Why the big deal with ETFs? Are mutual funds going away?

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Why the big deal with ETFs? Are mutual funds going away?

Post by LadyGeek »

I am confused. I was totally happy with my target retirement fund (and TIPS for my Roth). Vanguard announces free trading for ETFs and all heck breaks loose in the forum.

All of a sudden, there are threads about market / limit / stop loss orders. How to setup your limit order to optimize the bid/ask spread. Upticks / downticks. Sounds like day-trading gone wild to me.

Countering that, there are a number of forum members who are staying put. It doesn't matter, ETFs will match mutual fund expenses in the long run. Limit orders are not for Bogleheads (speculation vs. investing?).

Yes, I read the wiki. I see the mechanics of how ETFs work. However, the tutorials don't explain the shift in momentum from mutual funds to ETFs.

To me, ETFs vs. mutual funds seems to be a like the 200-day moving average market timing thread, except the timeframe is scaled from (months / weeks) to (days / hours / milliseconds (! high frequency trading)).

===============
If ETFs are that good, should new purchases go to ETFs instead of mutual funds? I don't know what I'm missing here.

How do ETF costs really compare against mutual funds? As shown in Understanding the True Costs of ETFs, there are more than trading costs. Could the free trading deal be a loss-leader and the brokers win again?
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by bpp »

ETFs are generally cheaper, and have fewer restrictions on who is allowed to buy them. Other than that, there is no significant difference.
LadyGeek wrote:I was totally happy with my target retirement fund (and TIPS for my Roth).
Then what do you care what other people do?
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Post by nisiprius »

It's just a fashion, like minivans or tonsillectomies or Ashlee Simpson. None of which have displaced what came before them, and all of which still exist today. (I assume some kids do still get tonsillectomies today). One of the great mysteries of human group behavior. "Tipping points" and all that. Saying it's "just a fashion" is just an explanation of why there's so much ado about nothing. Fashions can become dominant--men's hats went away for good with President Kennedy, so ETFs could certainly wipe out mutual funds--for no good reason. But I don't think they will.

In this thread I give my reasons why I don't think mutual funds are going away soon. Basically, it's the same reason why Vanguard Five Hundred Index didn't go away, even though it's seemingly superseded by Vanguard Total Stock Market Index; and Vanguard LifeStrategy funds didn't go away, even though they are seemingly superseded by the Target Retirement funds; and Vanguard Total International Stock Index (VGTSX) and Vanguard FTSE All-World Ex-US (VFWIX) both persist, continuing to puzzle every investor who wants a Vanguard international stock index fund.

Who knows how far it will go? But I believe that if ETFs displace mutual funds it will take at least a decade before it becomes uncomfortable to hold mutual funds. VTSMX could lose 99% of its investors and it would still be a $1 billion fund.

I think it's much more likely that we're just seeing a shift to a different balance. What fraction of present mutual fund owners wanted ETFs and were just being held back by $7.95 commissions? Let's say 25% but I think it's much smaller. What fraction are susceptible to wanting ETFs because they're new and cool and they're reading about them? Let's say 25% but I think it's much smaller.

How much work would it take to revamp 401(k) plans to include ETFs? Nothing insuperable, but, being a "geek" you know it's going to take some serious code to deal with making a $167.23 monthly contribution that is directed 80% to an ETF that costs $52.89 a share and 20% to an ETF that costs $46.73 a share... and can be purchased only in integral shares.

Are companies that offer 401(k) plans with ETFs going to find they have a huge competitive advantage in recruiting over companies that offer 401(k) plans with mutual funds?
Last edited by nisiprius on Fri May 14, 2010 10:06 pm, edited 1 time in total.
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by WannaBeMiniDave »

LadyGeek wrote: Sounds like day-trading gone wild to me.

This has to be a joke right?

It's doesn't matter what the product is, it's how you use it that determines wether it's day trading or buy/hold etc.

Just because i use a limit order and buy VTI (and then plan on holding it for the next 39 years) doesn't make me a trader.

Market orders are for idiots anyways. (in 95%+ of the cases)
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Post by LadyGeek »

WannaBeMiniDave wrote:
LadyGeek wrote: Sounds like day-trading gone wild to me.
This has to be a joke right?
No. From my perspective, there was way Too Much Information saying to go ETFs, especially to convert from mutual funds. Remember that investors with no background in ETFs are reading these threads. Without understanding all the details, that's the conclusion I came to.

nisiprius - Thank you! That was the missing information I didn't understand. I now have the right context for the forum threads. I can now sleep better at night. I'm very glad I asked.
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Post by matt »

LadyGeek wrote:
All of a sudden, there are threads about market / limit / stop loss orders. How to setup your limit order to optimize the bid/ask spread. Upticks / downticks. Sounds like day-trading gone wild to me.
The spike in discussions on trading was due to the May 6 "flash crash", not Vanguard's announcement of free trades.
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Post by bpp »

nisiprius wrote:It's just a fashion, like minivans or tonsillectomies or Ashlee Simpson.
You know, nisi, I like a lot of what you say, but this seems very condescending. People on this site get excited about cheaper ways to invest because in an efficient market, cost is all that matters. Why the snideness? People here also get all excited about things like I Bond rates, tax efficiency, and asset allocation. Does that render those subjects merely fashions, too?

Also, when were minivans and tonsillectomies ever considered "in fashion," and who the heck is Ashlee Simpson? (Ok, I could google that last one if I cared.)
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by Jack »

LadyGeek wrote:I am confused. I was totally happy with my target retirement fund (and TIPS for my Roth). Vanguard announces free trading for ETFs and all heck breaks loose in the forum.
It reminds me of this old Ameritrade ad.

"Let's light this candle!"
http://www.youtube.com/watch?v=SFvblyRNRRM

I think this is what Jack Bogle had in mind when he expressed his reservations about ETFs. All of this talk has that whiff of casino excitement about it. Investing should be boring, not exciting.
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Post by nisiprius »

bpp wrote:
nisiprius wrote:It's just a fashion, like minivans or tonsillectomies or Ashlee Simpson.
You know, nisi, I like a lot of what you say, but this seems very condescending. People on this site get excited about cheaper ways to invest because in an efficient market, cost is all that matters.
I'm sorry if my tone gave offense.

Now I'm going to take that non-apology apology back by ranting again.

I stand by my opinion, that even if you were to say that ETFs are just plain better than mutual funds, the excitement is wildly disproportionate to the importance. It is the amount of excitement, the irrationality that makes me cranky, not the fact that many people prefer ETFs.

Do the math. Consider magnitude, not just direction: there's nothing about the cost differences of ETFs to warrant what we're seeing.

The expense ratio of Vanguard Total Stock Market is 0.18% if purchased as mutual fund investor shares (VTSMX), 0.07% as Admiral Shares (VTSAX), 0.07% as ETF (VTI).

Ordinary "investor shares" of Schwab Total Stock Market Index Fund (SWTSX), minimum investment $100 (!), is ER 0.09%. I believe they did that sometime around the middle of 2009. I don't recall any excitement about SWTSX in this forum--Google finds only one appearance of SWTSX in this forum ever. Nor should there have been.

Fidelity Spartan Total Stock Index Fund, FTSMX, $10,000 minimum, has been at 0.10% ER for a long time, without ever eliciting more than grudging approval.

How much is that in dollars? Since we're assuming we don't qualify for Admiral shares, we're talking about less than $100,000. Say a hypothetical investment of $50,000 in VTSMX or VTI or SWTSX or FTSMX. Assume the tradition-hallowed 7% real rate of return for the stock market--in fact let's assume that after expenses, VTSMX exactly doubles in real value every ten years after expenses (about 7.18%).

What's the bottom line? Measuring everything in year-2010 dollars, after twenty years, the savings are a bit less than $380 per basis point. You end up with $200,000 in VTSMX.

Going to Fidelity FTSMX, you make extra $3,007.

To Schwab SWTSX, $379 more than FTSMX.

Going to VTI, $760 more than SWTSX, $4,145 more than VTSMX.

Just using the lowest-cost mutual fund gets you 80% of the benefit of converting to an ETF.

What, Nisi, would you just leave $760 lying on the street if you saw it there? No, but over twenty years that amounts to a dime a day. By the brilliant maneuver of moving $25,000 from money market funds to a Reward Checking Account, I am making $2 a day.

A Reward Checking Account is twenty times as exciting as the cost savings of an ETF.

Now, put it in perspective another way. The difference between SWTSX and VTI over twenty years amounts to $800/$200000 = 0.4%. The price of VTSMX on 4/26 was $30.29; on 4/27, $29.57. I picked that date because it wasn't the day of the glitch, by the way. That is a 2% difference.

Hypothetically, the luck of the draw of which day we chose to buy our $50,000 worth of VTI could make a $4,000 difference in our final outcome. The day-to-day fluctuations in the price are five times as big as the savings between the best mutual fund and ETF. Picking the wrong day could cost you more than the entire difference between VTSMX and VTI. Yes, I take the point that you can't control the fluctuations and they go both ways and you make more than one purchase so they cancel over time. And you can control the expenses and they are always a drag. But still. Isn't there such a thing as "lost in the noise?"

Are ETFs cheaper? Yes. Is it nice that you can get them now without paying a commission? Yes. Is there anything about them to warrant all the excitement? Boy, I sure don't see it.

Bogleheads who use ETFs are not an evil or foolish bunch of gambling day-traders, they're just people who are willing to take the extra effort to pick that dime a day off the street. We all have our money quirks. My wife goes ape when I leave the basement lights on, 200 watts times 12 hours times maybe $0.10 per kwh, $0.25 cents... hey, maybe she's got a point.

(P. S. Hey, I just noticed that my math actually exaggerates the difference between VTSMX and the others... because after ten years the hypothetical VTSMX reaches $100,000 and qualifies for Admiral shares!)

(P. P. S. If you do the same math between your typical 1.2% ER, 5% load fund and your typical 0.2%, no-load Vanguard fund, the difference is not lost in the noise).
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Post by bpp »

nisiprius wrote:Are ETFs cheaper? Yes. Is it nice that you can get them now without paying a commission? Yes. Is there anything about them to warrant all the excitement? Boy, I sure don't see it.
Ok, well, maybe I'm just not reading the right threads then, because I hadn't noticed "all the excitement" that you (and the OP) are talking about. I saw some concern about the mechanics and merits of limit orders vs market orders in the aftermath of "Brown Thursday" last week, and discussion of Vanguard's new fee schedule, but hadn't noticed anyone proclaiming the second coming of sliced bread or anything like that. But if there are such threads, sure, it's fair to tell the fanboys to get a life I guess.
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Post by livesoft »

This poll http://www.bogleheads.org/forum/viewtopic.php?t=54897
helps to show the excitement. I think it is true that there have been an increase in ETF-related threads.

It is certainly true that many more folks will become familiar with ETFs and will own ETFs. At that point in time we should more responses about experience with ETFs. Right now, it is a big unknown for many folks ... in the same way that stepping away from Vanguard Prime Money Market to online high yield savings accounts at ING, EmigrantDirect, and Ally was.
Last edited by livesoft on Sat May 15, 2010 8:14 am, edited 1 time in total.
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Post by AlwaysaQ »

Two advantages of ETFs over mutual funds

Extremely portable from investment house to investment house.

If you are doing tax loss harvesting in the US the only rules you have to follow are those of the IRS.
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by YDNAL »

LadyGeek wrote:I am confused. I was totally happy with my target retirement fund (and TIPS for my Roth). Vanguard announces free trading for ETFs and all heck breaks loose in the forum.
LG,

Like you, I also see the excitement like kids unwrapping new toys. But, I also see benefit in controlling costs in a diversified long-term portfolio. There's also the underlying current to mask the addiction to trade and follow intraday prices, etc., etc. Everyone has a motive.

Like Nisiprius before, I don't particularly see a phenomenal benefit when you own VG funds (one share class), especially VG Admiral shares - at low(est) expense ratios - versus VG ETFs (another share class).
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Post by nisiprius »

Just wondering. I wonder whether there are advantages to the fund companies in providing ETFs rather than mutual funds? Looser or less cumbersome regulation? Maybe it's difficult or costly providing for redemption? Maybe the exchange and brokerages do all the heavy lifting with the individual retail accounts and the ETF just deals in bulk with the exchange specialists?

Maybe it's a little better for the providers and a lot better for the customers, a win-win with the providers getting most of the winnings?
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Post by dbr »

If, for whatever reason one does not hold Vanguard funds at Vanguard Mutual Fund Company, it is cheaper to transact ETFs than it is to transact Vanguard mutual funds, in addition to reduced ER comparable to Admiral Funds.
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Post by Beagler »

I don't understand the concern over folks wanting to invest in ETFs. Plus, I don't recall any consternation when Mr. Ferri published his ETF book.
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Post by GammaPoint »

The cost benefits of the ETF aren't gone once you reach $100k and could in theory get admiral shares. If you've got a S&D portfolio, maybe you've got 8 different slices. If you've got $100,000 - 1 cent in each one, then that's $800,000, and you still don't have admiral shares. Also, many things don't have Admiral shares available. Furthermore, people don't always have all their assets consolidated at one place, or in one account. Maybe I've got a brokerage 401k where some of my small caps are but then a ROTH IRA at Vanguard where I've also got small caps. If I can buy ETFs I can get "admirality" everywhere.

Do free ETFs at Vanguard warrant all the excitement? No. But I don't actually see any excitement through the forums. I haven't seen any threads where someone is asking "oh.my.god I am going to be uber rich now that I can haz ETFs. How much less can I save per year if I use the magical ETF?"

Well okay, to be fair, I can think of one post that sort of reminds me of that, but that's it. Most of the questions are from people who never traded or considered ETFs before because they had trading costs (direct that is). But now that those trading costs are removed, people want to learn about them and see if they are appropriate for their situation. The average forum user doesn't like to search the forums, so we get the same question over and over again. Those who prefer to use strictly mutual funds don't need to interpret these questions as any sort of attack on their investing method. It's simply someone who is trying to learn more.

I use both ETFs and MFs.
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Post by diasurfer »

Pick one ETF hoopla critics: the advantage of holding ETFs disappears once you can hold admiral shares, or the cost difference between ETFs (and admiral shares) and regular share mutual funds doesn't amount to a hill of beans.

Of all the "yippee I've reached admiral share status" type threads I've read over the years, I don't recall a single rain-on-your-parade post pointing out how little the new admiral is going to save in the long run. If there is one thing posters in this forum agree on, it's the benefit of low cost.

Of course, mistakes made in buying and selling ETFs can wipe out any advantage in cost to the long-term investor, so beware.
LadyGeek wrote:No. From my perspective, there was way Too Much Information saying to go ETFs, especially to convert from mutual funds. .
I disagree with your "especially". I think this might be the best case scenario. Add to your investment at monthly intervals using a MF, withe the safety of always ensuring you always buy at NAV and don't screw up your market or limit order, and then once a year or so convert to ETF for free to lower your ER for the long ride into retirement. Wonder if you can convert back to MF for ease of selling during retirement?
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Post by Opponent Process »

yes IMO mutual funds will disappear over the next 5-10 years.
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Post by rai »

nisiprius wrote:

Are ETFs cheaper? Yes. Is it nice that you can get them now without paying a commission? Yes. Is there anything about them to warrant all the excitement? Boy, I sure don't see it.
I don't know if there is too much excitement, but as Jonh Bogle would say, "look at the costs".

I would expect more excitement, or more universal excitement. The ETFs already had lower ERs not they are free to trade (that was one big MF advantage which was just taken away).

I don't know why but it sounds like many bogleheads are against ETFs. If they save a dollar a day or more. Why not?

You can not do anything about the markets ups and downs. But you can pick a fund with lower fees.

for example: ETF 'VSS' $10K initial and $10k per year for 10 years. You'd save ~$200 per year with the ETF.

VEU save like $120 per year on a 10K initial and $1k per month for 10 years.

Maybe $200 a year or $120 a year is 'just a lil bit'. Bit I don't mind taking that. It'll buy be gas for a week, or dinner out, or whateve. I don't think saving fifty cents a day is a bad thing, especially if it's no effort beyind picking ETF class over MF class.

Maybe if you are already Admiral ther would be no big savings. But not all MFs have admiral class shares.

With ETFs it's like they are all admiral class all the time. No limit to reach you just start off as an admiral.

For me, just converting over to index and asset allocation (from stocks) in a sense it's all new money. For me there seems to be no reason to ever start with MFs.

I wonder if Vanguard realizes that it's MFs are now at a disadvantage with some of the ER being double what the ETFs are. Who would ever pick the MF? Who would not switch from a MF to an ETF is you can save 10 or 20 or 30 basis points?
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Post by matt »

Opponent Process wrote:
yes IMO mutual funds will disappear over the next 5-10 years.
Wanna bet?
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Post by livesoft »

rai wrote:...
VEU save like $120 per year on a 10K initial and $1k per month for 10 years.

Maybe $200 a year or $120 a year is 'just a lil bit'. Bit I don't mind taking that.
...
I wonder if Vanguard realizes that it's MFs are now at a disadvantage with some of the ER being double what the ETFs are. Who would ever pick the MF? Who would not switch from a MF to an ETF is you can save 10 or 20 or 30 basis points?
The folks who somehow always pay $200 a year too much for their annual ETF transactions may not realize the savings that you write about. It would be easy to overpay due to bid/ask spread and not monitoring what you are doing. They might not even know that they could have paid $200 to $500 less with judicious use of appropriate limit orders.
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Post by Mordoch »

nisiprius wrote:Just wondering. I wonder whether there are advantages to the fund companies in providing ETFs rather than mutual funds? Looser or less cumbersome regulation? Maybe it's difficult or costly providing for redemption? Maybe the exchange and brokerages do all the heavy lifting with the individual retail accounts and the ETF just deals in bulk with the exchange specialists?
Certainly one clear benefit is is how the redemption issue works. Ordinarily if there are allot of individuals wanting to sell their mutual fund shares suddenly, the fund has to either quickly sell shares of its individual stocks or leave a certain amount of money lying in cash to be ready for such an occurrence. When its simply a matter of person selling ETF shares to someone else, its a non-event as far as the mutual fund is concerned administratively. (A mutual fund selling shares to free up money can be complicated, with an index having to potentially sell the proper amount of each holding to maintain the proper ratio of each.)

At least when another brokerage is handling things, its true that the brokerage handles all the complications of the retail account.

Finally, its definitely about the overall market and the ability of the mutual fund provider to grow bigger. In the case of Vanguard, without offering ETFs it would be giving up a significant component of the market to Barclay's Ishares and other providers. For instance with a financial adviser who is heavily using ETFs, even if he/she is otherwise clearly doing a disservice for their client in how they are investing their money, it makes sense for them to go for the lowest cost ETF in its index class. If Vanguard has the lowest cost ETF shares, which it should be able to ensure in the long run due to its ownership structure, it should have the advantage. In a case such as VWO versus EEM, VWO is increasingly the clearly smarter pick period, and I would expect money to start heading for VWO at an increasingly rate. (Economy of scale considerations mean VWO will continue to get cheaper as it continues to grow.)
Last edited by Mordoch on Sat May 15, 2010 1:06 pm, edited 2 times in total.
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Post by rai »

nisiprius wrote:
Just using the lowest-cost mutual fund gets you 80% of the benefit of converting to an ETF.

What, Nisi, would you just leave $760 lying on the street if you saw it there? No, but over twenty years that amounts to a dime a day. By the brilliant maneuver of moving $25,000 from money market funds to a Reward Checking Account, I am making $2 a day.

A Reward Checking Account is twenty times as exciting as the cost savings of an ETF.
Your posts are usually very well though out. But this argument, you can save $2 a day by doing 'X' so therefore you shouldn't do "Y" doesn't make any sense.

Why can't you do both and save $2.10 a day?

Also, you can check the calculators and see that sometimes, it's not ten cents a day but closer to a dollar a day. Sure it depends on the money involved. But just to pick ten cents a day seems to be on the low side.
Now, put it in perspective another way. The difference between SWTSX and VTI over twenty years amounts to $800/$200000 = 0.4%. The price of VTSMX on 4/26 was $30.29; on 4/27, $29.57. I picked that date because it wasn't the day of the glitch, by the way. That is a 2% difference..
that's really trying to pick a difference that you can't control. I mean you buy a MF and the next day it tanks. Or the next day it goes up 5%. Same can happen with a ETF or happen intra-day. You can't control it but it does not argue against ETFs. Just because it can happen, it's just as likely or more likely to go up after you buy it (doesn't the market trend up?).

What I am trying to say, you could pick and example where I lose 2% intraday buying a ETF, or I could pick a day that I would gain 2% by buying an ETF instead of waiting and buying the MF. Likely they cancel each other out, but that does not cancel out 20 or 30 basis points. That's like say you are playing baseball and you want to steal second. Give one player a couple steps of a lead off first (lower fees) he has the better chance to steal second all other things being equal.

I would say having more control (with ETFs) if you want to buy on a falling day, I guess you may fall. But if the market is gang busters up likley the MF would lag the ETF that day wouldn't you think since you buy after the close? It's chance and should not be confused with the fact (not chance) that the ETFs have lower (or the same) ER as MF. I don't sweat intraday fluctuations, it's a gamble either way. But Expese ratios are not a chance, we know what they are.
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Post by Tyrobi »

Like OP, I find it odd that ETF's suddenly become a big deal recently. In my opinion, mutual funds are here to stay for the long run.

By now all bogleheads should already recognize and accept that the portion of the long-run return achieved by the class of financial assets in which they invest will be less than 100 percent. With low-cost index funds, I'm very happy to get 98-99% of the long-run market return. What more do I want! (That is far better than 85% of the annual returns provided by the average actively managed funds.)

Now, enter ETF's in the picture of four dimensions of investment (return, risk, cost and time). ETF's offer very low competitive cost. Yes, cost does matter in the long haul. But will ETF's offer the same certainty and consistency of reaching 98-99% level as our low-cost index funds for the average investors in ETF's?

To those investors changing to ETF's in their portfolio, more power to you in the search for the holy grail of getting as close to 100 percent level. For me, index funds are the optimal way to approach the return of the markets for long-term investing.

Lastly, Mr. Bogle warned us that, "much of the mutual fund industry is engaged in a hell-bent mission to take hold of the finest instrument ever created for long-term investing and transform it into a vehicle for intermediate term—and even short term—speculation."
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Post by GammaPoint »

livesoft wrote: They might not even know that they could have paid $200 to $500 less with judicious use of appropriate limit orders.
How do you know this? You said in another thread that you set low limit orders to buy and wait for the price to come to you. But if it doesn't, you just don't buy.

How is this not arbitrarily deciding on what a 'fair market value' is? How is this not market timing? Have you actually calculated what would have happened, on average, if you would have just bought at the ask each time? I imagine not.

I ask this because you seem very confident that you are saving a lot of money each year doing this. And if you are correct, then I'd like to do it as well, because I have the patience to wait. I just don't see how you know that it's paying off.
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Post by rai »

nm
Last edited by rai on Sat May 15, 2010 1:12 pm, edited 1 time in total.
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HoldenCaulfield
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Post by HoldenCaulfield »

I am to understand that ETFs often have a more favorable expense ratio over its counterpart mutual fund - in the long term.

Though I don't exactly understand why that would be the case. I would have thought that a more actively traded security would garner additional expenses.

Being a long-term focused investor, presently I am only investing in ETFs to maintain a position in specific secors that I have noted a need for larger holdings in.

Is there a benefit to a buy and hold fella like myself - in converting my mutual funds to their ETF counterparts (where applicable)?

And, is it naive to think that something that has the ability to be actively traded (and often is actively traded to a degree) will be less expensive than a mutual fund - (whose 1 NAV a day just feels more regulated to me)?

Cheers.
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Post by avalpert »

livesoft wrote:
rai wrote:...
VEU save like $120 per year on a 10K initial and $1k per month for 10 years.

Maybe $200 a year or $120 a year is 'just a lil bit'. Bit I don't mind taking that.
...
I wonder if Vanguard realizes that it's MFs are now at a disadvantage with some of the ER being double what the ETFs are. Who would ever pick the MF? Who would not switch from a MF to an ETF is you can save 10 or 20 or 30 basis points?
The folks who somehow always pay $200 a year too much for their annual ETF transactions may not realize the savings that you write about. It would be easy to overpay due to bid/ask spread and not monitoring what you are doing. They might not even know that they could have paid $200 to $500 less with judicious use of appropriate limit orders.
But thos buying mutual funds cna also always be paying $200 'too much' if they place there orders on the wrong day etc. If anything, ETFs give you mor options to control the price you pay if you want than mutual funds ever could - and if you are an extreme effecient market type what difference does it make if you are talking about the price at 2:35 or the coincidental last price of the day?
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Post by livesoft »

GammaPoint wrote:
livesoft wrote: They might not even know that they could have paid $200 to $500 less with judicious use of appropriate limit orders.
How do you know this? You said in another thread that you set low limit orders to buy and wait for the price to come to you. But if it doesn't, you just don't buy.
How does anybody know this? With ETFs how do you know you paid too much? Of course it is arbitrarily deciding on what a fair market value is. So what?

As for market timing, I love to do market timing. There is this thread where I report "worst days" as they happen so that you can submit buy orders if you like before the market closes:
http://www.bogleheads.org/forum/viewtopic.php?t=41939

The orders I enter are only good-for-the-day. I do not sit around and wait for days for an order to be completed. Furthermore, I am not quite in the accumulation stage anymore even though I am adding to my portfolio. I can put my contributions into fixed income or stocks ... the amounts I add do not have any material effect on my asset allocation. So if I don't like the prices of the stock ETFs, I just let my contribution sit in fixed income until I decide otherwise (I mean rebalance into stocks). Is that market timing? Of course! :twisted:
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Post by GammaPoint »

HoldenCaulfield wrote: Though I don't exactly understand why that would be the case. I would have thought that a more actively traded security would garner additional expenses.

Being a long-term focused investor, presently I am only investing in ETFs to maintain a position in specific secors that I have noted a need for larger holdings in.

Is there a benefit to a buy and hold fella like myself - in converting my mutual funds to their ETF counterparts (where applicable)?

And, is it naive to think that something that has the ability to be actively traded (and often is actively traded to a degree) will be less expensive than a mutual fund - (whose 1 NAV a day just feels more regulated to me)?
ETFs are cheaper, at least partly, due to the fact that instead of the mutual fund company having to mess with all the paperwork involved with the fund, it's the brokerage where you hold the ETF that is responsible for it. So a brokerage has to give you 1099-DIV, etc. forms each year and the mutual fund company doesn't have to deal with all that overhead.

Secondly, trading doesn't affect the cost of the ETF. Trading of the securities within the ETF would increase costs, but trading of the ETF itself generates no trading costs to the fund (although may very well to the owner of the ETF as an individual).
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Post by rai »

HoldenCaulfield wrote:I am to understand that ETFs often have a more favorable expense ratio over its counterpart mutual fund - in the long term.

Though I don't exactly understand why that would be the case. I would have thought that a more actively traded security would garner additional expenses.
the active trading of an ETF does not have anything to do with the ER.

Once the ETF is created it's a basket of stocks. You have a basket of stocks in your own account you don't pay any ER.


How ETFs work?http://finance.yahoo.com/etf/education/01
The custodial bank holds the basket of stocks in the fund's account for the fund manager to monitor. There isn't too much activity in these accounts, but some cash comes into them for dividends and there are a variety of oversight tasks to perform. Some managers have leeway to use derivatives to track an index.

What motivates each player? The fund manager takes a small portion of the fund's annual assets as their fee, clearly stated in the prospectus available to all investors. The investors who loan stocks to make up a basket make a small interest fee for the favor. The custodial bank makes a small portion of assets likewise, usually paid for by the fund manager out of management fees.
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Post by GammaPoint »

livesoft wrote: How does anybody know this?
I'm not saying that anyone does. I'm just saying that your posts read as "the cost benefits of ETFs are removed if you don't market time". And I completely disagree with that.

Market-timing and cost benefit through ER are two distinct issues. You can get a lower ER by going to an ETF. You can also get a better return by market timing successfully, either by getting the best price of the hour, day, week, etc. They aren't related. For those who don't want to market time then you can save money with ETFs. For those who don't want an ETF they can save money by market timing (if they can in fact do that).

And I'm not sure if investing on the "worst" days outperforms a simple DCA strategy. In some markets it might, and in some it might not. If you wait around for a 5% single-day drop, but the market goes up 10% first, you're not getting an extra value.
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Post by HoldenCaulfield »

Much obliged Rai and Gammapoint.

My fundemental trading know-how must have taken the day off on this marvelous Saturday.

Be well.
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by knowmad »

bpp wrote:
LadyGeek wrote:I was totally happy with my target retirement fund (and TIPS for my Roth).
Then what do you care what other people do?
If everyone drinks the Koolaid and switches to ETFs, then mutual fund ERs will rise. Bye bye automatic investment plan. Hello limit order. Ignore the spread to your detriment.
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by GammaPoint »

knowmad wrote: If everyone drinks the Koolaid and switches to ETFs, then mutual fund ERs will rise. Bye bye automatic investment plan. Hello limit order. Ignore the spread to your detriment.
Not a bad point. I wonder to what extent VG's MF will suffer from this though, since they are a different share class of the ETF. Probably the VG MF will get a lower ER because of more ETF holders to share costs with.
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by knowmad »

GammaPoint wrote:Not a bad point. I wonder to what extent VG's MF will suffer from this though, since they are a different share class of the ETF. Probably the VG MF will get a lower ER because of more ETF holders to share costs with.
Oh yeah I forgot about that. Does this mean that the VG mutual funds won't suffer at all because of the ETF Exodus? Why the sudden VG push towards ETF conversion?
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Post by rai »

HoldenCaulfield wrote:Much obliged Rai and Gammapoint.

My fundemental trading know-how must have taken the day off on this marvelous Saturday.

Be well.
if you are anything like your namesake Holden, you must take most days off :wink:

As for the bid//ask spreads, for the most part they are small, and do not offset the low ER of an ETF. An ER is an expense every day and every year, the bid/ask is a one time charge.

A bid/ask spread is only paid when you buy or sell and I am not sure if you loses every time with the bid/ask.

here is a list of vanguard bid/ask spreads https://advisors.vanguard.com/VGApp/iip ... daskspread

as low as $1 for a $10K order, that is less than one penny for each $80 share of BND.
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Mordoch
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by Mordoch »

knowmad wrote: Oh yeah I forgot about that. Does this mean that the VG mutual funds won't suffer at all because of the ETF Exodus? Why the sudden VG push towards ETF conversion?
It certainly shouldn't and basically its the equivalent of the mutual funds becoming larger and getting greater economies of scale. (It doesn't really matter if the shares are in the mutual funds or ETF.)

I don't think there is really that much of an overall push, its just individuals here deciding with the latest change ETFs are now a bit better, so they will go ahead and convert.

(As I noted, the changes Vanguard made were basically about maximizing their share of the ETF market in the areas they have such options.)
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Post by CaliJim »

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kenner
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Post by kenner »

A pretty bright, successful guy named John Bogle says investing in ETFs is a mistake for many investors. I'm guessing the reasons are largely based on investor psychology - not a strength of many investors.

http://www.smartmoney.com/investing/mut ... ors-20877/

This may not apply to any Boglehead.
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Post by Jack »

That is a handy table on the advisors site, but for the life of me I can't figure out how to navigate to that page from the menus nor can I find it by searching.

Any clues on how you got there?
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Post by LadyGeek »

Tyrobi wrote:Like OP, I find it odd that ETF's suddenly become a big deal recently. In my opinion, mutual funds are here to stay for the long run.
livesoft wrote:This poll http://www.bogleheads.org/forum/viewtopic.php?t=54897 helps to show the excitement. I think it is true that there have been an increase in ETF-related threads.
GammaPoint wrote:...Most of the questions are from people who never traded or considered ETFs before because they had trading costs (direct that is). But now that those trading costs are removed, people want to learn about them and see if they are appropriate for their situation. The average forum user doesn't like to search the forums, so we get the same question over and over again. Those who prefer to use strictly mutual funds don't need to interpret these questions as any sort of attack on their investing method. It's simply someone who is trying to learn more.
nisiprius wrote:...I stand by my opinion, that even if you were to say that ETFs are just plain better than mutual funds, the excitement is wildly disproportionate to the importance. It is the amount of excitement, the irrationality that makes me cranky, not the fact that many people prefer ETFs.
Do the math. Consider magnitude, not just direction: there's nothing about the cost differences of ETFs to warrant what we're seeing...
I'm happy to find that I'm not alone here. GammaPoint is absolutely correct- I wanted to learn more.

I'll reiterate that it's not possible for an investor with no experience in ETFs to understand what's important here. To an engineer (like me), Nisiprius's vector analogy is perfect (magnitude, direction). A new investor needs to minimize the excitement so he/she is not driven off-course and ends up with the wrong decision.

So, how do you educate forum members and eliminate recurring questions? Put it in the wiki. You'll note that there has been some recent activity to show how to convert mutual funds to ETFs. So, I stand on my opinion that it's of high interest in the forum.

What's missing is the Bogleheads investing expertise to provide guidance on the use of ETFs that will put things in the proper perspective, such as John Bogle's advice on ETFs (thanks to kenner) or any of several previous posts. Please see Exchange Traded Funds on the Bogleheads Wiki.

I'd be more than happy to put suggested updates in the wiki.
diasurfer wrote:
LadyGeek wrote:No. From my perspective, there was way Too Much Information saying to go ETFs, especially to convert from mutual funds. .
I disagree with your "especially". I think this might be the best case scenario. Add to your investment at monthly intervals using a MF, withe the safety of always ensuring you always buy at NAV and don't screw up your market or limit order, and then once a year or so convert to ETF for free to lower your ER for the long ride into retirement. Wonder if you can convert back to MF for ease of selling during retirement?
There was at least one thread on this. Perhaps I focused on it too much. The answer to your question is no. Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs? See the last sentence.
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Post by grabiner »

CaliJim wrote:Could it be that buying into a mutual fund that has unrealized losses is more tax efficient than buying the same basket of stocks via an ETF?

I once got hit with the burden of paying someone else's capital gains by buying into a mutual fund that had large unrealized capital gains - and then realized some of these gains.

I like the fact that you don't have to worry about this situation at all with ETFs.
You can have the risk with ETFs, particularly new ones. Most of the international small-cap ETFs have distributed gains in their early years. Vanguard started VSS near the 2009 market bottom, so it didn't have many stocks with losses to sell when the index changed, and it wasn't quite able to cancel out all its gains.
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Post by exigent »

To me, ETFs aren't worth the trade off. Sure, the expense ratios are marginally lower that regular Vanguard funds. They are, however, on par with Admiral shares (for funds where those are available). The big (HUGE) downside for me is the inability to invest automatically. I'll just stick with mutual funds, thank you very much. That being said, I did appreciate the discussion on converting between MF and ETF shares.
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Post by LadyGeek »

Jack wrote:
That is a handy table on the advisors site, but for the life of me I can't figure out how to navigate to that page from the menus nor can I find it by searching.

Any clues on how you got there?
Same for me. However, it's the first hit when you google "vanguard etf bid/ask spread". Go figure.
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Post by tetractys »

livesoft wrote:It would be easy to overpay due to bid/ask spread and not monitoring what you are doing.
I agree with this. With a little smarts I guesstimate about an %85 chance of bettering the NAV on each trade, and eliminating the cost of the spread. But this is a task for a unique investor who can afford some extra time and care, and likely not even worth consideration for the others. I wouldn't think professional managers would have the space to do this for their clients. -- Tet
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by Blue »

Morgan wrote: 4. If you get a accumulation ETF version, then there's no income tax on dividends either. They get rolled up into the NAV and you only get taxed when you sell at the capital gains end of the spectrum. I think mutual funds can have an similar thingy mechanism.
Morgan, would you (or anyone else) expound upon this? This is new information to me and I can not seem to find much on ETF's with this feature of avoiding dividend distribution as a tax deferral method. Seems like this could be incredibly useful in taxable accounts.

Thanks in advance.
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Post by rai »

LadyGeek wrote:
Jack wrote:
That is a handy table on the advisors site, but for the life of me I can't figure out how to navigate to that page from the menus nor can I find it by searching.

Any clues on how you got there?
Same for me. However, it's the first hit when you google "vanguard etf bid/ask spread". Go figure.
Vanguard website is a labrynth. You can only get to certain pages by going in order through other pages.

I don't know how I found that page so I stuck it on my favorites tab so I can find it again in the future (or else google).
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Re: Why the big deal with ETFs? Are mutual funds going away?

Post by livesoft »

Blue wrote:
Morgan wrote: 4. If you get a accumulation ETF version, then there's no income tax on dividends either. They get rolled up into the NAV and you only get taxed when you sell at the capital gains end of the spectrum. I think mutual funds can have an similar thingy mechanism.
Morgan, would you (or anyone else) expound upon this? This is new information to me and I can not seem to find much on ETF's with this feature of avoiding dividend distribution as a tax deferral method. Seems like this could be incredibly useful in taxable accounts.

Thanks in advance.
First, you have to live in the UK.
Second, you cannot be a US citizen.
Etc.
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