Allan Roth: "Why ETFs Won't Replace Mutual Funds"

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Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Taylor Larimore » Tue Feb 28, 2017 4:35 pm

Bogleheads:

Allan Roth CPA, CFA, is one of my favorite authors and columnists (AARP magazine). His latest article written for ETF.com helps answer the difficult question every investor must decide: Shall I use mutual funds or ETFs? Allan typically recommends Vanguard Admiral share class mutual funds over the ETFs because the funds are superior in six ways:

1. Can buy fractional shares
2. No premium or discount—all transactions are at net asset value
3. No spreads between bid and ask
4. Less cash drag, as dividends are reinvested more quickly
5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
6. Can do automated dollar cost averaging

Allan adds: "Both the Admiral share and ETF share classes have the same expense ratio and are extremely tax efficient."

Why ETFs Won't Replace Mutual Funds

Best wishes.
Taylor
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by willthrill81 » Tue Feb 28, 2017 4:57 pm

My feeble understanding of the differences leads me to think that ETFs may be better for taxable accounts in at least some instances, but I prefer mutual funds for my tax advantaged accounts.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Earl Lemongrab » Tue Feb 28, 2017 5:05 pm

ETFs are superior for me because you can get the best ERs and choose whichever custodian suits your needs rather than forced to one. That allows me to move them as I desire.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by BW1985 » Tue Feb 28, 2017 5:19 pm

All my accounts are at VG so I just use mutual funds. I never saw a reason to use ETF's instead.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by dodecahedron » Tue Feb 28, 2017 5:22 pm

Earl Lemongrab wrote:ETFs are superior for me because you can get the best ERs and choose whichever custodian suits your needs rather than forced to one. That allows me to move them as I desire.


I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there. (I am pretty it would be expensive to buy new Vanguard mutual funds there, but no plans to add to my holdings at Schwab, just to gradually donate them to my Schwab DAF at opportune times. The ease and speed of doing this last step is remarkable.)
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by spectec » Tue Feb 28, 2017 5:24 pm

Seems to me that the "fractional share" advantage of mutual funds is a tiny marginal savings at best.
It's more like fine-tuning or tweaking rather that being significant in any meaningful way.

But the portability of ETF's is important.
Hopefully it will never be an issue, but we can't predict the future.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Earl Lemongrab » Tue Feb 28, 2017 5:30 pm

dodecahedron wrote:
Earl Lemongrab wrote:ETFs are superior for me because you can get the best ERs and choose whichever custodian suits your needs rather than forced to one. That allows me to move them as I desire.


I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there.

Some custodians allow moving, selling, and even reinvesting, but few if any allow buying new shares.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by ruralavalon » Tue Feb 28, 2017 5:33 pm

Taylor Larimore wrote:Bogleheads:

Allan Roth CPA, CFA, is one of my favorite authors and columnists (AARP magazine). His latest article written for ETF.com helps answer the difficult question every investor must decide: Shall I use mutual funds or ETFs? Allan typically recommends Vanguard Admiral share class mutual funds over the ETFs because the funds are superior in six ways:

1. Can buy fractional shares
2. No premium or discount—all transactions are at net asset value
3. No spreads between bid and ask
4. Less cash drag, as dividends are reinvested more quickly
5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
6. Can do automated dollar cost averaging

Allan adds: "Both the Admiral share and ETF share classes have the same expense ratio and are extremely tax efficient."

Why ETFs Won't Replace Mutual Funds

Best wishes.
Taylor

That's an interesting article, thanks for the link.

The points you summarize from the article are the reasons that I personally prefer regular mutual funds over ETFs. For me they add up to simpler and easier to use.

I don't have a desire to trade during the day using ETFs. I am not in the hunt for new account bonuses, so I don't feel a need to be concerned about portability using ETFs.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by powermega » Tue Feb 28, 2017 5:45 pm

I still like ETFs in a taxable account myself, just for the potential to transfer in-kind if you ever need to. I also think ETFs are a little more tax efficient than their mutual fund twin for any company other than Vanguard. Without those considerations I prefer mutual funds and hold them in our qualified accounts.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by selters » Tue Feb 28, 2017 5:55 pm

A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by GuyLafleur » Tue Feb 28, 2017 6:35 pm

Unfortunately for us Canadians, Vanguard Canada does not offer mutual funds, so we are stuck with ETFs. Thankfully the bid-ask spread is only about $0.01 for all of the Vanguard ETFs I purchase.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by GuyLafleur » Tue Feb 28, 2017 6:38 pm

selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?


I may be wrong, but I think you are not insured if someone hacks into your account and sells everything (or you may be insured if someone forcibly hacks in, but not insured if they merely guess or obtain your password from you somehow). However, there is usually a separate "trading password" needed to put in any orders on top of the initial password used to log into your account.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by nisiprius » Tue Feb 28, 2017 6:42 pm

1) There's no reason I can think of why I should care whether ETFs will replace mutual funds. OK, if they do, they do. So what? If there comes a day when Vanguard tells me I must convert my mutual funds to ETFs I'll grumble a bit and I'll do it. If there comes a day when I discover some kind of problem with mutual funds I'll switch to ETFs. It's not a big deal. The inability to buy mutual funds will bother me less than my inability to buy 8-ounce containers of yogurt.

2) The real question is why some people (notably Ric Edelman, who has been saying since 2009 that mutual funds are dinosaurs that will be gone within ten years) make a big deal about it. Seriously, I'm supposed to switch to ETFs out of shame at being thought "old school?" I imagine advisors see higher profit potential for them in ETFs, and therefore are promoting them as if they were something new and wonderful.

3) Finally, in addition to Roth's reasons, I don't a shred of evidence in the data to think that ETFs are going to replace mutual funds, or even match them in total assets,, any time soon. These charts on relative asset growth are based on data from the Investment Company Institute.

The two facts are, first that, yeah, ETFs are growing faster than mutual funds. But mutual funds are a lot bigger than ETFs, more than seven times bigger, and ETFs aren't on track to equal them any time soon--much less replace them.

The first chart, on a linear scale, shows a fair visual illustration of just how much bigger mutual funds are.

The second, on a log scale, show that, yes, ETFs are growing faster. The dotted lines are extrapolations based on the last five years' growth, and show that if present growth rates continue, it will take until 2037 for ETFs to match mutual funds in total assets under management. Note: that doesn't ETFs will have replaced mutual funds by 2037, it just means the two categories will be equal. And that's if growth rates continue, but it seems obvious to me that ETF growth is slowing.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by aristotelian » Tue Feb 28, 2017 8:15 pm

dodecahedron wrote:
Earl Lemongrab wrote:ETFs are superior for me because you can get the best ERs and choose whichever custodian suits your needs rather than forced to one. That allows me to move them as I desire.


I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there. (I am pretty it would be expensive to buy new Vanguard mutual funds there, but no plans to add to my holdings at Schwab, just to gradually donate them to my Schwab DAF at opportune times. The ease and speed of doing this last step is remarkable.)


I just gave Schwab a call today to see if I could move some T. Rowe Price funds. I have not pulled the trigger but I was shocked at how easy it will be. The only concern would be that you could get charged higher fees to make additional purchases for out-of-family funds, but the Schwab guy said I could liquidate them for free.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by pyld76 » Tue Feb 28, 2017 10:08 pm

spectec wrote:Seems to me that the "fractional share" advantage of mutual funds is a tiny marginal savings at best.
It's more like fine-tuning or tweaking rather that being significant in any meaningful way.

But the portability of ETF's is important.
Hopefully it will never be an issue, but we can't predict the future.


The fractional share bit is incredibly meaningful. For the large number of folks who invest automatically every few weeks, ETFs are cumbersome at best. It is a nontrivial advantage to the mutual fund.

At least at VG, I've never worried about the portability issue, at least for equity funds: you can always convert to ETFs.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by wolf359 » Tue Feb 28, 2017 10:14 pm

BW1985 wrote:All my accounts are at VG so I just use mutual funds. I never saw a reason to use ETF's instead.


Ditto on being at VG. However, I found 2 reasons:
1: To get past purchase minimums or redemption fees when I don't have enough money. For example, some bond funds require $50,000 to buy Admiral shares.
2: When Vanguard doesn't have an equivalent fund. For example, if I wanted exposure to momentum, it's not tax efficient in mutual fund form, and Vanguard doesn't offer it. EtF is the best path in that case.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Leif » Tue Feb 28, 2017 10:18 pm

To me more important then the list presented by Taylor is that mutual funds are just easier. Just put in a dollar amount to buy/sell and it is executed at the end of the day market price. No worry about no or partial purchase/sales. No worry about limit orders. No trying to take my dollar amount and figure the number of shares to transact. Not wondering how my transaction is being gamed with front running. That is simple I can really appreciate.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by columbia » Tue Feb 28, 2017 10:30 pm

Aside from Total World, are there any Vanguard ETFs, which are appreciably cheaper than the mutual fund version?

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Impromptu » Tue Feb 28, 2017 11:06 pm

The Schwab ETFs will automatically reinvest my dividends. When automatically reinvesting my dividends Schwab purchases fractional shares for me.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by baw703916 » Tue Feb 28, 2017 11:08 pm

I have to say, the entire discussion in this thread seems to have completely missed the larger point that Allan Roth is making, namely that "mutual funds" vs. ETFs (ETFs are in fact mutual funds!) doesn't matter nearly as much as low cost, diversification, tax efficiency, etc.

I argue the data reveals that the real story [is] about investors realizing the impact of costs on their investment returns, and moving from more expensive funds to less expensive.


Not all ETFs are low cost and broad, but the ones that gathered the most inflows were.


Three ETF fund families—BlackRock, Vanguard and SSgA—attracted nearly 89% of the asset inflows last year. Those funds had a weighted average expense ratio of 0.19%.


ETFs are great, and I’m all for low-cost ETFs. I’m also for low-cost mutual funds, and care more about diversification, costs and tax efficiency than I do about any wrapper.

So don’t paint mutual funds as bad or ETFs as good. Low-cost, broad and boring index funds are typically superior, regardless of whether it comes in a mutual fund or an ETF.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by triceratop » Tue Feb 28, 2017 11:21 pm

columbia wrote:Aside from Total World, are there any Vanguard ETFs, which are appreciably cheaper than the mutual fund version?


VFSVX/VSS.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by dodecahedron » Tue Feb 28, 2017 11:25 pm

Earl Lemongrab wrote:
dodecahedron wrote:
Earl Lemongrab wrote:ETFs are superior for me because you can get the best ERs and choose whichever custodian suits your needs rather than forced to one. That allows me to move them as I desire.


I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there.

Some custodians allow moving, selling, and even reinvesting, but few if any allow buying new shares.


Not being allowed to buy new shares is not a problem for me. I moved my Vanguard mutual fund holdings to Schwab in order to efficiently donate my existing shares to my Schwab DAF at opportune times. Not planning to buy any additional shares of Vanguard funds there. I am not in the accumulation phase of my life, but if I do decide to buy new shares, for whatever reason (e.g. rebalancing), I am perfect happy to buy shares of Schwab's counterpart funds, since they have even lower ERs than Vanguards.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by White Coat Investor » Wed Mar 01, 2017 1:47 am

I also prefer the admiral share classes, but I won't pay more to get them. So if my 401(k) or HSA requires me to use a different brokerage, I buy the ETFs.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by nisiprius » Wed Mar 01, 2017 8:27 am

Does anyone, perhaps someone who's worked in the investing industry, have any ideas about why certain advisors seem to make such a big deal about it? To take a specific example, why does Ric Edelman want his radio listeners to believe that mutual funds will be gone, completely superseded by ETFs, very soon? (In 2009 or so he said "within ten years?") Why does he care?

Are ETFs way better for advisors? Do they try to present ETFs as a win-win for advisors and clients when it is more like a win-tie--("better for me, harmless to you?") Are they constantly facing pushback from clients who (from the advisor's point of view) have a strong irrational stick-in-the-mud preference for mutual funds? Why do some advisors apparently try to sell the concept of ETFs as a class, as if "investing in ETFs" was a thing in itself, instead of a microscopically different way to invest in stocks and bonds (and "alternatives")?

Are advisors often stuck with brokerage relationships that only let them offer their clients mutual funds or ETFs but not both, so they are forced to make a choice, and forced to hard-sell customers that have a slight preference for whichever one they don't offer?

As with individuals, are advisors forced to choose a brokerage partner that has transaction fees on some mutual funds but not others--so it is easier to say to a client "Mutual funds suck, forget 'em; here, have an ETF, all the cool kids use them now" than to say "Uh, great, I can get you an index fund but if you actually want the one Warren Buffett mentioned it will cost you $75, but I have one just as good from Schwab, oh, and ETFs, I could get you an ETF?"
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Jack FFR1846 » Wed Mar 01, 2017 8:31 am

This is a very dynamic playing field right now. 6 months ago, ETFs were the low cost way to go at Schwab and TDAmeritrade and I opened a taxable account at Schwab since they had the lowest price equity ETFs around. With the recent announcements, Schwab has matched these low costs in their mutual funds. At Fidelity, it's still cheaper to buy mutual funds if you meet the $10k minimum. TDAmeritrade, it's cheaper to go with ETFs. Vanguard is equal with Admiral or ETFs. As I think Nisiprius said, it's a matter of whether you get your beer in a can or a bottle.

For me, Allan misses the mark as I honestly don't care which way I hold investments. I know enough to only buy ETFs when the market is open and only to buy high volume ETFs where the bid/ask spread is always negligible.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by HueyLD » Wed Mar 01, 2017 8:33 am

I think advisors/salespeople prefer ETFs because it is easier to trade and easier to carry on any broker's books. More trades means more money earned for the advisors/salespeople.

I own both out of necessity but I definitely prefer mutual funds.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by dodecahedron » Wed Mar 01, 2017 8:45 am

Jack FFR1846 wrote:For me, Allan misses the mark as I honestly don't care which way I hold investments. I know enough to only buy ETFs when the market is open and only to buy high volume ETFs where the bid/ask spread is always negligible.


I don't understand why you wrote "For me, Allan misses the mark as I honestly don't care which way I hold investments," because if you actually read the entire article Taylor linked in the OP, the whole thrust of the article is precisely in agreement with you. He fully agrees that it doesn't matter. (The initial premise of the article was his response to another "expert" who was proclaiming that ETFs were so strongly superior to mutual funds that the aforesaid expert was predicting conventional mutual funds would be extinct in a decade. Taylor's short quoted excerpt needs to be read in context.)

Read the concluding two paragraphs of Allan's article that Taylor linked:

Allan Roth wrote:ETFs are great, and I’m all for low-cost ETFs. I’m also for low-cost mutual funds, and care more about diversification, costs and tax efficiency than I do about any wrapper.

So don’t paint mutual funds as bad or ETFs as good. Low-cost, broad and boring index funds are typically superior, regardless of whether it comes in a mutual fund or an ETF.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by BrandonBogle » Wed Mar 01, 2017 8:54 am

nisiprius wrote:Does anyone have any ideas about why certain advisors seem to make such a big deal about it?


No restrictions. They can buy any ETF on their trading platform vs. certain mutual funds (or other mutual funds w/ transaction fees they don't pocket), no trading restrictions (they can buy/sell Vanguard ETFs all day long), etc. It's like the stocks that they "know".

Any advisor who is really on the client's side would, as Allan Roth alludes to and others have mentioned, not care so much whether it is a Mutual Fund or ETF, but what the underlying viability and costs are.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by ruralavalon » Wed Mar 01, 2017 9:04 am

Jack FFR1846 wrote:This is a very dynamic playing field right now. 6 months ago, ETFs were the low cost way to go at Schwab and TDAmeritrade and I opened a taxable account at Schwab since they had the lowest price equity ETFs around. With the recent announcements, Schwab has matched these low costs in their mutual funds. At Fidelity, it's still cheaper to buy mutual funds if you meet the $10k minimum. TDAmeritrade, it's cheaper to go with ETFs. Vanguard is equal with Admiral or ETFs. As I think Nisiprius said, it's a matter of whether you get your beer in a can or a bottle.

For me, Allan misses the mark as I honestly don't care which way I hold investments. I know enough to only buy ETFs when the market is open and only to buy high volume ETFs where the bid/ask spread is always negligible.

His conclusion was that low expense ratios and good diversification are good, and you can get that in both either mutual funds or ETFs. He says that the real story is fund flows into low expense investing vehicles.

He was also debunking the fiction that ETFs will soon supersede mutual funds, by pointing out: 1) the advantages of mutual funds in terms of ease of use; and 2) the fact that current fund flows do not show ETFs overtaking mutual funds.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by dodecahedron » Wed Mar 01, 2017 9:06 am

Advisors might also like to promote ETFs as being better than mutual funds because ETFs can discourage clients from deciding to leaving the advisor become DIYers. For DIY people who have day jobs that keep them very busy during trading hours, mutual funds are easier to buy and sell since orders can be automated or placed in advance during hours when the markets are closed.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Allan Roth » Wed Mar 01, 2017 10:01 am

spectec wrote:Seems to me that the "fractional share" advantage of mutual funds is a tiny marginal savings at best.
It's more like fine-tuning or tweaking rather that being significant in any meaningful way.

But the portability of ETF's is important.
Hopefully it will never be an issue, but we can't predict the future.


As Pyld76 points out, fractional shares are useful in regular purchases. But even on a one time purchase, it's very useful. Say you had $50,000 in your account in which you wanted to buy VTI. At $122.96, you could buy 406.636 shares. But you don't want to keep putting limit orders at exactly that price and you don't want to have a negative cash balance. So you are conservative and put in a limit order to buy 400 shares. Now you are left with significant cash in your account earning very little or have to put in a second order to buy more VTI. It's simpler to put in an order to by $50,000 of VTSAX, IMO.

Again, Vanguard ETFs are also very good and great portfolios can be built with either.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by snowshoes » Wed Mar 01, 2017 11:01 am

The financial industry can only sell to us, what we as investors put up with, or better yet actively line up to buy. There are no more bucket shops(or the like), or purveyors of ETNs(absorbed by ETFs), and fewer closed end funds etc. too.
I'd suspect ETFs are still being offered as the newest, latest, & greatest, option for both new and seasoned investors to consider. I too see no reason ETFs replace Mutual Funds. As always its great to see Allan's insights & opinions.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Leif » Wed Mar 01, 2017 11:09 am

Allan Roth wrote:As Pyld76 points out, fractional shares are useful in regular purchases. But even on a one time purchase, it's very useful. Say you had $50,000 in your account in which you wanted to buy VTI. At $122.96, you could buy 406.636 shares. But you don't want to keep putting limit orders at exactly that price and you don't want to have a negative cash balance. So you are conservative and put in a limit order to buy 400 shares. Now you are left with significant cash in your account earning very little or have to put in a second order to buy more VTI. It's simpler to put in an order to by $50,000 of VTSAX, IMO.

Again, Vanguard ETFs are also very good and great portfolios can be built with either.

Exactly. I have both. But, I prefer mutual funds since they are easier to work with. I stress over watching the ETF bounce up and down, "safe" number of shares to purchase, limit orders, partial transactions, front running, etc.
Last edited by Leif on Wed Mar 01, 2017 11:14 am, edited 2 times in total.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by House Blend » Wed Mar 01, 2017 11:09 am

dodecahedron wrote:I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there. (I am pretty it would be expensive to buy new Vanguard mutual funds there, but no plans to add to my holdings at Schwab, just to gradually donate them to my Schwab DAF at opportune times. The ease and speed of doing this last step is remarkable.)

Thanks for that tip.

Since my only non-covered shares at Vanguard are shares of VTSAX (and the embedded gains are substantial), I like the idea of transferring those shares to a broker that

a) has a good DAF program, and
b) offers Specific ID tracking for non-covered shares.

At such a brokerage, I would be taking dividends in cash, and never buying new shares of that fund or anything else. Just occasional transfers into a DAF or (even rarer) sales. Sounds very similar to you, except that I'm perfectly happy with my covered shares and IRAs at Vanguard, and have no reason to move them.

So, does Schwab allow you to enter your own cost basis records after a transfer in of non-covered shares, and what are the parameters for their DAF (minimum account size, minimum donation)?

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by caliguy1 » Wed Mar 01, 2017 11:52 am

selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?


If you buy the largest ETFs ($40B+ AUM) like VTI, VEA, VWO, would that be an issue? Unless you're trading like $50m at a time, which I'm assuming most people here are not, even if you put a limit order of 1 cent wouldn't it execute near market price just because there is so much liquidity in those large ETFs?

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by jhfenton » Wed Mar 01, 2017 12:30 pm

caliguy1 wrote:
selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?


If you buy the largest ETFs ($40B+ AUM) like VTI, VEA, VWO, would that be an issue? Unless you're trading like $50m at a time, which I'm assuming most people here are not, even if you put a limit order of 1 cent wouldn't it execute near market price just because there is so much liquidity in those large ETFs?

It's going to be the case with any ETF, at least any Vanguard ETF. If someone hacked our account and sold our, say, 1500 shares of VSS (ex-US Small Cap), the worst at this moment they could do was sell a few hundred at $101.00 and the rest maybe a few cents less. (The Bid is $101.00, and the Ask is $101.09.)

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by MrNewEngland » Wed Mar 01, 2017 12:44 pm

I do ETFs because my IRAs are with BoA/ML and I cannot buy Admiral Shares there. So it's purely for the ER.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by selters » Wed Mar 01, 2017 1:15 pm

jhfenton wrote:
caliguy1 wrote:
selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?


If you buy the largest ETFs ($40B+ AUM) like VTI, VEA, VWO, would that be an issue? Unless you're trading like $50m at a time, which I'm assuming most people here are not, even if you put a limit order of 1 cent wouldn't it execute near market price just because there is so much liquidity in those large ETFs?

It's going to be the case with any ETF, at least any Vanguard ETF. If someone hacked our account and sold our, say, 1500 shares of VSS (ex-US Small Cap), the worst at this moment they could do was sell a few hundred at $101.00 and the rest maybe a few cents less. (The Bid is $101.00, and the Ask is $101.09.)


If that's the case, then my worry should be of no concern. But can't you sell your shares at any price? If I wanted to sell shares for $1, would I not be able to?

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by jhfenton » Wed Mar 01, 2017 1:30 pm

selters wrote:
jhfenton wrote:
caliguy1 wrote:
selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?


If you buy the largest ETFs ($40B+ AUM) like VTI, VEA, VWO, would that be an issue? Unless you're trading like $50m at a time, which I'm assuming most people here are not, even if you put a limit order of 1 cent wouldn't it execute near market price just because there is so much liquidity in those large ETFs?

It's going to be the case with any ETF, at least any Vanguard ETF. If someone hacked our account and sold our, say, 1500 shares of VSS (ex-US Small Cap), the worst at this moment they could do was sell a few hundred at $101.00 and the rest maybe a few cents less. (The Bid is $101.00, and the Ask is $101.09.)


If that's the case, then my worry should be of no concern. But can't you sell your shares at any price? If I wanted to sell shares for $1, would I not be able to?

There's no way that I'm aware. Whether you dump all your shares in a market order or place a limit order to sell them at $1, you're going to get the best available bid. If it's a huge order on a lightly-traded ETF or stock, you may hit several prices on your way down the order book to fill the entire sale, but you'll get something not too far off of fair market value.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Phineas J. Whoopee » Wed Mar 01, 2017 1:52 pm

selters wrote:...
If that's the case, then my worry should be of no concern. But can't you sell your shares at any price? If I wanted to sell shares for $1, would I not be able to?

If you placed a limit order to sell at $1, which means $1 or more, when other bids and asks were 100 times as much, and your broker let you do it rather than rejecting it as obviously a fat-finger error, yours would immediately become the national best ask and be matched with, and sold to, a bidder whose order at that moment was the national best bid, which is to say the highest. You would get far more than $1 per share. Even with high-frequency trading, a bidder can't become national best by bidding lower than others. Your order would be matched with the highest current bid and you would receive the bidder's limit price. It's the way modern stock exchanges work. High bidders are similarly protected. A match always includes one of the best bid or best ask, and transacts at that price. In your example your order, should your lazy broker not reject it outright, would behave in the same way as a market order.

As the previous poster noted, if your order was for an unusually large number of shares you might be matched with a number of bidders, but would receive their bid price for each slice.

Credible allegations claim the NBBO regulation I linked to above is not always strictly followed by each and every broker, but two orders of magnitude is something they'd be unlikely to risk.

PJW
Last edited by Phineas J. Whoopee on Wed Mar 01, 2017 3:21 pm, edited 1 time in total.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Phineas J. Whoopee » Wed Mar 01, 2017 2:00 pm

selters wrote:A while back, I wrote a post expressing concern that if someone gets into your account, they can sell your ETFs for close to nothing, thus wiping out your retirement funds with one click. They can't do that with mutual fund shares. Some posters said that was unlikely to happen, but I cannot say that I was reassured.

Am I right to assume that if that should happen, no insurance would cover the losses for you?

I answered just above about trade execution. I think your insurance question is important, so I'll write about it, too.

Insurance wouldn't cover you in the ETF case you refer to. Broker promises might, depending on how it came to be that somebody else initiated trades in your account.

Mutual funds and ETFs are covered, in reputable US brokers, by SIPC insurance, but that only makes you whole by restoring shares, and to a lesser extent cash, that were in your account before the brokerage failed and aren't there anymore after it applies for bankruptcy protection.

Unlike the situation with bank accounts, assets you hold with brokers are your property, not theirs, therefore even if they fail their creditors can't take possession of them.

Banks do own the money you deposit, which is one of the lines of reasoning behind FDIC insurance.

PJW
Last edited by Phineas J. Whoopee on Wed Mar 01, 2017 4:07 pm, edited 2 times in total.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Kalo » Wed Mar 01, 2017 2:11 pm

I did not see this point made in any other post so am making it as some posts seemed to be implying this was not the case. At Vanguard, and at some if not most brokers, dividends on ETFs can be reinvested in fractional shares. True also on many individual stocks.

I prefer admiral mutual funds at vanguard but I do hold some ETFs at vanguard when I can't afford admiral or no admiral is available.

I have read things about bond ETFs that make me prefer mutual funds for bonds.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Earl Lemongrab » Wed Mar 01, 2017 3:28 pm

House Blend wrote:So, does Schwab allow you to enter your own cost basis records after a transfer in of non-covered shares

Usually, cost basis will transfer eventually. It can take a week or so. However, most custodians will provide a way to update cost basis for non-covered shares. And in the end it doesn't really matter as long as you keep records before the move. What the custodian shows as the basis isn't relevant for that case.
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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by caliguy1 » Wed Mar 01, 2017 3:47 pm

Phineas J. Whoopee wrote:
selters wrote:...
If that's the case, then my worry should be of no concern. But can't you sell your shares at any price? If I wanted to sell shares for $1, would I not be able to?

If you placed a limit order to sell at $1, which means $1 or more, when other bids and asks were 100 times as much, and your broker let you do it rather than rejecting it as obviously a fat-finger error, yours would immediately become the national best ask and be matched with, and sold to, a bidder whose order at that moment was the national best bid, which is to say the highest. You would get far more than $1 per share. Even with high-frequency trading, a bidder can't become national best by bidding lower than others. Your order would be matched with the highest current bid and you would receive the bidder's limit price. It's the way modern stock exchanges work. High bidders are similarly protected. A match always includes one of the best bid or best ask, and transacts at that price. In your example your order, should your lazy broker not reject it outright, would behave in the same way as a market order.

As the previous poster noted, if your order was for an unusually large number of shares you might be matched with a number of bidders, but would receive their bid price for each slice.

Credible allegations claim the NBBO regulation I linked to above is not always strictly followed by each and every broker, but two orders of magnitude is something they'd be unlikely to risk.

PJW


I would argue that ETFs are safer than mutual funds in the sense that there's a 3 day settlement wait vs. 1 day for mutual funds, if someone were to hack and try to take the money out of your account.

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by Barry Barnitz » Thu Mar 02, 2017 1:59 pm

GuyLafleur wrote:Unfortunately for us Canadians, Vanguard Canada does not offer mutual funds, so we are stuck with ETFs. Thankfully the bid-ask spread is only about $0.01 for all of the Vanguard ETFs I purchase.


Hi:

While, understandably, the comments are reflecting the parochial views of US investors, keep in mind that in Canada, Europe, UK, and most of Asia mutual fund expenses are exorbitantly high, so that ETF's represent the best, and in some cases, the only way to assemble a low-cost indexed portfolio.

Also consider the following proposition, suggested by the innumerable requests on this site for lower-cost Admiral shares for target retirement and lifestrategy funds.

Why, we may ask, is Vanguard using investor share class funds for the Total Stock Market Index, the Total International Stock Index and the Total International Bond Index when they could just as easily use the lower cost ETFs (Vanguard employs a lower cost quasi institutional share class of the Total Bond Market index in these funds).

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Re: Allan Roth: "Why ETFs Won't Replace Mutual Funds"

Post by dodecahedron » Thu Mar 02, 2017 2:22 pm

House Blend wrote:
dodecahedron wrote:I used to think that, but was very surprised that I was able to move my Vanguard Admiral mutual fund holdings in kind to Schwab (as my preferred custodian) and maintain them there. (I am pretty it would be expensive to buy new Vanguard mutual funds there, but no plans to add to my holdings at Schwab, just to gradually donate them to my Schwab DAF at opportune times. The ease and speed of doing this last step is remarkable.)

Thanks for that tip.

Since my only non-covered shares at Vanguard are shares of VTSAX (and the embedded gains are substantial), I like the idea of transferring those shares to a broker that

a) has a good DAF program, and
b) offers Specific ID tracking for non-covered shares.

At such a brokerage, I would be taking dividends in cash, and never buying new shares of that fund or anything else. Just occasional transfers into a DAF or (even rarer) sales. Sounds very similar to you, except that I'm perfectly happy with my covered shares and IRAs at Vanguard, and have no reason to move them.

So, does Schwab allow you to enter your own cost basis records after a transfer in of non-covered shares, and what are the parameters for their DAF (minimum account size, minimum donation)?


I don't have any non-covered shares, so I can't answer your first question. My cost basis traveled with my (covered) shares. The Schwab DAF minimums are $5,000 to open, $500 for additional contributions, and $50 for grants to charities. There does not appear to be any minimum balance to maintain the account but the annual fee on accounts up to $500K is the greater of $100 or 60 basis points of the average annual balance. (In other words, if your annual annual balance times 0.6% does not amount to $100, the annual fee is $100.)

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