"10 common questions about ETFs"

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gkaplan
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"10 common questions about ETFs"

Postby gkaplan » Fri May 19, 2017 10:07 am

There's no denying the explosive growth in exchange-traded funds (ETFs). Over the past ten years, global ETF assets have increased from $580 billion to well over $3 trillion, growing at a clip that's more than three times faster than traditional mutual funds. . . .

This is good news because it means investors are, largely, taking advantage of low-cost, broadly diversified investment options to a greater degree.

But if you're like many investors, you probably still have questions about ETFs and the role they should play in your portfolio. We asked Vanguard Head of ETF Product Management Rich Powers about some of the common questions he gets about this fast-growing investment vehicle. . . .



Vanguard Head of ETF Product Management Rich Powers answers common questions about ETFs.
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Majormajor78
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Re: "10 common questions about ETFs"

Postby Majormajor78 » Sat May 20, 2017 8:27 am

Some surprising inaccuracies in the article. I realize the article was attempting to keep the explanations very simple and approachable but that is not really an excuse in my mind for giving faulty information.

8. What are the advantages of investing in mutual funds over ETFs?

Mutual funds offer the advantage of auto-investment, which is the option to automatically contribute a set amount at a predefined time. Again, this is more a preference than an advantage.


No mention of dividend reinvestment of mutual funds compared to ETF's.

No mention of ETF's required to be purchased in whole share amounts leaving a small amount of cash always sitting in your account.

9. Are ETFs more tax-efficient than mutual funds?

ETFs aren't more tax-efficient, per se. The ETF construct of indexing allows for lower turnover, which can result in lower capital gains distributions.

This is the big one in my mind. At least when the funds are held in a taxable account. The point is moot in a tax advantaged account.

ETF's are potentially much more tax efficient because when a firm redeems a creation unit from the ETF the fund can give the firm shares with the highest capital gains burden. Effectively skimming off much, if not most, accrued capital gains like a pressure valve. Mutual funds are much more often forced to directly sell stocks, triggering a taxable event in the form of a capital gains distribution. I realize Vanguard has a unique structure where the ETF and mutual fund are the same fund allowing their mutual funds to benefit from this practice. However, the article was written as a fact sheet for ETF's in general and many investors would come away with a faulty understanding.
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Re: "10 common questions about ETFs"

Postby livesoft » Sat May 20, 2017 8:35 am

The piece echoes the Bogleheads wiki on the subject.

One can use a broker such as Betterment or Wealthfront and have automatic investment into ETFs.

Some places even allow one to buy fractional shares of ETFs.

Dividend reinvestment is standard with both ETFs and mutual funds, so no difference there either.

I think the piece was about Vanguard and not other places.

And wasn't there an identical thread within the last month linking this article?
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gkaplan
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Re: "10 common questions about ETFs"

Postby gkaplan » Sat May 20, 2017 6:33 pm

livesoft wrote:. . . . wasn't there an identical thread within the last month linking this article?


I can't remember, probably because I invest only in mutual funds, so ETFs generally don't interest me, except to post an article or column that might interest others. This particular Vanguard column was posted on Vanguard's website yesterday.
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Re: "10 common questions about ETFs"

Postby TropikThunder » Sat May 20, 2017 7:13 pm

Majormajor78 wrote:
8. What are the advantages of investing in mutual funds over ETFs?

Mutual funds offer the advantage of auto-investment, which is the option to automatically contribute a set amount at a predefined time. Again, this is more a preference than an advantage.

No mention of dividend reinvestment of mutual funds compared to ETF's.

Not sure what you're saying here, since most (all?) ETF's allow dividend reinvestment.

Majormajor78 wrote:No mention of ETF's required to be purchased in whole share amounts leaving a small amount of cash always sitting in your account.

True, but the bits-and-pieces are usually so small as to be insignificant compared to an entire portfolio. The common, three-fund-portfolio ETF's from Vanguard are VTI (~$122), VXUS (~$52) and BND (~$82) so the cash drag is going to be at most ~$100 at any one time. Annoying, yes, but not significant.

gkaplan wrote:
livesoft wrote:. . . . wasn't there an identical thread within the last month linking this article?

I can't remember, probably because I invest only in mutual funds, so ETFs generally don't interest me, except to post an article or column that might interest others. This particular Vanguard column was posted on Vanguard's website yesterday.

I'm pretty sure there have been similar Top-10 lists for ETF's recently, but unless Vanguard is recycling their articles, this particular version is brand new.

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Majormajor78
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Re: "10 common questions about ETFs"

Postby Majormajor78 » Sun May 21, 2017 7:17 am

TropikThunder wrote:Not sure what you're saying here, since most (all?) ETF's allow dividend reinvestment.

ETF DRIPs are relatively new and I'm not sure how widespread they are. I think it depends mostly on the broker to offer this service to the investor, not the fund. In this case the broker takes all the dividends from it's account holders, buys the new shares and distributes them. The broker also buys additional shares and then administratively breaks them up crediting fractional shares to the appropriate accounts. Not all brokers offer this service and it's not available for every ETF even if your broker has such a service.

TropikThunder wrote:True, but the bits-and-pieces are usually so small as to be insignificant compared to an entire portfolio. The common, three-fund-portfolio ETF's from Vanguard are VTI (~$122), VXUS (~$52) and BND (~$82) so the cash drag is going to be at most ~$100 at any one time. Annoying, yes, but not significant.


I know. I remember it being aggravating when I was just starting out with a small balance. Even now a decade later seeing $30 cash sitting in my ROTH bothers me like a tooth ache. The issue is psychological more than mathematical.
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Earl Lemongrab
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Re: "10 common questions about ETFs"

Postby Earl Lemongrab » Sun May 21, 2017 1:44 pm

Majormajor78 wrote:ETF DRIPs are relatively new and I'm not sure how widespread they are.

I'm not sure what you mean by this. I've been investing in ETFs for ten years. Reinvestment has been available from every custodian I have used.
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