ETFs vs Mutual Funds

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investingforbank
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ETFs vs Mutual Funds

Post by investingforbank »

Should I use an ETF with an expense ratio of 0.03% if I have a mutual fund with an expense ratio of 0.015% in a taxable account? Will the tax advantage outweigh the difference in ER? Thanks
Thesaints
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Re: ETFs vs Mutual Funds

Post by Thesaints »

It depends on the fund. For some index funds there is very little tax difference between ETF and fund shares, if any.
sycamore
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Re: ETFs vs Mutual Funds

Post by sycamore »

investingforbank wrote: Wed Apr 07, 2021 10:48 am Should I use an ETF with an expense ratio of 0.03% if I have a mutual fund with an expense ratio of 0.015% in a taxable account? Will the tax advantage outweigh the difference in ER? Thanks
Hi investingforbank, you need to provide more information if you want an answer other than "maybe." :)
What are the funds in question?
Is the mutual fund an actively or passively managed?
What are the typical capital gains distributions for the mutual fund?
How much of the dividends are qualified (for mutual fund and ETF)?
What's the tax bracket?
Topic Author
investingforbank
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Re: ETFs vs Mutual Funds

Post by investingforbank »

It is FSKAX vs another total market etf and FTIHX vs another total international market etf
alex_686
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Re: ETFs vs Mutual Funds

Post by alex_686 »

investingforbank wrote: Wed Apr 07, 2021 10:48 am Should I use an ETF with an expense ratio of 0.03% if I have a mutual fund with an expense ratio of 0.015% in a taxable account? Will the tax advantage outweigh the difference in ER? Thanks
Probably. In the big picture I would go whichever one is most intuitive. The difference between the 2 are very modest. But since your asked...

1. ETFs win on the tax side.

2. The difference is insignificant. I say this as somebody who used to do this for a living. Next year the expense ratios are going to be different. Maybe the ETF will win then. Are you going to switch?

3. You should not care about the expense ratio for a index fund. What you should care about is tracking error. Yes, the expense ratio is a drag. However there are other costs and drags that are not reflected in the expense ratio, like trading costs. ETFs lower long term trading costs.

4. The future. The world is moving from mutual funds to ETFs. Operational expenses are just lower with ETFs. Save yourself some future hassle and go ETF now.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sycamore
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Re: ETFs vs Mutual Funds

Post by sycamore »

investingforbank wrote: Wed Apr 07, 2021 10:57 am It is FSKAX vs another total market etf and FTIHX vs another total international market etf
I'd go with the ETFs.
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BroIceCream
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Re: ETFs vs Mutual Funds

Post by BroIceCream »

In general, my personal preference is mutual funds -- primarily it eliminates most of the "emotion" of the purchase due to the elimination of the bid/ask spread. I can submit my purchase at any time (even the night before)...I like the 'fire and forget' aspect.

However, in my taxable account - I have shifted toward ETFs. My 401K/IRA's have MFs, with regular contributions. When I TLH the etfs, I don't need to worry about triggering the wash-sale rule with subsequent payroll purchases in my 401K, as my MF's and ETFs are very-slightly different in their composition.
illumination
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Re: ETFs vs Mutual Funds

Post by illumination »

I would recommend the ETF in a taxable account even at a slightly higher expense ratio purely for the portability. You can pick them up and take them to any brokerage.

The difference between a .015% vs a .03% is $15 every $100k. It's worth that "insurance" for me to be able to easily take it anywhere. The slightly better tax efficiency usually pays for that and then some.

You can do some calculations on the tax advantage of ETF vs Mutual Fund looking at past capital gains distributions, but for the sort of broad passive index funds recommended here, it's usually not a huge factor. As an example, For Fidelity's FXAIX (S&P500), in 2020 there was a $.586 capital gain per mutual fund share. So my back of the envelope says that there was a $461.89 distribution if you had $100,000 worth ($126.87/share). At a 20% tax rate, that would be $92.38 in additional taxes for that tax year, but you also have to remember the ETF just defers this amount as it goes into share appreciation, so you'd pay that additional amount when you sell instead for the ETF.
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ruralavalon
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Re: ETFs vs Mutual Funds

Post by ruralavalon »

investingforbank wrote: Wed Apr 07, 2021 10:48 am Should I use an ETF with an expense ratio of 0.03% if I have a mutual fund with an expense ratio of 0.015% in a taxable account? Will the tax advantage outweigh the difference in ER? Thanks
It depends on what fund or ETF you are talking about.

Please see the spreadsheet in the forum discussion "Tax efficiency 2020" ,
link.

Tax-efficiency can change from year to year, the amount of qualified dividends will change.

At Vanguard an ETF is a just a share class of the original mutual fund.

Vanguard index funds and their ETF share classes have the identical tax-efficiency.
Last edited by ruralavalon on Wed Apr 07, 2021 6:28 pm, edited 1 time in total.
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UpperNwGuy
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Re: ETFs vs Mutual Funds

Post by UpperNwGuy »

investingforbank wrote: Wed Apr 07, 2021 10:57 am It is FSKAX vs another total market etf and FTIHX vs another total international market etf
I love FSKAX. Everyone talks about taxes, but the impact is really really small.
livesoft
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Re: ETFs vs Mutual Funds

Post by livesoft »

investingforbank wrote: Wed Apr 07, 2021 10:48 am Should I use an ETF with an expense ratio of 0.03% if I have a mutual fund with an expense ratio of 0.015% in a taxable account? Will the tax advantage outweigh the difference in ER? Thanks
The expense ratio difference of a mere 0.015% is well within the variations in annual outcome expected just from buying on different days, buying at different times during the day, how dividends are reinvested, the slightly different indexes that the compared investments are attempting to track, the tracking errors, and so on.

In other words, there are bigger things going on and I would not expect this 0.015% difference in expense ratio to make a meaningful difference to the other bigger things. For instance, one's personality is probably the biggest factor: Does one like ETFs or does one like mutual funds? If one hasn't used both, then it is worthwhile to try to use both in a portfolio so that one gets some experience with both in order to reach their own comfort level with making their own decision.

That said, I use both mutual funds and ETFs because sometimes I feel like a mutual fund and sometimes I don't.
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Doc7
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Re: ETFs vs Mutual Funds

Post by Doc7 »

My choice (which is largely based on my brokerage of choice, Fidelity...if you are at M1 Finance etc with partial share auto-purchasing, may have a different story) is to auto invest in mutual funds in accounts I don't want to mess with and ETFs where I am planning to either TLH or potentially move around.


My "For Instances":
- 1/3rd of my 6 year old son's allowance is invested in a UTMA Account into FSKAX Fidelity total market fund. Because of his low allowance (he is 6, after all), it is below the monthly auto-purchase limit, so I set up a quarterly. As he grows older, all I will need to do is modify the quarterly amount. I will "Tax gain harvest" this account over the years so by the time it comes under his control, he does not have capital gains tax consequences right off the bat. But using a mutual fund allows me (at fidelity) to "set it and forget it."

- I use 1/2 my HSA space (3600) for on-going medical expenses and 1/2 for long term investing. I auto invest $300/mo in my AA (70/30, 20% INTL weight of Equities). Auto invest = use mutual funds.

- in my/spouse Roth IRAs (where i practice total asset LOCATION strategy with my 401ks) I utilize ETFs. Why? Because I have always lump summed into Roth IRAs, and after recently transferring from VG to Fidelity and finding out how simple it is, I am not averse to the idea of "chasing bonuses" as I have seen some folks on this forum do, for Roth IRA transfers. It may never happen, but the ETFs are very portable and it was basically seamless going from VG to Fido.

- In my taxable account (which is very small, at 1% of salary per year, we generally are thinking of it as a house payoff fund in our early 50s but I more or less suspect any mortgage interest remaining at that point will cause us to instead utilize this for college savings supplement and/or save for retirement bridge-gap years), I am purchasing ETFs, such as ITOT, that track different indexes from those utilized in any of my retirement accounts. I will utilize this for TLH over the years, and also I will cash flow my charitable giving through this while transferring capital gains shares to a Fidelity Donor Advised fund. To maintain ease of cost basis, in this account I am just saving a $ figure monthly and will buy a batch of shares each quarter. I believe I can keep this account fairly closer to a "Roth IRA" type tax situation, given the amount of cash flow of giving vs the relatively low amount of taxable savings, keeping my long term capital gains to essentially zero over a very long time I think, even if substantial Tax Loss Harvest opportunities appearing in the next 20 years.
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