Mutual fund vs ETF prices

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Mutual fund vs ETF prices

Post by trunkelectric » Mon Oct 02, 2017 8:10 pm

Does anybody know why a mutual fund company would bother having different share prices for an ETF vs a mutual fund? E.g., VTI is $130.18 today, while VTSAX is $63.36 and VTSMX is $63.34. Both variants of mutual fund are very close, but the ETF is seemingly an arbitrary multiple.

I understand it is not a material difference, I just wasn't sure what would justify/explain the obfuscation.

lack_ey
Posts: 5616
Joined: Wed Nov 19, 2014 11:55 pm

Re: Mutual fund vs ETF prices

Post by lack_ey » Mon Oct 02, 2017 8:27 pm

It's actually not unusual for different mutual fund share classes to have more widely varying share prices.

e.g.
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) - $13.93
Vanguard Developed Markets Index Fund Investor Shares (VDVIX) - $10.78

It's just a matter of what starting value they use for what a share price is and then the inception date, unless later on they split/unsplit shares to reset the values back to some figure.

For an ETF, companies pay attention to the prospective market for those shares and set an initial share price based on about what they think would be appropriate. Keep in mind that in many (non-dinky-retail) platforms, the brokerage cost for a trade depends on the number of shares traded. In addition, the bid/ask spread relative to a share price can be a concern as well; a penny spread on a $10 share costs more to trade than a two-penny spread on a $100 share. So too low a number is unwieldy and more costly for traders. On the other hand, too high a figure could scare off retail clients or annoy them leaving chunks of cash given that they can't invest in fractional shares. Sometimes fund companies split or reverse split shares if the figure gets too large or small.

For a Vanguard index fund, frequently the ETF inception date is not the same time as the mutual fund, and they don't set the same initial share price for both. Vanguard's total international bond index, BNDX and VTABX, started on the same day, but BNDX opened at $50 and VTABX at $20.

There are additionally some small differences with ETFs owing to the fact that the fund company does not set or declare a price. The price shown is whatever the last transaction was on the market, which the fund company does not control. Mutual fund prices are of NAV, though for some assets like internationally traded securities the setting of the price is a bit of an art owing to the practice of fair-value pricing.

trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Re: Mutual fund vs ETF prices

Post by trunkelectric » Mon Oct 02, 2017 8:45 pm

So it sounds like you said there are good reasons for the company to care about the ETF price and make sure it doesn't get too large or small. But I don't think you mentioned any constraints on the fund price, which raises the question of why not peg the fund price to the ETF price for simplicity -- at the very least the BNDX/VTABX example seems to have no other explanation, since they started on the same day.

I could imagine perhaps the large price difference is useful just to emphasize that the prices _can_ be different, and not suggest false arbitrage opportunities or anything of that sort.

lack_ey
Posts: 5616
Joined: Wed Nov 19, 2014 11:55 pm

Re: Mutual fund vs ETF prices

Post by lack_ey » Mon Oct 02, 2017 8:54 pm

Sure, fund share price is pretty arbitrary as you can transact in dollars and fractional shares. They could do something else if they wanted.

But the mutual fund share price can't be pegged exactly to the ETF price because the latter is based on fund transactions and out of the fund company's control. Some ETFs bob up and down around the NAV, and many are persistently biased, trading on average above (sometimes below) NAV too. If it can't be exact anyway, I don't see much utility in them being similar. What's your thinking here?

trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Re: Mutual fund vs ETF prices

Post by trunkelectric » Mon Oct 02, 2017 9:07 pm

Another question that comes to mind is if there's an official/correct way to determine what the ratio between the two should be, if that's even a well-defined thing to ask. You mentioned (I think) the NAV of the ETF, which seems to suggest that you could compare it to the NAV of the fund and come up with a theoretical ratio. I assume that's what enables you to talk about whether the ETF is trading above vs below?

User avatar
F150HD
Posts: 1061
Joined: Fri Sep 18, 2015 7:49 pm

Re: Mutual fund vs ETF prices

Post by F150HD » Mon Oct 02, 2017 9:14 pm

VTI is $130.18 today, while VTSAX is $63.36....
Related note, can someone clarify the % return each day for the ETF vs the MF?
Should these potentially be the same each day?

Looking at VTSAX and VTI specifically.

Image

Image

rgs92
Posts: 1377
Joined: Mon Mar 02, 2009 8:00 pm

Re: Mutual fund vs ETF prices

Post by rgs92 » Mon Oct 02, 2017 9:23 pm

ETF shares will spike just before they go ex-dividend, just like a share of a stock. Then they fall back.

venkman
Posts: 233
Joined: Tue Mar 14, 2017 10:33 pm

Re: Mutual fund vs ETF prices

Post by venkman » Mon Oct 02, 2017 9:42 pm

F150HD wrote:
Mon Oct 02, 2017 9:14 pm
VTI is $130.18 today, while VTSAX is $63.36....
Related note, can someone clarify the % return each day for the ETF vs the MF?
Should these potentially be the same each day?
The premium/discount could vary from day to day with the ETF, so it might not track the underlying fund exactly. Also, VTI shares are twice the price of VTSAX shares, but both are reported to the nearest penny. Rounding error could account for small differences.

User avatar
David Jay
Posts: 3881
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Mutual fund vs ETF prices

Post by David Jay » Mon Oct 02, 2017 10:38 pm

trunkelectric wrote:
Mon Oct 02, 2017 9:07 pm
Another question that comes to mind is if there's an official/correct way to determine what the ratio between the two should be, if that's even a well-defined thing to ask.
I don't think the question makes any sense.

An analogy: What is the official/correct price for milk? Store "A" sells milk for $2.50 and store "B" sells it for $1.25. Which is the correct price? Oh, did I mention that store A sells by the gallon and store B by the half gallon?

There is no established "volume" measurement for a mutual fund. Price per share doesn't have any meaning without a volume measurement of how much is in a share, so comparing prices is meaningless.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Re: Mutual fund vs ETF prices

Post by trunkelectric » Tue Oct 03, 2017 6:10 am

David Jay wrote:
Mon Oct 02, 2017 10:38 pm
trunkelectric wrote:
Mon Oct 02, 2017 9:07 pm
Another question that comes to mind is if there's an official/correct way to determine what the ratio between the two should be, if that's even a well-defined thing to ask.
I don't think the question makes any sense.

An analogy: What is the official/correct price for milk? Store "A" sells milk for $2.50 and store "B" sells it for $1.25. Which is the correct price? Oh, did I mention that store A sells by the gallon and store B by the half gallon?

There is no established "volume" measurement for a mutual fund. Price per share doesn't have any meaning without a volume measurement of how much is in a share, so comparing prices is meaningless.
It seems that both a mutual fund and an ETF have a NAV -- shouldn't the ratio of the NAVs be the ideal ratio of the prices?

trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Re: Mutual fund vs ETF prices

Post by trunkelectric » Tue Oct 03, 2017 6:21 am

David Jay wrote:
Mon Oct 02, 2017 10:38 pm
An analogy: What is the official/correct price for milk? Store "A" sells milk for $2.50 and store "B" sells it for $1.25. Which is the correct price? Oh, did I mention that store A sells by the gallon and store B by the half gallon?
Given that store A sells by the gallon and store B by the half gallon, the ideal ratio of their prices should be 2 to 1.

User avatar
David Jay
Posts: 3881
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Mutual fund vs ETF prices

Post by David Jay » Tue Oct 03, 2017 8:50 am

trunkelectric wrote:
Tue Oct 03, 2017 6:21 am
David Jay wrote:
Mon Oct 02, 2017 10:38 pm
An analogy: What is the official/correct price for milk? Store "A" sells milk for $2.50 and store "B" sells it for $1.25. Which is the correct price? Oh, did I mention that store A sells by the gallon and store B by the half gallon?
Given that store A sells by the gallon and store B by the half gallon, the ideal ratio of their prices should be 2 to 1.
Yes, because you have a volume measurement system (gallons, quarts, pints, cups, ounces...) for milk.

But, as I said above, there is no established volume measurement for Mutual Funds and ETFs. So every price is based on a arbitrary volume of holdings. That is why you can't get what you want.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

trunkelectric
Posts: 16
Joined: Thu Feb 16, 2017 5:18 pm

Re: Mutual fund vs ETF prices

Post by trunkelectric » Wed Oct 04, 2017 6:39 am

David Jay wrote:
Tue Oct 03, 2017 8:50 am
Yes, because you have a volume measurement system (gallons, quarts, pints, cups, ounces...) for milk.

But, as I said above, there is no established volume measurement for Mutual Funds and ETFs. So every price is based on a arbitrary volume of holdings. That is why you can't get what you want.
Why is NAV not an established "volume" measurement?

User avatar
David Jay
Posts: 3881
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Mutual fund vs ETF prices

Post by David Jay » Wed Oct 04, 2017 11:41 am

trunkelectric wrote:
Wed Oct 04, 2017 6:39 am
David Jay wrote:
Tue Oct 03, 2017 8:50 am
Yes, because you have a volume measurement system (gallons, quarts, pints, cups, ounces...) for milk.

But, as I said above, there is no established volume measurement for Mutual Funds and ETFs. So every price is based on a arbitrary volume of holdings. That is why you can't get what you want.
Why is NAV not an established "volume" measurement?
price != holdings
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Geologist
Posts: 1096
Joined: Fri Jan 02, 2009 7:35 pm

Re: Mutual fund vs ETF prices

Post by Geologist » Wed Oct 04, 2017 1:17 pm

trunkelectric wrote:
Wed Oct 04, 2017 6:39 am
David Jay wrote:
Tue Oct 03, 2017 8:50 am
Yes, because you have a volume measurement system (gallons, quarts, pints, cups, ounces...) for milk.

But, as I said above, there is no established volume measurement for Mutual Funds and ETFs. So every price is based on a arbitrary volume of holdings. That is why you can't get what you want.
Why is NAV not an established "volume" measurement?
Net Asset Value is the total assets divided by the unit of measure. As the unit of measure for mutual fund shares and etf shares is not the same, the NAV is not a single "volume" measurement. In addition, as others have pointed out, ETF's trade on the open market so their price will diverge from their NAV (the design is intended to keep the divergence fairly small but it isn't zero).

Different share classes (mutual fund, etf, etc) can have different values of unrealized capital gains, especially if they have different inception dates. This tends to make their values diverge over time. The classes will have different dividend payouts, but these are paid out at least annually. At any rate, there is no point to worrying about the different share prices for different classes: they are what they are.

alex_686
Posts: 2483
Joined: Mon Feb 09, 2015 2:39 pm

Re: Mutual fund vs ETF prices

Post by alex_686 » Wed Oct 04, 2017 1:29 pm

Geologist wrote:
Wed Oct 04, 2017 1:17 pm
Net Asset Value is the total assets divided by the unit of measure. As the unit of measure for mutual fund shares and etf shares is not the same, the NAV is not a single "volume" measurement. In addition, as others have pointed out, ETF's trade on the open market so their price will diverge from their NAV (the design is intended to keep the divergence fairly small but it isn't zero).

Different share classes (mutual fund, etf, etc) can have different values of unrealized capital gains, especially if they have different inception dates. This tends to make their values diverge over time. The classes will have different dividend payouts, but these are paid out at least annually. At any rate, there is no point to worrying about the different share prices for different classes: they are what they are.
2 points.

The NAV is calculated the same way for a mutual fund as it is for an ETF. So while a ETF's NAV is not actionable like a mutual fund it does give a clue on what is happening inside the fund.

Second, different share classes have exactly the same amount of unrealized capital gains. It is one fund. It is not like a specific tax lot belongs to one share class and another belongs to a different share class. The difference between the 2 are expenses that can be identified with a specific class. So postage and printing costs count, management and trading costs do no. Expenses are charged daily which causes the divergence of prices between the different share classes.

Post Reply