Owning 3 Index funds vs ETFS ?

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BossVincent007
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Owning 3 Index funds vs ETFS ?

Post by BossVincent007 »

Currently I am with Fidelity and I use the 3 - portfolio index theory with fidelity funds.

however, with fidelity index funds, if you sell in less then 30 days, you have a 1 % early redemption fee and if you make 3 round trips within a year you can get blocked from that mutual fund for a year.

With and ETF, - as far as i know - there is no such restriction .

With these restrictions in place, if you wanted to suddenly make quick changes to your account,

WOULD it be better to own a set of three ETFs instead of 3 index funds ?
AntsOnTheMarch
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Re: Owning 3 Index funds vs ETFS ?

Post by AntsOnTheMarch »

BossVincent007 wrote:Currently I am with Fidelity and I use the 3 - portfolio index theory with fidelity funds.

however, with fidelity index funds, if you sell in less then 30 days, you have a 1 % early redemption fee and if you make 3 round trips within a year you can get blocked from that mutual fund for a year.

With and ETF, - as far as i know - there is no such restriction .

With these restrictions in place, if you wanted to suddenly make quick changes to your account,

WOULD it be better to own a set of three ETFs instead of 3 index funds ?
It could be argued (especially by Mr. Bogle) that the ability "to suddenly make quick changes to your account" is exactly the reason not to own the ETF versions.
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Re: Owning 3 Index funds vs ETFS ?

Post by nisiprius »

BossVincent007 wrote:Currently I am with Fidelity and I use the 3 - portfolio index theory with fidelity funds.

however, with fidelity index funds, if you sell in less then 30 days, you have a 1 % early redemption fee and if you make 3 round trips within a year you can get blocked from that mutual fund for a year.

With and ETF, - as far as i know - there is no such restriction. With these restrictions in place, if you wanted to suddenly make quick changes to your account, WOULD it be better to own a set of three ETFs instead of 3 index funds ?
Yes. (Simple as that).
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Re: Owning 3 Index funds vs ETFS ?

Post by TropikThunder »

nisiprius wrote:
BossVincent007 wrote:Currently I am with Fidelity and I use the 3 - portfolio index theory with fidelity funds.

however, with fidelity index funds, if you sell in less then 30 days, you have a 1 % early redemption fee and if you make 3 round trips within a year you can get blocked from that mutual fund for a year.

With and ETF, - as far as i know - there is no such restriction. With these restrictions in place, if you wanted to suddenly make quick changes to your account, WOULD it be better to own a set of three ETFs instead of 3 index funds ?
Yes. (Simple as that).
Yes, except that commission-free ETF's have short term trading fees if held for less than 30 days too (cheaper than for mutual funds, but >0).
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Phineas J. Whoopee
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Re: Owning 3 Index funds vs ETFS ?

Post by Phineas J. Whoopee »

Making quick changes is precisely what one should not do, at least under ordinary circumstances, according to the Bogleheads' Philosophy. If there were extreme circumstances maybe a 1% fee, which applies only after the second round trip as Fidelity puts it, shouldn't be a barrier.

In terms of mutual funds vs. ETFs, our wiki has something to say on the matter.

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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

Phineas J. Whoopee wrote:Making quick changes is precisely what one should not do, at least under ordinary circumstances, according to the Bogleheads' Philosophy. If there were extreme circumstances maybe a 1% fee, which applies only after the second round trip as Fidelity puts it, shouldn't be a barrier.

In terms of mutual funds vs. ETFs, our wiki has something to say on the matter.

PJW
One should not make quick asset allocation changes. However the OP has not said that sales would be due to an asset allocation change. It's not unreasonable to protect one's ability to, without penalty, tax loss harvest from a total market fund to an S&P500 fund to a Large Cap index fund within 30 days, in the highly plausible event of a rapid market decline.
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Re: Owning 3 Index funds vs ETFS ?

Post by Phineas J. Whoopee »

triceratop wrote:...
One should not make quick asset allocation changes. However the OP has not said that sales would be due to an asset allocation change. It's not unreasonable to protect one's ability to, without penalty, tax loss harvest from a total market fund to an S&P500 fund to a Large Cap index fund within 30 days, in the highly plausible event of a rapid market decline.
Perhaps not, but Fidelity's policy, to which I linked in my post you quoted, does not interfere with doing such things.
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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

Phineas J. Whoopee wrote:
triceratop wrote:...
One should not make quick asset allocation changes. However the OP has not said that sales would be due to an asset allocation change. It's not unreasonable to protect one's ability to, without penalty, tax loss harvest from a total market fund to an S&P500 fund to a Large Cap index fund within 30 days, in the highly plausible event of a rapid market decline.
Perhaps not, but Fidelity's policy, to which I linked in my post you quoted, does not interfere with doing such things.
PJW
It absolutely does (and, of course, I read the link in your post prior to my statement so the reminder is unnecessary) ! What if one purchases TSM on day 0, on day 10 TSM is down 10% so one TLHs to SP500. But no, even this first transaction, the sale, is a violation according to Fidelity:
Roundtrip Transactions

We monitor the number of roundtrip transactions in shareholder accounts. A roundtrip is a mutual fund purchase or exchange purchase followed by a sell or exchange sell within 30 calendar days in the same fund and account. For example, if you purchased a fund on May 1, selling the fund prior to May 31 would incur a roundtrip violation. It is important to remember that share aging FIFO (First In First Out) is not considered when buy and sell transactions are evaluated for roundtrips.
Certain transactions are exempt from roundtrip violations. These include:
  • Trades for $1,000 or less. (Please note that if more than one buy order or sell order for a given fund is executed on the same day in the same account, the $1,000 threshold is based on the total dollar value of all orders for that fund.)
  • Any transactions in Fidelity Money Market Funds
  • Dividend and capital gains reinvestments that are sold within 30 days
  • Orders placed via Fidelity Automatic Investments or Automatic Withdrawals features
(emphasis Fidelity's)

Let's note two things:

(1) There is some ambiguity about the role that automatic investments play here. That is, even though the automatic investment orders themselves are exempt from roundtrip violations it may be possible that those count as an initial buy and disqualify a sell for the next 30 days. Some clarification here from Fidelity customers would be helpful.

(2) Even if one has hundreds of thousands of dollars, a single order will subject all tax lots to the rule for a subsequent 30 days regardless of market conditions. That is the effect of the bolded Fidelity quote above.

So, yes, Fidelity's policy, to which you linked in your post I quoted, does interfere with doing such things
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Re: Owning 3 Index funds vs ETFS ?

Post by Phineas J. Whoopee »

OP's question was about rapid cycling, and your examples were to sell one fund and buy another. Fidelity's "round trip" definition applies to a single fund within 30 days, not to different funds that are similar but not identical. The 1% fee applies if a customer does it twice within 90 days. It's in their plain words. Let's not have an argument about what they said.

Tax lots have nothing to do with Fidelity's policies.

What are we arguing about?

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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

Phineas J. Whoopee wrote: Fidelity's 1% fee applies to two "round trips" within 90 days. One within 30 days, and none of your examples was a round trip at all in their terms in the first place, does not incur a fee.

Let's not have an argument about the plain meaning of Fidelity's text.

I of course agree flexibility without fees is an advantage. With respect to OP's question and to your examples, Fidelity's policy that applies to two round trips, that is in their terms buy a fund, sell the same fund, then buy the same fund again not something similar but identical within 30 days, and then do it twice within 90 days, unless I understand words and grammar incorrectly, triggers a fee and does interfere. Anything less than that, like in your example exchanging between a total market fund and an S&P 500 fund an a large cap fund, does not incur a fee. Potential wash sales have nothing to do with Fidelity's policies nor are mutual funds at a disadvantage versus ETFs with respect to them.

What are we arguing about?

PJW
We're talking about how either (1) automatic Fidelity purchases may or (2) ordinary Fidelity purchases certainly will result in two roundtrips. Chaining together this logic. TSM purchase->SP500->Large Cap is 2 roundtrips since it involves (1) TSM purchase + TSM sale (2) SP500 purchase (from the TSM sale) + TSM sale.

You're quoting from the "Fund level blocks" section and ignoring the effect of the roundtrips on the "Complex-wide blocks" section. Fidelity is very clear that four roundtrip transactions in the same account across all Fidelity funds will result in penalties regardless of whether the roundtrips end you up in the same fund in 90 days.

I didn't bring up wash sales so I'm not sure why you're talking about them. Tax lots also have nothing to do with Fidelity's policy, and that's precisely the point: they don't give you the benefit of FIFO accounting for treating these things as roundtrips. That would help you as earlier purchases with larger losses might be able to be harvested before more recent purchases.
Let's not have an argument about the plain meaning of Fidelity's text.
We're not; you haven't presented an alternative explanation that is inconsistent with my reading.
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Re: Owning 3 Index funds vs ETFS ?

Post by Gamma Ray »

I am curious, I always hear the ability to sell ETFs mid-day for a quick action...
What are some situations where you would want to make that quick change? It's not like an individual stock where you just got a phone call from someone saying XYZ company executive was just arrested, SELL ALL.. :|
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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

Gamma Ray wrote:I am curious, I always hear the ability to sell ETFs mid-day for a quick action...
What are some situations where you would want to make that quick change? It's not like an individual stock where you just got a phone call from someone saying XYZ company executive was just arrested, SELL ALL.. :|
You wouldn't, not if you were being a long-term buy-and-hold passive Boglehead investor.

That's not to say that using an ETF doesn't have its advantages for intra-day purchase/sale.
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Re: Owning 3 Index funds vs ETFS ?

Post by Gamma Ray »

triceratop wrote:
Gamma Ray wrote:I am curious, I always hear the ability to sell ETFs mid-day for a quick action...
What are some situations where you would want to make that quick change? It's not like an individual stock where you just got a phone call from someone saying XYZ company executive was just arrested, SELL ALL.. :|
You wouldn't, not if you were being a long-term buy-and-hold passive Boglehead investor.

That's not to say that using an ETF doesn't have its advantages for intra-day purchase/sale.
Exactly, but it's your 2nd sentence that I am curious about. What are some cases where you would want to take advantage of intra-day sale. (If you are purchasing, it's a different story, you can always purchase them whether you already hold any or not)
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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

Gamma Ray wrote:
triceratop wrote:
Gamma Ray wrote:I am curious, I always hear the ability to sell ETFs mid-day for a quick action...
What are some situations where you would want to make that quick change? It's not like an individual stock where you just got a phone call from someone saying XYZ company executive was just arrested, SELL ALL.. :|
You wouldn't, not if you were being a long-term buy-and-hold passive Boglehead investor.

That's not to say that using an ETF doesn't have its advantages for intra-day purchase/sale.
Exactly, but it's your 2nd sentence that I am curious about. What are some cases where you would want to take advantage of intra-day sale. (If you are purchasing, it's a different story, you can always purchase them whether you already hold any or not)
I use ETFs to tax gain harvest. Since there is no wash sale to be concerned about there, I sell ETFs intra-day and buy the same shares back seconds later at usually the same price. This is not possible with mutual funds, but I am able to stay invested in the same funds which I find cool.
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Re: Owning 3 Index funds vs ETFS ?

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nisiprius wrote:
BossVincent007 wrote:Currently I am with Fidelity and I use the 3 - portfolio index theory with fidelity funds.

however, with fidelity index funds, if you sell in less then 30 days, you have a 1 % early redemption fee and if you make 3 round trips within a year you can get blocked from that mutual fund for a year.

With and ETF, - as far as i know - there is no such restriction. With these restrictions in place, if you wanted to suddenly make quick changes to your account, WOULD it be better to own a set of three ETFs instead of 3 index funds ?
Yes. (Simple as that).
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Re: Owning 3 Index funds vs ETFS ?

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triceratop wrote:I use ETFs to tax gain harvest. Since there is no wash sale to be concerned about there, I sell ETFs intra-day and buy the same shares back seconds later at usually the same price. This is not possible with mutual funds, but I am able to stay invested in the same funds which I find cool.
I've used similar reasoning to Tax Loss Harvest in foreign funds so that the pair of trades occur when US and European markets are both open. Of course in that case you need take care not to incur a wash sale so you need to use different ETFs.
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Re: Owning 3 Index funds vs ETFS ?

Post by David Jay »

triceratop wrote:I use ETFs to tax gain harvest.
That's interesting.

Is this because you are young and poor (i.e. low marginal tax rate) and you want to increase your cost basis, taking your cap gains now (at lower marginal rates) to reduce the amount of future capital gains?
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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

David Jay wrote:
triceratop wrote:I use ETFs to tax gain harvest.
That's interesting.

Is this because you are young and poor (i.e. low marginal tax rate) and you want to increase your cost basis, taking your cap gains now (at lower marginal rates) to reduce the amount of future capital gains?
Yes. While in graduate school I'll be in the 15% marginal bracket, hence 0% long term gains rate, but anticipate being in the 25% or likely 28% after that. Given the possibility of using the funds at some point for a downpayment (as well as other things that are forbidden to be discussed here) I am even willing to harvest to the top of the 6% California state tax bracket. Harvesting gains also sets up a nice situation where I harvest losses at 21% and harvest gains at 6%, up to a $3k cap. So I have alternated years with harvesting losses and gains; I don't know how long the market will cooperate with that plan though.
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Re: Owning 3 Index funds vs ETFS ?

Post by Doc »

David Jay wrote:
triceratop wrote:I use ETFs to tax gain harvest.
That's interesting.

Is this because you are young and poor (i.e. low marginal tax rate) and you want to increase your cost basis, taking your cap gains now (at lower marginal rates) to reduce the amount of future capital gains?
I am old and collecting SS and I periodically tax gain harvest because tax rates can actually go down once you blast through the taxable SS phaseout. This then sets up TGH opportunities in the following years.

Not all that different than triceratop except that he's a youngin and I'm an old fogey.
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Re: Owning 3 Index funds vs ETFS ?

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triceratop wrote:
David Jay wrote:
triceratop wrote:I use ETFs to tax gain harvest.
That's interesting.

Is this because you are young and poor (i.e. low marginal tax rate) and you want to increase your cost basis, taking your cap gains now (at lower marginal rates) to reduce the amount of future capital gains?
Yes. While in graduate school I'll be in the 15% marginal bracket, hence 0% long term gains rate, but anticipate being in the 25% or likely 28% after that. Given the possibility of using the funds at some point for a downpayment (as well as other things that are forbidden to be discussed here) I am even willing to harvest to the top of the 6% California state tax bracket. Harvesting gains also sets up a nice situation where I harvest losses at 21% and harvest gains at 6%, up to a $3k cap. So I have alternated years with harvesting losses and gains; I don't know how long the market will cooperate with that plan though.
That's what I gathered.

I haven't thought much about TLH (or TGH) as 100% of my retirement assets are in tax-deferred or tax-free accounts. But a recent explanation that TLH defers capital gains (by decreasing the cost basis) rather than reducing capital gains got me thinking.
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Re: Owning 3 Index funds vs ETFS ?

Post by Gamma Ray »

David Jay wrote:
triceratop wrote:
David Jay wrote:
triceratop wrote:I use ETFs to tax gain harvest.
That's interesting.

Is this because you are young and poor (i.e. low marginal tax rate) and you want to increase your cost basis, taking your cap gains now (at lower marginal rates) to reduce the amount of future capital gains?
Yes. While in graduate school I'll be in the 15% marginal bracket, hence 0% long term gains rate, but anticipate being in the 25% or likely 28% after that. Given the possibility of using the funds at some point for a downpayment (as well as other things that are forbidden to be discussed here) I am even willing to harvest to the top of the 6% California state tax bracket. Harvesting gains also sets up a nice situation where I harvest losses at 21% and harvest gains at 6%, up to a $3k cap. So I have alternated years with harvesting losses and gains; I don't know how long the market will cooperate with that plan though.
That's what I gathered.

I haven't thought much about TLH (or TGH) as 100% of my retirement assets are in tax-deferred or tax-free accounts. But a recent explanation that TLH defers capital gains (by decreasing the cost basis) rather than reducing capital gains got me thinking.
Have you thought about how much are you going to be gaining by doing this, I wonder if you guys do this as a hobby, or do you actually see significant benefits of doing this? I am all for taking advantage of as much as possible opp, but with rather stable market, I don't see benefit of TLH or TGH. Say if the market was to drop 20%, it would make sense to utilize this, but it sounds to me like you need to dedicate a lot of your time to keep up with this on a relatively stable market.
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Re: Owning 3 Index funds vs ETFS ?

Post by triceratop »

^^ I fully admit I'm somewhat of a geek when it comes to this, so don't discount that I am putting in more work to understand the intricacies than someone who feels fine (and is fine!) with a hands-off approach. However, costs matter, and taxes are but one of the costs, so it does add up. By choosing taxable account funds intelligently and harvesting gains/losses I anticipate substantial sums saved over the timeline that these funds are invested.
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Re: Owning 3 Index funds vs ETFS ?

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triceratop wrote:^^ I fully admit I'm somewhat of a geek when it comes to this, so don't discount that I am putting in more work to understand the intricacies than someone who feels fine (and is fine!) with a hands-off approach. However, costs matter, and taxes are but one of the costs, so it does add up. By choosing taxable account funds intelligently and harvesting gains/losses I anticipate substantial sums saved over the timeline that these funds are invested.
If you have capital loss carry forwards you can offset $3k a year of ordinary income which is worth $750 for many of us. Similarly the effect of deferring LTCG can reduce your effective LTCG rate from 15% to maybe 10%. The TLH helps with the deferral. And if some year you need a lot of money you can sell equities without incurring any additional tax for that year. Each of us has to decide for themselves if this is worth it.

I guess I belong to triceatop's geek squad since I just this morning finished the first estimate of how much ROTH conversion I can take this year and remain below the 85% SS taxable bracket. And I am counting on my $3k taxable income reduction from prior TLH. :beer
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Re: Owning 3 Index funds vs ETFS ?

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Doc wrote:I just this morning finished the first estimate of how much ROTH conversion I can take this year and remain below the 85% SS taxable bracket.
Now THAT, I spend a lot of time thinking about (89% tIRA, 11% Roth).
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Re: Owning 3 Index funds vs ETFS ?

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David Jay wrote:
Doc wrote:I just this morning finished the first estimate of how much ROTH conversion I can take this year and remain below the 85% SS taxable bracket.
Now THAT, I spend a lot of time thinking about (89% tIRA, 11% Roth).
You youngens have a different outlook than us old far foggies. (25% taxable, 25% ROTH, 50% RE direct investment not including home)

What's a tIRA anyway? :happy
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