Fund v. Inv. Trust v. ETF - How Much Does it Matter?

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AnnetteLouisan
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Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by AnnetteLouisan »

I have some non publicly traded index funds (my TSP), some investment trusts, mutual funds and stable value funds in my 401k and will likely put some ETFs in my brand new, impressive $7,002 (🤣) converted backdoor Roth IRA. (It earned $2 since I opened the tIRA a few weeks so that should cause interesting problems when I leave the $2 in my tIRA).

We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out. Without getting into all or any of the legal nitty gritty of the differences among those structures, do you think it’s a good idea to put solely ETFs in my IRA, given that millennials favor ETFs vs mutual funds and ETFs may be less likely to merge or undergo a consolidation wave like mutual funds when boomers redeem? Or are ETFs just as likely to face a consolidation wave since so many new ones were created in a short time, or if crypto implodes and millennials redeem.
tashnewbie
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by tashnewbie »

AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am I have some non publicly traded index funds (my TSP), some investment trusts, mutual funds and stable value funds in my 401k and will likely put some ETFs in my brand new, impressive $7,002 (🤣) converted backdoor Roth IRA. (It earned $2 since I opened the tIRA a few weeks so that should cause interesting problems when I leave the $2 in my tIRA).
Why leave the $2 in the TIRA? Just convert the full value to Roth IRA. You'll owe taxes on the $2. Probably about $0.50 (or $1 at most). Plus, you'd run into peskier issues with the pro rata rule if you leave the $2 in the TIRA (not a huge issue because the $2 is a small portion of the Roth conversion). And the $2 will grow over time and thus will become a bigger annoyance.
We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out. Without getting into all or any of the legal nitty gritty of the differences among those structures, do you think it’s a good idea to put solely ETFs in my IRA, given that millennials favor ETFs vs mutual funds and ETFs may be less likely to merge or undergo a consolidation wave like mutual funds when boomers redeem? Or are ETFs just as likely to face a consolidation wave since so many new ones were created in a short time, or if crypto implodes and millennials redeem.
I wouldn't worry about any of that. I would use whichever you prefer -- ETFs or mutual funds. In a Roth IRA, I would prefer mutual funds for ease and convenience of contribution and not having to deal with fractional shares (not an issue at Fidelity).
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by sycamore »

AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out.
Curious about the above part. I'm not familiar with that scenario, at least it's not widespread enough that I've heard about it. What are the examples you've heard of?

Vanguard has merged a few funds in the past, e.g., Tax Managed International with Developed Markets Index, and Tax Managed Growth & Income with the S&P 500 fund. I think investors basically got their shares swapped at net asset value.

In any case, to answer your broader question, I think it's safe to use solely ETFs, or solely mutual funds, or solely CITs/UITs, at least if they're from the bigger fund sponsors (Fidelity, iShares, Vanguard, T Rowe Price, American, Schwab, etc.)
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by AnnetteLouisan »

sycamore wrote: ↑Mon Oct 04, 2021 12:05 pm
AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out.
Curious about the above part. I'm not familiar with that scenario, at least it's not widespread enough that I've heard about it. What are the examples you've heard of?

Vanguard has merged a few funds in the past, e.g., Tax Managed International with Developed Markets Index, and Tax Managed Growth & Income with the S&P 500 fund. I think investors basically got their shares swapped at net asset value.

In any case, to answer your broader question, I think it's safe to use solely ETFs, or solely mutual funds, or solely CITs/UITs, at least if they're from the bigger fund sponsors (Fidelity, iShares, Vanguard, T Rowe Price, American, Schwab, etc.)
In the early 90s, I had the opportunity to observe, in the course of my employment, a number of small investment funds that could not survive due to redemptions or shrinking asset size (in the wake of the early 90s recession) face the options of dissolving or merging into a larger fund. Given their weak bargaining position (it’s unwieldy to acquire a struggling fund and integrate it, and there are so many funds out there), it was costly to find a suitable merger partner, advising the fund became costly, and terms of mergers were not very favorable to fund shareholders, who after all own fund shares, not shares in the underlying securities. Some shareholders were bitterly disappointed in what they received after all was said and done. During the 90s, reeling from 87, one could even speak of a fund consolidation wave, although asset flows into funds were much smaller then than today. I don’t remember specific names but the SEC may have them in their investment funds studies. Something similar happened to real estate master limited partnerships after the early 90s CRE downturn and changes in tax incentives made them decline in value significantly.

Could something similar occur in 10-15 years if millennials have no appetite for old school mutual funds? I have no idea but I am very focused on demographic changes and my outsider’s perception is young people like ETFs and crypto and not so much mutual funds.
Last edited by AnnetteLouisan on Thu Oct 14, 2021 7:38 am, edited 1 time in total.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by grabiner »

AnnetteLouisan wrote: ↑Mon Oct 04, 2021 12:29 pm
sycamore wrote: ↑Mon Oct 04, 2021 12:05 pm
AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out.
Curious about the above part. I'm not familiar with that scenario, at least it's not widespread enough that I've heard about it. What are the examples you've heard of?

Vanguard has merged a few funds in the past, e.g., Tax Managed International with Developed Markets Index, and Tax Managed Growth & Income with the S&P 500 fund. I think investors basically got their shares swapped at net asset value.

In any case, to answer your broader question, I think it's safe to use solely ETFs, or solely mutual funds, or solely CITs/UITs, at least if they're from the bigger fund sponsors (Fidelity, iShares, Vanguard, T Rowe Price, American, Schwab, etc.)
In the early 90s, I had the opportunity to observe, in the course of my employment, a number of small investment funds that could not survive due to redemptions or shrinking asset size (in the wake of the early 90s recession) face the options of dissolving or merging into a larger fund. Given their weak bargaining position (its unwieldy to acquire a struggling fund and integrate it, and there are so many funds out there), it was costly to find a suitable merger partner, advising the fund became costly, and terms of mergers were not very favorable to fund shareholders, who after all own fund shares, not shares in the underlying securities. Some shareholders were bitterly disappointed in what they received after all was said and done
Presumably, these were not open-end mutual funds. Open-end funds are redeemable at any time at net asset value; shareholders will only be disappointed if the fund's investments have fallen in value before they decide to sell. A merger on unfavorable terms would be a breach of the manager's fiduciary duty; if a fund holds a million shares and $10M of assets, then any merger would add $10M of assets to the merged fund, and thus the shareholders of the old fund would get enough shares of the new fund to be worth $10 per old share.

In contrast, a fund holding assets which were not liquid, such as a non-traded REIT, might liquidate for much less than its quoted value.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by AnnetteLouisan »

I think it was a combination of asset value having declined, redemptions having occurred, it no longer made sense to keep the fund going, so they merged or wound it up and any merger was the best deal they could get at the time so no breach of fiduciary duty for not great terms. Plus lawyer fees and other fees, extra advisory and bankruptcy fees all took a bite.

A lot like what happened to the Structured Investment Vehicles in 2007 or 08 - asset values dropped temporarily, mark to market was in effect and there were automatic provisions to wind up the SIVs if assets dropped below a certain level. Those provisions were designed to protect investors but ended up locking them into selling at a loss. Totally unintended but not much could be done to avoid the result.

As to whether the funds in my first example were open or closed end, I just don’t recall. They may well have been closed end.

But the issue is with any fund - what happens in a correction or when there happen to be a lot of redemptions for whatever reason.

Maybe this is all academic and moot. I was just wondering, given LTCM, Janus, Auction Rate Securities, Archegos, Structured Notes, CDOs etc. Nothing intrinsically wrong with any of it. Just trying to understand how big demographic and paradigm shifts like another commenter mentioned potentially affect the large fund structures. Maybe the answer is: all investing has risks. I just wonder how many millennials with a choice to buy a mutual fund v an ETF choose a mutual fund. And now ETFs are in many 401k plans.
Last edited by AnnetteLouisan on Thu Oct 14, 2021 7:40 am, edited 1 time in total.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by grabiner »

AnnetteLouisan wrote: ↑Tue Oct 05, 2021 1:47 pm I think it was a combination of asset value having declined, redemptions having occurred, it no longer made sense to keep the fund going, so they merged or wound it up and any merger was the best deal they could get at the time so no breach of fiduciary duty for not great terms.
This wouldn't happen within a mutual fund group. If Fidelity closes a mutual fund and merges it into another Fidelity fund, it has a fiduciary duty to the shareholders of both funds, so the merge must happen at the proper asset value. A fire-sale merger would happen only if the fund issuer itself closed.

It is possible for a mutual fund to hold investments which lose value, but this has nothing to do with the risk of closure; it is a risk of holding the fund. There are plenty of funds which held Internet stocks in 2001, or collateralized mortgage obligations in 2008, and lost a lot of money whether the fund stayed open, liquidated in cash, or merged.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by 000 »

In a non-taxable account I would say it doesn't matter except that it may be harder to find information about investment trusts.

In an IRA I would prefer mutual funds if available at a low ER to avoid having to deal with ETF orders and having funds left in the settlement account.

In taxable ETFs are probably the best.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by alex_686 »

AnnetteLouisan wrote: ↑Tue Oct 05, 2021 1:47 pm I think it was a combination of asset value having declined, redemptions having occurred, it no longer made sense to keep the fund going, so they merged or wound it up and any merger was the best deal they could get at the time so no breach of fiduciary duty for not great terms. Plus lawyer fees and other fees, extra advisory and bankruptcy fees all took a bite.
You story does not make any kind of sense. I used to work in public mutual fund accounting and been involved in a merger or 3. Not back when you were refencing - more recently if that makes any difference.

For example, I can't think of how a fund could declare bankruptcy. It is a zero employee corporation that can only hold liquid assets and can't really take on any debt. Yeah it has some liabilities, such as audit fees and such. Sure, the fund's sponsor could go bankrupt, but that is a separate corporation. The fund's assets are going to be completely segregated.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by AnnetteLouisan »

alex_686 wrote: ↑Tue Oct 05, 2021 8:54 pm
AnnetteLouisan wrote: ↑Tue Oct 05, 2021 1:47 pm I think it was a combination of asset value having declined, redemptions having occurred, it no longer made sense to keep the fund going, so they merged or wound it up and any merger was the best deal they could get at the time so no breach of fiduciary duty for not great terms. Plus lawyer fees and other fees, extra advisory and bankruptcy fees all took a bite.
You story does not make any kind of sense. I used to work in public mutual fund accounting and been involved in a merger or 3. Not back when you were refencing - more recently if that makes any difference.

For example, I can't think of how a fund could declare bankruptcy. It is a zero employee corporation that can only hold liquid assets and can't really take on any debt. Yeah it has some liabilities, such as audit fees and such. Sure, the fund's sponsor could go bankrupt, but that is a separate corporation. The fund's assets are going to be completely segregated.
Alex seems to be saying -and Alex please correct me if I am wrong - that if a mutual fund company goes bankrupt, the individual funds are bankruptcy remote. For example if an Archegos style collapse occurred at say Vanguard, perish the thought, or Franklin Templeton, we individual investors would not lose our invested funds. Is this accurate? I am aware of SIPC protection.
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by alex_686 »

AnnetteLouisan wrote: ↑Wed Oct 13, 2021 9:07 pm
alex_686 wrote: ↑Tue Oct 05, 2021 8:54 pm
AnnetteLouisan wrote: ↑Tue Oct 05, 2021 1:47 pm I think it was a combination of asset value having declined, redemptions having occurred, it no longer made sense to keep the fund going, so they merged or wound it up and any merger was the best deal they could get at the time so no breach of fiduciary duty for not great terms. Plus lawyer fees and other fees, extra advisory and bankruptcy fees all took a bite.
You story does not make any kind of sense. I used to work in public mutual fund accounting and been involved in a merger or 3. Not back when you were refencing - more recently if that makes any difference.

For example, I can't think of how a fund could declare bankruptcy. It is a zero employee corporation that can only hold liquid assets and can't really take on any debt. Yeah it has some liabilities, such as audit fees and such. Sure, the fund's sponsor could go bankrupt, but that is a separate corporation. The fund's assets are going to be completely segregated.
Alex seems to be saying -and Alex please correct me if I am wrong - that if a mutual fund company goes bankrupt, the individual funds are bankruptcy remote. For example if an Archegos style collapse occurred at say Vanguard, perish the thought, or Franklin Templeton, we individual investors would not lose our invested funds. Is this accurate? I am aware of SIPC protection.
SPIC covers losses if your broker declared bankruptcy and could not turn over your assets - which is darn unlikely because they are probably “segregated”. It does not cover your assets if they blow up.

I would not use the term “bankrupt remote”. Public mutual funds are restricted in what they can do so I have a hard time thinking of cases where they would blow up. But it would not be impossible. The fund you cite was closer to a hedge fund than a public fund.

Rather it is because every fund is a separate and distinct Limited Liability Corporation. They have their own papers of incorporation, independent board, shareholders (investors), auditors, etc. Their assets are held in a “segregated” account at a independent bank. The fund really can’t invest or guarantee the sponsor’s assets.

The fund sponsor, the investment manager, and every fund is in its own separate silo. If one silo blew up it would not affect the other silos.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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AnnetteLouisan
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by AnnetteLouisan »

sycamore wrote: ↑Mon Oct 04, 2021 12:05 pm
AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out.
Curious about the above part. I'm not familiar with that scenario, at least it's not widespread enough that I've heard about it. What are the examples you've heard of?

Vanguard has merged a few funds in the past, e.g., Tax Managed International with Developed Markets Index, and Tax Managed Growth & Income with the S&P 500 fund. I think investors basically got their shares swapped at net asset value.

In any case, to answer your broader question, I think it's safe to use solely ETFs, or solely mutual funds, or solely CITs/UITs, at least if they're from the bigger fund sponsors (Fidelity, iShares, Vanguard, T Rowe Price, American, Schwab, etc.)
Rereading this, I see you repeatedly wrote „solely“ but I didn’t immediately pick up on that. My 401k has investment trusts and mutual funds - should I have only funds or trusts there, but not both? Or did you mean the Roth IRA should have solely ETFs, funds or trusts? Is the reason so its easier to rebalance?
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Re: Fund v. Inv. Trust v. ETF - How Much Does it Matter?

Post by sycamore »

AnnetteLouisan wrote: ↑Mon Oct 18, 2021 9:39 pm
sycamore wrote: ↑Mon Oct 04, 2021 12:05 pm
AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am We all know how funds that merge or consolidate in the face of redemptions sometimes give their shareholders cents on the dollar, after all fees and expenses of the transaction are taken out.
Curious about the above part. I'm not familiar with that scenario, at least it's not widespread enough that I've heard about it. What are the examples you've heard of?

Vanguard has merged a few funds in the past, e.g., Tax Managed International with Developed Markets Index, and Tax Managed Growth & Income with the S&P 500 fund. I think investors basically got their shares swapped at net asset value.

In any case, to answer your broader question, I think it's safe to use solely ETFs, or solely mutual funds, or solely CITs/UITs, at least if they're from the bigger fund sponsors (Fidelity, iShares, Vanguard, T Rowe Price, American, Schwab, etc.)
Rereading this, I see you repeatedly wrote „solely“ but I didn’t immediately pick up on that. My 401k has investment trusts and mutual funds - should I have only funds or trusts there, but not both? Or did you mean the Roth IRA should have solely ETFs, funds or trusts? Is the reason so its easier to rebalance?
I used "solely" because you mentioned it in your OP :)
AnnetteLouisan wrote: ↑Mon Oct 04, 2021 9:31 am do you think it’s a good idea to put solely ETFs in my IRA
My intent was to indicate that any one "investment wrapper" would be okay all by itself. Doesn't matter if it's mutual fund, ETF, or CIT/UIT. Mixing and matching is also okay. All of those wrappers are well-regulated and commonly-used. The bigger question is what stocks and bonds are held within the wrapper and at what expense ratio.

AFAIK, you can't get CIT/UIT in an IRA so there it comes down to your preference between mutual funds & ETFs.

If your 401k only offers CIT/UIT, I'd have no concern about that. Plenty of large companies (not to mention the Federal government's TSP) use CIT/UIT as the plan options.

I had a 401k once with CIT options, and it was fine. Only downside was no ticker symbol that I could use to track the price; I had to logon to the 401k website to get my balance.
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