussion

Post by xb7 » Tue Jul 09, 2019 5:43 pm

schooner wrote:
Tue Jul 09, 2019 4:14 pm
To the OP's question, I don't know if the bid/ask spread effect is greater than the difference in expense ratio. It would be great if Vanguard published some research on the subject.
My hunch is they are the same and the difference in expense ratio reflects that.
FWIW, I didn't bring up bid/ask, my post focused on premium/discount, though of course both come into play.
Why risk open market transactions with an ETFs when you can just purchase a MF at NAV?
Per original post, because the ETF equivalents have a lower expense ratio. My feeling about this has shifted to think that the long term savings in lower expense ratios likely outweigh any reasonably expected 'costs' due to premium/discount, or indeed, bid/ask as well --- at least for the set of four funds that I'm interested in. But I can't easily quantify or 'prove' this, hence my request for feedback.

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Re: Yet another ETF premium/discount discussion

Post by grabiner » Tue Jul 09, 2019 8:42 pm

vineviz wrote:
Tue Jul 09, 2019 2:32 pm
schooner wrote:
Tue Jul 09, 2019 2:05 pm
The bid/ask is just a tiny commission you pay to play in the sunlight, reducing your returns.
The bid/ask spread is not a commission. It's a cost of investing, and you pay it whether you use ETFs or open-end fund shares. The only differences are whether you have it explicitly detailed (as in ETFs) versus concealed (as in mutual funds) and whether you pay only your own costs (as in ETFs) versus subsidize the trades of other more frequent traders (as in mutual funds).
Mutual funds do pay the spread for their trades, but low-turnover funds pay it on a much smaller fraction of their investments. If investors buy $100M and sell $90M of a mutual fund in one day, the fund pays trading costs on only $10M of stocks, not $190M.

When the transaction costs are significant (usually with growing funds in illiquid markets), Vanguard imposes a purchase fee, so that traders pay their own share of the costs. This fee goes back to the fund.
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Re: Yet another ETF premium/discount discussion

Post by alex_686 » Wed Jul 10, 2019 6:34 am

schooner wrote:
Tue Jul 09, 2019 4:44 pm
I’m fine with that but where is the actual data to back up the switch from MFs to ETFs.

Not a finance guy, but I get queasy hearing things like “wash”.

The bid/ask spread is a tangible cost. A cost of greater liquidity for the investor.

My point is what benefit are you actually getting from that liquidity? Is it worth the cost?
A couple of points.

I will try to find some decent research for you. Most of my stuff is either proprietary or behind a paywall.

Can you clarify your point on the benefit from liquidity? The standard position for ETFs is that low bid/ask spreads represents high liquidity and low trading costs, and that these are a good thing. You are not paying for that liquidity, you are benefiting from it.

Technically speaking, the bid/ask is a implicit cost, not a explicit cost. It is not what the industry would consider a tangible cost. This is not exactly a minor quibble.

There are lots of good studies that estimate the cost associated with trading and the bid/ask spread. Lots of good high quality visible data here. There are fewer on the premium/discount. The problem is that the bid/ask spread and the premium/discount lay on the same dimension.

Next - and critically - what is a better measure of value, the market price or the accountants' estimate of NAV? If there is a premium/discount is it because the market is wrong or are the accountants wrong? This is very hard to unravel.

Back to your question. I never said wash. While the cost of the bid spread and premium/discount of ETFs are hard to estimate they are very very small.

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Re: Yet another ETF premium/discount discussion

Post by schooner » Wed Jul 10, 2019 7:23 am

alex_686 wrote:
Wed Jul 10, 2019 6:34 am
schooner wrote:
Tue Jul 09, 2019 4:44 pm
I’m fine with that but where is the actual data to back up the switch from MFs to ETFs.

Not a finance guy, but I get queasy hearing things like “wash”.

The bid/ask spread is a tangible cost. A cost of greater liquidity for the investor.

My point is what benefit are you actually getting from that liquidity? Is it worth the cost?
A couple of points.

I will try to find some decent research for you. Most of my stuff is either proprietary or behind a paywall.

Can you clarify your point on the benefit from liquidity? The standard position for ETFs is that low bid/ask spreads represents high liquidity and low trading costs, and that these are a good thing. You are not paying for that liquidity, you are benefiting from it.

Technically speaking, the bid/ask is a implicit cost, not a explicit cost. It is not what the industry would consider a tangible cost. This is not exactly a minor quibble.

There are lots of good studies that estimate the cost associated with trading and the bid/ask spread. Lots of good high quality visible data here. There are fewer on the premium/discount. The problem is that the bid/ask spread and the premium/discount lay on the same dimension.

Next - and critically - what is a better measure of value, the market price or the accountants' estimate of NAV? If there is a premium/discount is it because the market is wrong or are the accountants wrong? This is very hard to unravel.

Back to your question. I never said wash. While the cost of the bid spread and premium/discount of ETFs are hard to estimate they are very very small.
Sure:

1) Research indicates the market return during normal trading hours is nil (actually a bit negative). All of the returns happen overnight. Source:

https://www.nytimes.com/2018/02/02/your ... ading.html

Therefore, over the long term, it does not matter when you purchase a security during a given day, your expected return is the same...unless you can time price movements intraday ;-)

2) ETFs can trade during the day. The cost of the ability to trade intraday is a bid/ask spread around NAV.

3) Traditional mutual funds don’t have the same cost because they trade only at close. If 100 shares are purchased and 90 are sold, there are only 10 shares that need to be completed in the market, and so only 10 subject to a similar cost through the potential bid/ask for the underlying securities.

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Re: Yet another ETF premium/discount discussion

Post by vineviz » Wed Jul 10, 2019 7:40 am

schooner wrote:
Wed Jul 10, 2019 7:23 am
3) Traditional mutual funds don’t have the same cost because they trade only at close. If 100 shares are purchased and 90 are sold, there are only 10 shares that need to be completed in the market, and so only 10 subject to a similar cost through the potential bid/ask for the underlying securities.
The same round-trip net effect is present for ETFs: VTI traded 11+ million shares last week but required net creations of less than 850,000 shares. This works for the benefit of ETF investors, keeping the bid/ask spread of the ETF under the weighted average bid/ask spread of the underlying securities.

The difference is that if you're a buy-and-hold investor in VTI and didn't buy or sell shares last week, your net transaction costs were zero.

If you're a buy-and-hold investor in VTSMX and didn't buy or sell shares last week, you paid the net transaction costs of the people who DID buy or sell shares.

The fact that a cost isn't obvious shouldn't be taken as evidence that it's not there.
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Re: Yet another ETF premium/discount discussion

Post by schooner » Wed Jul 10, 2019 7:43 am

vineviz wrote:
Wed Jul 10, 2019 7:40 am
schooner wrote:
Wed Jul 10, 2019 7:23 am
3) Traditional mutual funds don’t have the same cost because they trade only at close. If 100 shares are purchased and 90 are sold, there are only 10 shares that need to be completed in the market, and so only 10 subject to a similar cost through the potential bid/ask for the underlying securities.
The same round-trip net effect is present for ETFs: VTI traded 11+ million shares last week but required net creations of less than 850,000 shares. This works for the benefit of ETF investors, keeping the bid/ask spread of the ETF under the weighted average bid/ask spread of the underlying securities.

The difference is that if you're a buy-and-hold investor in VTI and didn't buy or sell shares last week, your net transaction costs were zero.

If you're a buy-and-hold investor in VTSMX and didn't buy or sell shares last week, you paid the net transaction costs of the people who DID buy or sell shares.

The fact that a cost isn't obvious shouldn't be taken as evidence that it's not there.
VTI has a bid/ask for every one of those transactions.

And most investors who buy and hold also dollar cost average and reinvest dividends. And they incur a cost every time they do that.

ETFs are great if you want to time the market. It’s just weird that ETF fans don’t like to admit that or put it in euphemistic language. There’s nothing wrong about trying to time intraday swings.

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vineviz
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Re: Yet another ETF premium/discount discussion

Post by vineviz » Wed Jul 10, 2019 8:38 am

schooner wrote:
Wed Jul 10, 2019 7:43 am
VTI has a bid/ask for every one of those transactions.
It's not going to be helpful to focus only on the number of transactions without taking into account the size of the transaction: the SUM of the bid/ask spread on those transactions for VTI roughly equal to the sum of the net bid/ask spreads on a similar dollar amount of mutual fund transactions.

Again, the difference is that the ETF transaction costs are entirely born by the people who actually make the transactions. In a mutual fund, every investor pays a pro-rated portion of everybody's transaction costs. That's fine if everyone has the same transaction frequency, but that's obviously not the case. In a mutual fund, buy-and-hold investors subsidize the frequent traders.

Imagine if you went out to dinner a friend and they wanted to split the tab equally: but you drank water and your friend drank a bottle of 1996 Chateau Lafite Rothschild. That's a mutual fund world. In an ETF world, you'd tell your friend to pay for their own wine. The mutual fund world is clearly a better one for your friend, but just as clearly not for you.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

schooner
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Re: Yet another ETF premium/discount discussion

Post by schooner » Wed Jul 10, 2019 9:04 am

vineviz wrote:
Wed Jul 10, 2019 7:40 am
schooner wrote:
Wed Jul 10, 2019 7:23 am
3) Traditional mutual funds don’t have the same cost because they trade only at close. If 100 shares are purchased and 90 are sold, there are only 10 shares that need to be completed in the market, and so only 10 subject to a similar cost through the potential bid/ask for the underlying securities.
The same round-trip net effect is present for ETFs: VTI traded 11+ million shares last week but required net creations of less than 850,000 shares. This works for the benefit of ETF investors, keeping the bid/ask spread of the ETF under the weighted average bid/ask spread of the underlying securities.

The difference is that if you're a buy-and-hold investor in VTI and didn't buy or sell shares last week, your net transaction costs were zero.

If you're a buy-and-hold investor in VTSMX and didn't buy or sell shares last week, you paid the net transaction costs of the people who DID buy or sell shares.

The fact that a cost isn't obvious shouldn't be taken as evidence that it's not there.
According to Vanguard, the average bid/ask spread for VTI is $0.02 / share. Source:
https://institutional.vanguard.com/VGAp ... daskspread

If volume is 11 million shares, that equals a transaction cost of $220,000 that investors pay to buy and sell VTI (this doesn't include any commissions) in a week. But, as you pointed out, there are only 850k shares created that week. Because mutual fund transactions are settled once a day (and assuming you're buying them directly from the issuer), buyers and sells can cancel each other out and only the net difference must be settled in the market (through the purchase or sale of the underlying securities). It's true the underlying securities must be bought and sold, and those are subject to a bid/ask spread as well. But Vanguard is a large institution that commands better prices. And that only needs to happen on a net basis.

Again, I realize the big advantage of ETFs is you can trade them during the day. I get that. But the research indicates that all of the fancy foot work with limit orders, etc. is not going to get you any more in the long run:

https://www.nytimes.com/2018/02/02/your ... ading.html

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Re: Yet another ETF premium/discount discussion

Post by vineviz » Wed Jul 10, 2019 9:15 am

schooner wrote:
Wed Jul 10, 2019 9:04 am
Again, I realize the big advantage of ETFs is you can trade them during the day. I get that.
That's only ONE of the advantages of ETFs, and not the most important advantage for most individual investors.

Open-end mutual funds have some advantages too, and someone might have very good reasons for preferring them over ETFs. I have no objection to that.

However, there's no need to defend such a preference for mutual funds by propagating a false narrative about ETFs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

schooner
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Re: Yet another ETF premium/discount discussion

Post by schooner » Wed Jul 10, 2019 9:22 am

vineviz wrote:
Wed Jul 10, 2019 9:15 am
schooner wrote:
Wed Jul 10, 2019 9:04 am
Again, I realize the big advantage of ETFs is you can trade them during the day. I get that.
That's only ONE of the advantages of ETFs, and not the most important advantage for most individual investors.

Open-end mutual funds have some advantages too, and someone might have very good reasons for preferring them over ETFs. I have no objection to that.

However, there's no need to defend such a preference for mutual funds by propagating a false narrative about ETFs.
I'm only talking Vanguard funds, which have a unique tax structure. We're probably closer in opinion on the rest.

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Re: Yet another ETF premium/discount discussion

Post by livesoft » Wed Jul 10, 2019 2:10 pm

schooner wrote:
Wed Jul 10, 2019 9:04 am
Again, I realize the big advantage of ETFs is you can trade them during the day. I get that. But the research indicates that all of the fancy foot work with limit orders, etc. is not going to get you any more in the long run:

https://www.nytimes.com/2018/02/02/your ... ading.html
The linked article has this:
On the other hand, if you had done the reverse, buying the E.T.F. at the first second of regular trading every morning at 9:30 a.m. and selling at the 4 p.m. close, you would be down 4.4 percent since 1993.
That reminded of this trade noted by this post and the follow on post:
viewtopic.php?p=2600976#p2600976 where the market dropped about 4.5% from after the opening to the close. That is, the entire 4.4 percent loss noted by the study occurred because of one single day: 08/25/2015. if that day had not happened, then their result would have been "you would be even since 1993" which makes complete sense because the NY Sttock exchange opens at 9:30 am after much of the day's business news has been released. Companies and government data reports generally occur outside of market open hours so that the news is fully disseminated and few, if any, people can take advantage, of the newly published information before anyone else.
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Re: Yet another ETF premium/discount discussion

Post by KyleAAA » Wed Jul 10, 2019 2:29 pm

schooner wrote:
Tue Jul 09, 2019 4:44 pm
alex_686 wrote:
Tue Jul 09, 2019 4:38 pm
schooner wrote:
Tue Jul 09, 2019 4:14 pm
My hunch is they are the same and the difference in expense ratio reflects that.

But I do know that market returns during the day have been nil, while virtually all of the market return has occurred overnight.

Why risk open market transactions with an ETFs when you can just purchase a MF at NAV?

No - the expense ratio and the issues with pricing lay on different dimensions.

Vineviz has the right of it. I have struck the NAV of a fund and there is nothing magical about it. NAVs are a accountants estimate, and the inputs and models are less clean then tou think.

To the OP, there are issues surrounding pricing. Most are very small. They are also very hard to quantify. I think ETFs have a edge when the market is under stress. But overall I think it is a wash.
I’m fine with that but where is the actual data to back up the switch from MFs to ETFs.

Not a finance guy, but I get queasy hearing things like “wash”.

The bid/ask spread is a tangible cost. A cost of greater liquidity for the investor.

My point is what benefit are you actually getting from that liquidity? Is it worth the cost?
I am not sure I understand your question. You pay bid/ask spread with both an etf and a mutual fund. With an etf, you pay it explicitly. With a mutual fund, you still pay it but you don’t see what it is at the time of the transaction, it is just taken out of the fund’s assets and you have to dig into the annual SEC filings to figure out what they are. You do not gain any extra liquidity as a result of it. The premium/discount is something that is unique to ETFs, but for large and liquid etfs it trends to 0% over time. The ability to enforce this was the innovation that enabled the creation of etfs to begin with. After reading your responses above I am still not sure what you are trying to claim. I don’t think anybody is making the case that the ability to trade intra-day is a de facto advantage of etfs. But the expense ratios are lower, they tend to be at least as, if not more, tax efficient, and you can access many more asset classes inexpensively in etf vs mutual fund form. Add them all together and there are plenty of reasons for long term investors to hold etfs. I hold both. The ability to trade during he day is not the big advantage to long term investors, it is mostly irrelevant.

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