When would I want ETFs vs Funds?

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Cait
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When would I want ETFs vs Funds?

Post by Cait »

I have almost everything with Vanguard. I’ve noticed over the past year I get more and more emails about their ETF options. Are there particular pros (or cons) of their ETF vs their Fund options? I want a fairly simple portfolio.

Thanks!
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22twain
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Re: When would I want ETFs vs Funds?

Post by 22twain »

From our Wiki:
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

A couple of discussion threads:
viewtopic.php?t=263464
viewtopic.php?t=222467

You can find more by entering "etfs vs mutual funds" in the search box at the top right of this page.

If I were in accumulation mode, making frequent small contributions to my account, I would prefer mutual funds because one can buy exact dollar amounts, without being restricted to whole shares.
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brad.clarkston
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Re: When would I want ETFs vs Funds?

Post by brad.clarkston »

The short answer is you do not need them.

The longer answer is it depends on when you want to buy and how much. ETF's are bought in full 1 share prices and are closed at the end of the day.
While funds can be bought in dollar amounts (less than a full share) and close when the trade is finished.

Sometimes a ETF is cheaper and easier than the a particular fund and track the same index or tracks a index you prefer. I own IJS because it uses more small value stocks than any of the funds I've found.

But it's a personal thing you do not need to worry about them in a 2 or 3 fund port.
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TimeRunner
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Re: When would I want ETFs vs Funds?

Post by TimeRunner »

Because you can hold them at any brokerage. For example, hold Vanguard ETFs at Fidelity or Schwab and enjoy free trades, local offices, and excellent customer service - all the advantages of Vanguard fund management and low expenses without Vanguard's crappy website.
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Cheez-It Guy
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Re: When would I want ETFs vs Funds?

Post by Cheez-It Guy »

Vanguard's website isn't crappy.
stan1
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Re: When would I want ETFs vs Funds?

Post by stan1 »

Cheez-It Guy wrote: Sat Jan 25, 2020 10:28 pm Vanguard's website isn't crappy.
I agree, spend a little time learning to use it.

Spouse inherited accounts at Merrill Lynch. Good thing you are paying for full service from a person there because you can't do anything with the website.
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TimeRunner
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Re: When would I want ETFs vs Funds?

Post by TimeRunner »

Cheez-It Guy wrote: Sat Jan 25, 2020 10:28 pmVanguard's website isn't crappy.
OK, whatever.
One cannot enlighten the unconscious.
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Cheez-It Guy
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Re: When would I want ETFs vs Funds?

Post by Cheez-It Guy »

Excellent point!
StealthRabbit
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Re: When would I want ETFs vs Funds?

Post by StealthRabbit »

I use ETF's so I get immediate transactions and use of limit orders.

End of day pricing (funds) may not be too pretty.

Depends on your desire and trading style.
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Re: When would I want ETFs vs Funds?

Post by StealthRabbit »

delete (duplicate post... "dial-up" lag :annoyed )
tripelkonzert
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Re: When would I want ETFs vs Funds?

Post by tripelkonzert »

My comments below refer to US investments:

ETFs are basically the same thing as MF, except you buy/sell them on an exchange rather than selling/buying at end of day from the fund sponsor directly.

Both structures (MF and ETF) can be Actively Managed (most MFs are) or replicate a market cap weighted Index (called passive, most ETFs are). There is a third category, so called smart beta index replicating, which you can think of as “automated active”. The idea of those is like for active strategies to generate alpha. alpha means the difference between market cap weighted return and the return of that specific investments.

Having said that. you need to understand what you want to invest in: Passive, Active, Smart Beta. Then the question of the structure, i.e., MF versus ETF.

Advantages ETF:
+ can buy and sell during day
+ most ETFs have easier to understand cost structure. total expense ratio (TER) can easily be identified
+ most ETFs have a lower management fee (see TER) than comparable MF. Most ETFs have a simpler cost structure, so called unitary fee, where the management fee equals the total expense ratio.
+ trading costs are mostly 0 today since most platforms eliminated trading commissions (Schwab, Fidelity, TD Ameritrade...)
+ ETFs have an inherent tax advantage due to in-kind capital creation during rebalance. This helps avoiding cap gains in the fund, i.e., higher performance for the investor

Disadvantages:
+ trade takes place at discount to NAV when selling and premium when buying (bid-ask spread). This should be tiny if the ETF has at least 500M in assets, but be aware especially if you trade them often.
+ you need to understand what the ETF does exactly. What index is the ETF replicating?

Assuming you are comparing an actively managed with an ETF, then the main difference is the expected return. Market cap weighted (“Passive”) strategies outperform most active strategies in most Equity asset classes, especially Developed Markets such as US, Europe, Japan, Australia, Canada.

I only use ETFs except for my 401K, where they are not offered (yet).
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nisiprius
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Re: When would I want ETFs vs Funds?

Post by nisiprius »

It is 99.9% personal preference. (Ignore anyone who claims one or the other is just plain better).

My personal preference happens to be for mutual funds. I will list reasons why someone might want ETFs.

1) People who are accustomed to trading stocks prefer ETFs because all of the procedures are the same. People who are accustomed to bank accounts usually prefer mutual funds.

2) Fee structure. If you happen to want the Vanguard Total Stock Market fund, and your account is not at Vanguard, you may find that the fee for the VTI ETF is low or zero, and that the transaction fee to buy the VTSAX mutual fund is significant ($35, $50, $75).'

3) Availability of less common asset classes. Let me editorialize and call them "bizarre" asset classes, but obviously if you want them, you don't think they are bizarre. If you happen to want only emerging markets high-tech stocks, you can find an ETF that invests in an index of a few dozen of them, and I don't think you can find a mutual fund that does.

Or, less bizarrely, I once bought a TIPS ETF, named TIP, at Fidelity. At that time Fidelity charged a $75 fee to buy the Vanguard TIPS fund, Fidelity's TIPS fund had an expense ratio I thought was too high, and TIP had a much lower expense ratio.

4) Minimum purchase, in some cases. Vanguard in particular requires a minimum purchase of $3,000 for most of its funds, but you can buy Vanguard ETFs in one-share increments, at prices in the range of $100

5) Portability. No brokerage actually offers literally every ETF or mutual fund, but if you move from brokerage X to brokerage Y, the odds are good that every ETF will transfer, while I personally have encountered cases where brokerage Y did not offer and would not accept mutual funds I was holding at brokerage X. For example: at least in the past, Fidelity would not accept an incoming transfer of Vanguard Total Stock Market Index Fund Admiral Shares, VTSAX; Vanguard would not accept an incoming transfer of the MFS Utilities Fund, MMUFX, which I had been holding at Schwab; and from what I've read the attractive/interesting Fidelity Zero funds cannot be held anywhere but Fidelity.

I gotta editorialize about one thing. ETF fans sometimes use "wave-of-the-future, everyone is doing them now, mutual funds are dinosaurs" rhetoric. The facts are that, yes, total money invested in ETFs is growing faster than the total in mutual funds, and a dumb straight-line projection suggests that if trends continue, by the year 2032 there will be more money invested in ETFs than in mutual funds. But as of 2019 six times as much money was invested in mutual funds as in ETFs. Do what makes sense for you, but do not be afraid to put your money in mutual funds out of any fear of their imminent demise.

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Last edited by nisiprius on Sun Jan 26, 2020 7:36 am, edited 5 times in total.
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beyou
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Re: When would I want ETFs vs Funds?

Post by beyou »

There are many more funds than ETFs out there.

For taxable accounts, I use Vanguard muni bond funds and money market funds that are mostly not available as ETFs (there is one muni ETF and many muni funds). If you want real simplicity, balanced funds such as Lifestrategy and Target date funds are not ETFs, and a single investment can be your only, if all you have is an ira.

Additionally there are pros/cons in terms of convenience even when there are sister options. Well documented here. One of the main reasons is portability to tale your account to another broker. If you feel strongly against Vanguard service but like their funds, Etrade offers same ETFs like all brokers, but is among the best for Vanguard traditional funds (many at no transaction fee).
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