Vanguard ETFs vs. Index Funds

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boognish
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Vanguard ETFs vs. Index Funds

Post by boognish » Sun Sep 18, 2016 11:23 am

Which do people like more? I'm thinking about transferring money that I currently hold in the Windsor II fund into a value index or etf, just to reduce the expense ratio. The ETF has the lowest expense ratio of the three, but Bogle and Buffet and others seem to favor index funds over ETFs for some reason. With the commission free trades that Vanguard has on ETFs, is there a reason not to go down that path? I feel like I'm missing something.

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Yesterdaysnews
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Re: Vanguard ETFs vs. Index Funds

Post by Yesterdaysnews » Sun Sep 18, 2016 12:29 pm

I prefer ETFs. Mutual funds are great but seem to becoming the "old" way of doing things. ETFs are cheap (Vanguard and iShares is what I prefer), tax efficient, diversified, and liquid. I also like that they price in real-time during the day and not just at the end of the day.

Another nice things is that you can buy Vanguard ETFs at any broker for a nominal commission, or free if you have some free trades. This is nice because you can get all the benefits of the Vanguard ETFs but use a superior brokerage platform such as Fidelity or Schwab -- best of both worlds in my opinion.

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Re: Vanguard ETFs vs. Index Funds

Post by Bradiator » Sun Sep 18, 2016 12:37 pm

There's a lot here that I think it would be wise to pull apart into different decisions. A few thoughts for you to consider:

1) Mutual Funds vs. ETFs. There's not an either/or between index funds and ETFs. The two choices for investment structure are between mutual funds and ETFs. There are a number of considerations for which one is right for you. Check the wiki. Also to note: make sure you are comparing the ETF expense ratio to the Vanguard Admiral Funds expense ratio -- they are almost always identical, so I am doubtful about your data when you say the ETF is "cheaper."

2) Active vs. Passive. Windor is an active large cap value fund, whereas there are index-based alternatives from Vanguard (both in mutual funds and ETFs). Passive options are usually cheaper, but Windsor itself is quite cheap for an active fund. Mr. Bogle makes a strong argument that active management has drawbacks and isn't often worth the additional cost; other data suggests that low-cost active funds can perform competitively with low-cost passive funds.

3) Action vs. Inaction. Windsor is a good fund (my view), and moving to an index fund in the same category isn't likely to get you all that much. Of course...it all depends. I personally use only passive strategies and like ETFs, but whether it'd be right for you depend on about of unrealized gains, the tax status of the account you hold it in, etc. Inaction has a lot of benefits.

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Earl Lemongrab
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Re: Vanguard ETFs vs. Index Funds

Post by Earl Lemongrab » Mon Sep 19, 2016 3:05 pm

Yesterdaysnews wrote:Another nice things is that you can buy Vanguard ETFs at any broker for a nominal commission, or free if you have some free trades. This is nice because you can get all the benefits of the Vanguard ETFs but use a superior brokerage platform such as Fidelity or Schwab -- best of both worlds in my opinion.

Plus that flexibility allows you to take advantage of Brokerage Bonus Programs.

Earl
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Re: Vanguard ETFs vs. Index Funds

Post by powermega » Mon Sep 19, 2016 3:56 pm

Assuming all else equal... In a qualified account, we prefer mutual funds. In a taxable account, we prefer ETFs.
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ogd
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Re: Vanguard ETFs vs. Index Funds

Post by ogd » Mon Sep 19, 2016 4:06 pm

Your questions should be answered in our wiki: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

boognish
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Re: Vanguard ETFs vs. Index Funds

Post by boognish » Fri Sep 30, 2016 8:34 am

Thanks for all the responses. I don't have enough in this fund to qualify for the Admiral funds, or I would likely just go that route. As a follow up, I've always been told about the value of dollar-cost-averaging, which ensures that I don't buy all of a fund when it's at the most expensive price point. So I'm a little concerned about taking $7,000 or so from my Windsor II account and dumping it all into an ETF or Index, for fear that I'll buy it at a high point and watch it go down over time. Does it make sense to set up the ETF/Index and just "trickle" the money into that fund slowly over time? I purchased an Emerging Market ETF some time ago and put a big chunk of money in all at once and its value has never returned to that initial purchase value. I'm concerned about repeating that incident.

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Re: Vanguard ETFs vs. Index Funds

Post by RadAudit » Fri Sep 30, 2016 8:47 am

boognish wrote: So I'm a little concerned about taking $7,000 or so from my Windsor II account and dumping it all into an ETF or Index, for fear that I'll buy it at a high point and watch it go down over time.


Opinions will differ on this point. Here's mine. You've $7,000 currently in the Windsor II fund - i.e, the market. All you are doing is moving the money from a fund that is in the market to another fund and / or ETF that is in the market. So there is no need to trickle the money in to the market over time since it was already there.

I believe that your money in the market will go down, if the market goes down, whether you are in Windsor II or an index or an ETF or another fund. Now, that said, how much it'll go down is a function of the change in asset allocation. If your money in Windsor II has a more conservative asset allocation than the ETF, index, etc. that you are considering switching in to than the money in Windsor II would have gone down less - that is if the stock and bond markets behave like they normally do.

Hope that helps.
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nisiprius
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Re: Vanguard ETFs vs. Index Funds

Post by nisiprius » Fri Sep 30, 2016 9:09 am

First, a Vanguard ETF is a kind of index fund. Don't let anyone distract you from that main point. An ETF is a kind of mutual fund--an Exchange Traded Fund. The difference between, say, a Vanguard index fund and the corresponding Vanguard ETF are like the differences between the same brand of beer in bottle or in cans. People make it out to be hugely important, but it's not.

Second, stocks are stocks. You aren't going to get terribly different results from going from Windsor II to an index ETF in the same style box. Windsor is in the Large Value style box. The obvious index ETF counterpart would be the Vanguard Value ETF, VTV.
Source

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Third, with regard to expense ratios, actually do the math. You didn't say whether you are using Investor or Admiral shares of Windsor, but whichever it is, do the actual math, calculate the number of dollars' difference it makes with the amount of money you personally have invested. Let's say it's $25,000 in Investor shares. The Windsor expenses would be $25,000 x 0.34% = $85/year. VTV, $25,000 x 0.08% = $20/year. $65 a year difference.

Seriously, really, take the time now to do the calculation. How many dollars a year does the expense ratio difference mean to you? (Don't tell us, just calculate the number).

Now consider that $25,000 in VTV changes by more than that amount almost every day. VTV dropped more than 2% between September 8th and 9th, meaning a $25,000 investment dropped $500. One day. And then it rose hundreds of dollars the next day, then fell hundreds of dollars the next and so on.

Image

You have to answer the question for yourself about whether you seriously care about saving $65 a year in an investment with daily fluctuations of hundreds of dollars... and a drop in 2008-2009 of over ten thousand dollars. For some people the answer is "you bet, $65 is $65." For me, it's "aaaaah, lost in the noise."

If you do the compounding thing, then the difference between, say, 1.34%/year and 0.34%/year is 1% a year and it really is important. The difference between 0.34% and 0.08%--and it's the difference that matters, not the ratio--is 0.26% and that is much much less important.

Fourth, the really important thing is not to get too itsy and making changes to your portfolio every six months or every year.

So I can't tell you what to do, but I can suggest that you not make any change unless you really have a strong conviction about it.
Last edited by nisiprius on Fri Sep 30, 2016 9:15 am, edited 2 times in total.
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nisiprius
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Re: Vanguard ETFs vs. Index Funds

Post by nisiprius » Fri Sep 30, 2016 9:13 am

P.S. The reason why some people--I think this includes Bogle--dislike ETFs is not because they are intrinsically bad, but because of a feeling that the reason they were created was in order to facilitate and encourage speculation. The example I like to point to is Morningstar's charts. Ask Morningstar to show you a chart for a mutual fund and they show you ten years. Ask them to show you a chart for an ETF and they show you thirty days. I think this really does represent the mindset of the typical mutual fund buyer and the typical ETF buyer.

There wold be no ETF industry if the only people who bought ETFs were long-term investors. It's speculators who are the driving force. That doesn't make them bad for long-term investors; I've used ETFs once or twice when the choices and the fee structure at a brokerage made them better. If my only account were at Fidelity, I would not use Vanguard's mutual funds. I would either use Vanguard ETFs or I would use Fidelity's index funds, just because of the $75 transaction fee on the Vanguard funds at Fidelity.
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Re: Vanguard ETFs vs. Index Funds

Post by Lieutenant.Columbo » Fri Sep 30, 2016 9:32 am

Yesterdaysnews wrote:...EFT...tax efficient...you can buy Vanguard ETFs at any broker...but use a superior brokerage platform such as Fidelity or Schwab
So, are EFTs That Much More tax efficient than comparable index finds?
Also, what makes Fid or Sch better platforms compared to Vang in your opinion?
Thank you.
Last edited by Lieutenant.Columbo on Fri Sep 30, 2016 9:39 am, edited 1 time in total.
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Re: Vanguard ETFs vs. Index Funds

Post by dbr » Fri Sep 30, 2016 9:34 am

I use ETFs in the cases where the investments are at a brokerage and I can save in transaction fees. There are a lot of reasons one may have no choice in brokerage or prefer not to broker at Vanguard. This works as I am currently running a 0.004% addition to expenses from transactions.

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Re: Vanguard ETFs vs. Index Funds

Post by ogd » Fri Sep 30, 2016 9:43 am

boognish wrote: I don't have enough in this fund to qualify for the Admiral funds, or I would likely just go that route.

nisiprius wrote:Third, with regard to expense ratios, actually do the math. You didn't say whether you are using Investor or Admiral shares of Windsor, but whichever it is, do the actual math, calculate the number of dollars' difference it makes with the amount of money you personally have invested. Let's say it's $25,000 in Investor shares. The Windsor expenses would be $25,000 x 0.34% = $85/year. VTV, $25,000 x 0.08% = $20/year. $65 a year difference.

I think the OP is asking about an Admiral index mutual fund, not staying with Windsor. In this case, the numbers are even smaller:

With value: VTV vs VIVAX ER difference = 0.22 - 0.08 = 0.14%. Times a maximum of $10k before converting to Admiral shares, $14 a year.
With Total Stock Market, the similar calculation is $11 a year.

I think both ETF and mutual fund work if the MF is the cheap index variety. I prefer mutual funds for convenience and in my mind it's well worth a few bucks a year. But I have ETFs in other accounts with no major problems, just annoyances.

boognish wrote:So I'm a little concerned about taking $7,000 or so from my Windsor II account and dumping it all into an ETF or Index, for fear that I'll buy it at a high point and watch it go down over time.

Do it now and get it over with. You might show a little red at some point, but if you look back at Windsor you'd likely see a similar loss, these things don't diverge much.

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Re: Vanguard ETFs vs. Index Funds

Post by dbr » Fri Sep 30, 2016 9:55 am

boognish wrote:Thanks for all the responses. I don't have enough in this fund to qualify for the Admiral funds, or I would likely just go that route. As a follow up, I've always been told about the value of dollar-cost-averaging, which ensures that I don't buy all of a fund when it's at the most expensive price point. So I'm a little concerned about taking $7,000 or so from my Windsor II account and dumping it all into an ETF or Index, for fear that I'll buy it at a high point and watch it go down over time. Does it make sense to set up the ETF/Index and just "trickle" the money into that fund slowly over time? I purchased an Emerging Market ETF some time ago and put a big chunk of money in all at once and its value has never returned to that initial purchase value. I'm concerned about repeating that incident.


If you are afraid the index fund will go down, then it makes no sense whatsoever to ever buy it. What are you going to do if the fund goes down at the end of the year you spend trickling money into it.? As far as EM, if the outcome bothered you, you should never have thought of buying that fund. Besides, you didn't wait long enough. Investments can go down and not recover for some time, but when that will happen cannot be known in advance.

Anyway, if you are transferring from large cap value in Windsor II to a large cap ETF, both investments are going to go up and down pretty much the same.

Another comment is that what you are doing is not dollar cost averaging anyway. That concept applies to investing fixed dollar amounts at fixed intervals compared to buying a fixed number of shares at fixed intervals. Arithmetic shows the first results in a cheaper price per share than the second. Phasing in an investment vs investing the lump sum is a different issue. Arithmetic shows that the largest gain results from getting the most money into the highest returning investment as soon as possible. If the two investments have equal return and equal risk it won't make any difference.

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Re: Vanguard ETFs vs. Index Funds

Post by Earl Lemongrab » Fri Sep 30, 2016 1:13 pm

boognish wrote: As a follow up, I've always been told about the value of dollar-cost-averaging, which ensures that I don't buy all of a fund when it's at the most expensive price point.

It ensures nothing of the sort. In fact, the likely outcome is that you will pay more and get less in overall return. The trend of the market is upward, so your DCA contributions are likely to have HIGHER share cost than the point where you could have bought with the lump sum. Not guaranteed. What you are really doing gradually shifting your asset allocation to be more aggressive over the DCA period.

It's been mentioned often enough to almost be trite, but what will you do at the end of the DCA period if the market is even higher? Sell it all and start DCA again? Remember that, other than taxes, there's no difference between holding cash and not buying and selling.

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Re: Vanguard ETFs vs. Index Funds

Post by Yesterdaysnews » Fri Sep 30, 2016 9:00 pm

Lieutenant.Columbo wrote:
Yesterdaysnews wrote:...EFT...tax efficient...you can buy Vanguard ETFs at any broker...but use a superior brokerage platform such as Fidelity or Schwab
So, are EFTs That Much More tax efficient than comparable index finds?
Also, what makes Fid or Sch better platforms compared to Vang in your opinion?
Thank you.


Not a lot more efficient, but a little.

Fido and Schwab have far superior websites and customer service, and some stand alone offices. I love Vanguard products, and use their ETFs almost exclusively, however their website is pretty archaic and customer service pretty slow.

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Re: Vanguard ETFs vs. Index Funds

Post by akpk » Sat Oct 01, 2016 10:24 am

1. If i plan to make regular contributions (weekly/monthly) , I go with Index fund.
2. If i want to own vanguard index funds at brokerage account in other firms, i just buy etf's.

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Re: Vanguard ETFs vs. Index Funds

Post by ogd » Sat Oct 01, 2016 1:40 pm

Yesterdaysnews wrote:
Lieutenant.Columbo wrote:
Yesterdaysnews wrote:...EFT...tax efficient...you can buy Vanguard ETFs at any broker...but use a superior brokerage platform such as Fidelity or Schwab
So, are EFTs That Much More tax efficient than comparable index finds?
Also, what makes Fid or Sch better platforms compared to Vang in your opinion?
Thank you.


Not a lot more efficient, but a little.

Fido and Schwab have far superior websites and customer service, and some stand alone offices. I love Vanguard products, and use their ETFs almost exclusively, however their website is pretty archaic and customer service pretty slow.

Vanguard mutual funds are just as tax efficient as the corresponding ETFs, if they exist. See the wiki. But this is only Vanguard.

I have both Schwab and Vanguard and I can't say I'm missing anything for either website or customer service with Vanguard. On the other hand, the Admiral shares and conversion option are genuinely unique.

Furthermore, I don't trust Schwab to not pressure less savvy investors into higher fee products during one of their "bad corporate" periods (right now is a good one, but shareholders are always gonna demand growth - of your fees). I don't trust Fidelity either. Only Vanguard.

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Re: Vanguard ETFs vs. Index Funds

Post by FillorKill » Sun Oct 02, 2016 8:34 am

Not significant and rarely mentioned - although annoying to me- is the cash drag of the ETF share class. I tend to avoid it in this way: in anticipation of quarterly distributions I will take a look at what I need to buy to move toward targets and the dollar value of distributions. In instances where I will need to buy into ETFs I will make the purchases on the respective ex dates and then let the actual distributions flow back and replenish cash expenditure used in advance of actual distributions. This pretty well eliminates the cash drag. YMMV.

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Re: Vanguard ETFs vs. Index Funds

Post by Earl Lemongrab » Sun Oct 02, 2016 2:25 pm

FillorKill wrote:Not significant and rarely mentioned - although annoying to me- is the cash drag of the ETF share class. I tend to avoid it in this way: in anticipation of quarterly distributions I will take a look at what I need to buy to move toward targets and the dollar value of distributions. In instances where I will need to buy into ETFs I will make the purchases on the respective ex dates and then let the actual distributions flow back and replenish cash expenditure used in advance of actual distributions. This pretty well eliminates the cash drag. YMMV.

Not sure what you mean. You can, if you want, reinvest ETF distributions just as you would regular mutual funds. I don't to avoid fractional shares and to direct new money to lagging allocations.

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Re: Vanguard ETFs vs. Index Funds

Post by FillorKill » Sun Oct 02, 2016 3:51 pm

Earl Lemongrab wrote:Not sure what you mean. You can, if you want, reinvest ETF distributions just as you would regular mutual funds. I don't to avoid fractional shares and to direct new money to lagging allocations.

Earl

That doesn't help. An ETF goes ex and trades at a price reflecting the distribution, you, however, don't get the distribution back into the market if reinvesting (or the cash) for several days. MF will pay or reinvest with much less of a time interval from record date. Advantage: MF (or use a work-around).

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