Will ETFs Replace Traditional Funds

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LoveVermont
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Will ETFs Replace Traditional Funds

Post by LoveVermont » Wed May 15, 2019 7:13 pm

First time Bogleheads poster. I just finished listening to a live Vanguard webcast about ETFs. It almost sounded like the panelists were promoting ETFs – but maybe I’m reading too much into that. I’ve been investing on a monthly basis for many years in a vanguard balanced fund in my IRA and I have no particular desire to move to an ETF structure. But I wonder if the day will come when ETFs will replace traditional funds.Are there advantages to Vanguard if clients exchange their fund strategies for ETF strategies? I’d be interested in anybody’s thoughts.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Wed May 15, 2019 8:12 pm

I love Vermont, too. It's a beautiful state.

Regarding ETFs vs index mutual funds, there has been a lot of discussion on the Bogleheads about this recently.

I would recommend that you stick with your current plan if that's been working for you.

For some reason, some people on this forum get unreasonably combative about this topic.

I personally prefer mutual funds because I find them to be simpler. I have no need or want to do intra-day buying/selling. If others want to invest in ETFs, that's perfectly fine with me.

I don't worry about minuscule differences in expense ratio. As long as all of your funds have expenses of 20 basis point or lower, you're good.

Mike Scott
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Re: Will ETFs Replace Traditional Funds

Post by Mike Scott » Wed May 15, 2019 8:19 pm

Not any time soon. Pick what works for you.

Dottie57
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Re: Will ETFs Replace Traditional Funds

Post by Dottie57 » Wed May 15, 2019 8:43 pm

The biggest advantage is ETFs can be purchased on any brokerage platform whereas Vanguard Mutual Funds are purchased at Vanguard (with exception of 401k).

I cannot purchase Vanguard Mutual Funds at Fidelity, Schwab etc,

Explorer
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Re: Will ETFs Replace Traditional Funds

Post by Explorer » Wed May 15, 2019 8:50 pm

As long as active mutual funds exist, their managers would not want to expose their holdings on a daily basis to the general public - that is a requirement for ETFs.

ETFs are about daily transparency... that is one reason active ETFs haven't come out in large numbers.

On the behavioral aspects, ETFs could lead to intra-day trading which is counter-productive to long term investment success.

TropikThunder
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Re: Will ETFs Replace Traditional Funds

Post by TropikThunder » Wed May 15, 2019 8:59 pm

Until every 401k/403b custodian can automate ETF purchases on their customers' bi-weekly contributions, there will be a place for mutual funds.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Wed May 15, 2019 9:15 pm

Yes, but it will a slow process. They have a lower cost structure.

There are active funds and there are ways of getting around the daily disclosures. There are a few which do monthly.

There are 2 big issues. First, buying ETFs in a 401k. Second, the lock in of current investors in low cost bias funds. Vanguard has side stepped that problem.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Wed May 15, 2019 10:37 pm

alex_686 wrote:
Wed May 15, 2019 9:15 pm
Yes, but it will a slow process. They have a lower cost structure.

There are active funds and there are ways of getting around the daily disclosures. There are a few which do monthly.

There are 2 big issues. First, buying ETFs in a 401k. Second, the lock in of current investors in low cost bias funds. Vanguard has side stepped that problem.
I think the real issue is that ETFs are slightly more complicated to buy and sell compared to mutual funds.

Psychologically, people don't want to have to worry about whether they are getting a good price.

Considering that both mutual funds and ETFs can be bought at extremely low cost, it doesn't seem like there is much incentive for most people to switch to one over the other, just to save a basis point in expenses.

Either way, both mutual funds and ETFs will be around for a long time and we shouldn't give anyone the false impression that we somehow know that one will no longer be available in the future. I worry that people will read something like this and feel like they need to switch.

If you are invested in mutual funds, and you prefer that, keep doing what you're doing.

If you are invested in ETFs, and you prefer that, keep doing what you're doing.

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jeffyscott
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Re: Will ETFs Replace Traditional Funds

Post by jeffyscott » Thu May 16, 2019 7:30 am

Dottie57 wrote:
Wed May 15, 2019 8:43 pm
The biggest advantage is ETFs can be purchased on any brokerage platform whereas Vanguard Mutual Funds are purchased at Vanguard (with exception of 401k).

I cannot purchase Vanguard Mutual Funds at Fidelity, Schwab etc,
You can, it's just that there is a much higher transaction fee than there would be to buy Vanguard ETFs on those platforms.
Time is your friend; impulse is your enemy. - John C. Bogle

stan1
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Re: Will ETFs Replace Traditional Funds

Post by stan1 » Thu May 16, 2019 7:36 am

LoveVermont wrote:
Wed May 15, 2019 7:13 pm
First time Bogleheads poster. I just finished listening to a live Vanguard webcast about ETFs. It almost sounded like the panelists were promoting ETFs – but maybe I’m reading too much into that. I’ve been investing on a monthly basis for many years in a vanguard balanced fund in my IRA and I have no particular desire to move to an ETF structure. But I wonder if the day will come when ETFs will replace traditional funds.Are there advantages to Vanguard if clients exchange their fund strategies for ETF strategies? I’d be interested in anybody’s thoughts.
Simple answer: I predict you'll be able to keep doing what you have been doing for the rest of your life. No need to change anything.

bgf
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Re: Will ETFs Replace Traditional Funds

Post by bgf » Thu May 16, 2019 7:45 am

Silence Dogood wrote:
Wed May 15, 2019 8:12 pm
I personally prefer mutual funds because I find them to be simpler. I have no need or want to do intra-day buying/selling. If others want to invest in ETFs, that's perfectly fine with me.
not to pick on you, but i do not understand this "argument."

how the ability to trade on a minute by minute or hourly basis is a negative for ETFs while the ability to trade on a daily basis with mutual funds is a positive makes absolutely no sense.

i have no need or want to do daily buying/selling with mutual funds. i buy on a monthly basis, as many here do. some might buy on a weekly basis, but they are fewer in number id imagine.

in other words, your criticism is a distinction without a difference. both vehicles provide far more trading ability than any boglehead requires. if you knock one, you should knock the other for the same reason.
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stan1
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Re: Will ETFs Replace Traditional Funds

Post by stan1 » Thu May 16, 2019 7:56 am

bgf wrote:
Thu May 16, 2019 7:45 am
Silence Dogood wrote:
Wed May 15, 2019 8:12 pm
I personally prefer mutual funds because I find them to be simpler. I have no need or want to do intra-day buying/selling. If others want to invest in ETFs, that's perfectly fine with me.
not to pick on you, but i do not understand this "argument."

how the ability to trade on a minute by minute or hourly basis is a negative for ETFs while the ability to trade on a daily basis with mutual funds is a positive makes absolutely no sense.

i have no need or want to do daily buying/selling with mutual funds. i buy on a monthly basis, as many here do. some might buy on a weekly basis, but they are fewer in number id imagine.

in other words, your criticism is a distinction without a difference. both vehicles provide far more trading ability than any boglehead requires. if you knock one, you should knock the other for the same reason.
I think some people find it simpler to invest in a dollar amount using mutual funds instead of a number of shares using an ETF. It would be helpful to some people if Vanguard could implement the mechanics of purchasing and selling ETFs as a dollar amount (purchases and sales using fractional shares).

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 7:58 am

Silence Dogood wrote:
Wed May 15, 2019 10:37 pm
Considering that both mutual funds and ETFs can be bought at extremely low cost, it doesn't seem like there is much incentive for most people to switch to one over the other, just to save a basis point in expenses.
You are looking at this from the wrong end. What is a basis point? If you are a fund and your expense ratio is 10 basis points, then moving to a ETF structure cuts costs by 10%. That’s huge, which is why the industry is very interested in moving over.

Dottie57
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Re: Will ETFs Replace Traditional Funds

Post by Dottie57 » Thu May 16, 2019 7:59 am

jeffyscott wrote:
Thu May 16, 2019 7:30 am
Dottie57 wrote:
Wed May 15, 2019 8:43 pm
The biggest advantage is ETFs can be purchased on any brokerage platform whereas Vanguard Mutual Funds are purchased at Vanguard (with exception of 401k).

I cannot purchase Vanguard Mutual Funds at Fidelity, Schwab etc,
You can, it's just that there is a much higher transaction fee than there would be to buy Vanguard ETFs on those platforms.
Hmm. Someone lied at Fidelity. :oops: But Fidelity has been doing well for me with their funds.

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oldzey
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Re: Will ETFs Replace Traditional Funds

Post by oldzey » Thu May 16, 2019 8:10 am

ETFs are T+2 (2 days to settle). Mutual funds are generally T+1 (settle the next day).

ETFs used to be T+3. If ETFs ever get to T+1, then they would be desirable for both intraday trading and overnight settlement.
Last edited by oldzey on Thu May 16, 2019 8:12 am, edited 1 time in total.
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jeffyscott
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Re: Will ETFs Replace Traditional Funds

Post by jeffyscott » Thu May 16, 2019 8:12 am

Dottie57 wrote:
Thu May 16, 2019 7:59 am
jeffyscott wrote:
Thu May 16, 2019 7:30 am
Dottie57 wrote:
Wed May 15, 2019 8:43 pm
The biggest advantage is ETFs can be purchased on any brokerage platform whereas Vanguard Mutual Funds are purchased at Vanguard (with exception of 401k).

I cannot purchase Vanguard Mutual Funds at Fidelity, Schwab etc,
You can, it's just that there is a much higher transaction fee than there would be to buy Vanguard ETFs on those platforms.
Hmm. Someone lied at Fidelity. :oops: But Fidelity has been doing well for me with their funds.
Well, it's something like $50 or $75 to buy (free to sell), so not something that you'd probably want to do. E-trade and I think Firsttrade do offer (some) Vanguard funds without transaction fees fwiw.
Time is your friend; impulse is your enemy. - John C. Bogle

stan1
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Re: Will ETFs Replace Traditional Funds

Post by stan1 » Thu May 16, 2019 8:15 am

alex_686 wrote:
Thu May 16, 2019 7:58 am
Silence Dogood wrote:
Wed May 15, 2019 10:37 pm
Considering that both mutual funds and ETFs can be bought at extremely low cost, it doesn't seem like there is much incentive for most people to switch to one over the other, just to save a basis point in expenses.
You are looking at this from the wrong end. What is a basis point? If you are a fund and your expense ratio is 10 basis points, then moving to a ETF structure cuts costs by 10%. That’s huge, which is why the industry is very interested in moving over.
Let's do the math. Hypothetical drop from 10 basis points to 9 basis points on $100K investment is $10 per year. It is reasonable that convenience of purchasing mutual funds in dollars not ETFs in integer shares is worth $10 per year to someone.

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nisiprius
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Re: Will ETFs Replace Traditional Funds

Post by nisiprius » Thu May 16, 2019 8:25 am

There is no reason for any investor to care about whether ETFs will replace traditional funds.

I do not know exactly why ETF fans keep pushing a narrative that suggests that it will ever happen, that it will happen soon, or that it will pose any problems for investors who prefer mutual funds.

It is not a factor that should play into any investor's decision about which vehicle to use.

It is just some marketing thing. ETFs are the modern light one for those who think young. Mutual funds are for fuddy-duddies who drive Oldsmobiles. Ken Fisher Ric Edelman hates mutual funds. He has been saying, at least since 2009, that mutual funds are "dinosaurs" that will be gone in ten years. It's always ten years. Yes, it's now been ten years since he first said they would be gone in ten years.

As of the latest Investment Company Institute Factbook, figure 2.1, p. 32, ETFs collectively hold only 15% of the assets as mutual funds. Investors have six times as much money in mutual funds as they in ETFs.

I made two charts from the ICI data.

Image

And while ETFs are collecting assets faster, they are not on track to displace mutual funds any time soon. Putting things on a log scale to compress the differences, and drawing a straight-line projection by eye...

Image

even if ETF growth continues at the same rate... it's going to take fifteen years or more for ETFs even to match mutual funds in assets--which is a long way from displacing them.
Last edited by nisiprius on Thu May 16, 2019 8:22 pm, edited 4 times in total.
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jeffyscott
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Re: Will ETFs Replace Traditional Funds

Post by jeffyscott » Thu May 16, 2019 8:29 am

Explorer wrote:
Wed May 15, 2019 8:50 pm
As long as active mutual funds exist, their managers would not want to expose their holdings on a daily basis to the general public - that is a requirement for ETFs.
Not any more, with the approval of non-transparent actively managed ETFs ("ActiveShares").

I'm not worried about mutual funds going away in my lifetime, though. And even if they did, or became so expensive that I wanted to switch to ETFs, I would just do that at that time...so still no reason to do anything different now. Liquidation in a taxable account could be an issue, but for a taxable account that uses mutual funds, Vanguard index funds make the most sense for normal current tax reasons right now, so switching to ETFs should that time come is not an issue even in taxable.
Time is your friend; impulse is your enemy. - John C. Bogle

TheGipper
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Re: Will ETFs Replace Traditional Funds

Post by TheGipper » Thu May 16, 2019 8:41 am

Anybody know which brokerages (if any) allow automated Vanguard ETF market order monthly purchases? Hopefully VG will soon. Eventually, if ETF/admiral MF expense gap widens, I’ll swap, but prefer autopilot.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 11:10 am

bgf wrote:
Thu May 16, 2019 7:45 am
Silence Dogood wrote:
Wed May 15, 2019 8:12 pm
I personally prefer mutual funds because I find them to be simpler. I have no need or want to do intra-day buying/selling. If others want to invest in ETFs, that's perfectly fine with me.
not to pick on you, but i do not understand this "argument."

how the ability to trade on a minute by minute or hourly basis is a negative for ETFs while the ability to trade on a daily basis with mutual funds is a positive makes absolutely no sense.

i have no need or want to do daily buying/selling with mutual funds. i buy on a monthly basis, as many here do. some might buy on a weekly basis, but they are fewer in number id imagine.

in other words, your criticism is a distinction without a difference. both vehicles provide far more trading ability than any boglehead requires. if you knock one, you should knock the other for the same reason.
Hi bgf,

The misunderstanding is because I was not trying to argue that mutual funds are better because of the lack of intra-day trading.

I was simply pointing out that the major benefit of ETFs (they are called exchange-traded funds for a reason) is that you can buy and sell them intra-day.

Since this benefit is not beneficial to me, it's a moot point. It's neither a positive nor negative feature.

Therefore, I will choose whichever is more convenient for me, which is mutual funds.

If someone else prefers ETFs, then they should invest with ETFs.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 11:23 am

nisiprius wrote:
Thu May 16, 2019 8:25 am
There is no reason for any investor to care about whether ETFs will replace traditional funds.

I do not know exactly why ETF fans keep pushing a narrative that suggests that it will ever happen, that it will happen soon, or that it will pose any problems for investors who prefer mutual funds.

It is not a factor that should play into any investor's decision about which vehicle to use.

It is just some marketing thing. ETFs are the modern light one for those who think young. Mutual funds are for fuddy-duddies who drive Oldsmobiles. Ken Fisher hates mutual funds. He has been saying, at least since 2009, that mutual funds are "dinosaurs" that will be gone in ten years. It's always ten years. Yes, it's now been ten years since he first said they would be gone in ten years.

As of the latest Investment Company Institute Factbook, figure 2.1, p. 32, ETFs collectively hold only 15% of the assets as mutual funds. Investors have six times as much money in mutual funds as they in ETFs.
Thank you nisiprius for the useful information and charts.

The whole mission of the Bogleheads is to give people sound investment advice. I think we are doing a disservice if we are making people feel like they need to change course based on false allusions.

Mutual funds are fine. ETFs are fine.

I prefer mutual funds, others may prefer ETFs. Both are fine.

pdavi21
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Re: Will ETFs Replace Traditional Funds

Post by pdavi21 » Thu May 16, 2019 11:33 am

Probably. Then something else will replace ETFs.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

MittensMoney
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Re: Will ETFs Replace Traditional Funds

Post by MittensMoney » Thu May 16, 2019 11:36 am

The only credible argument I've heard for investing in one or the other is when investing in a taxable account: i.e. using ETF's is more tax efficient due to the way MF's distribute capital gains when they sell holdings within the fund. Makes no difference in an IRA though.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 12:30 pm

stan1 wrote:
Thu May 16, 2019 8:15 am
Let's do the math. Hypothetical drop from 10 basis points to 9 basis points on $100K investment is $10 per year. It is reasonable that convenience of purchasing mutual funds in dollars not ETFs in integer shares is worth $10 per year to someone.
Yes, let us do the math - but let us do it from the other end. You are a fund family selling a commodity product - because that is what an index fund does. You really can't differentiate on the product you are selling. The only real difference is price. You can cut your expenses by 10% by moving to a ETF structure, greatly improving your market position. And this is the last of the big stones you can move.

Now, does math line up with reality? $10 per year per 100k might be chump change to you, but it is kind of make or break in the razor thin margins of big funds, and it is one of the areas of expense that is under their control. You might not care, but the people on the other side of the table do care.

Take a look at what funds are offering. They are launching new ETFs, not mutual funds.

retiringwhen
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Re: Will ETFs Replace Traditional Funds

Post by retiringwhen » Thu May 16, 2019 12:44 pm

alex_686 wrote:
Thu May 16, 2019 12:30 pm
stan1 wrote:
Thu May 16, 2019 8:15 am
Let's do the math. Hypothetical drop from 10 basis points to 9 basis points on $100K investment is $10 per year. It is reasonable that convenience of purchasing mutual funds in dollars not ETFs in integer shares is worth $10 per year to someone.
Yes, let us do the math - but let us do it from the other end. You are a fund family selling a commodity product - because that is what an index fund does. You really can't differentiate on the product you are selling. The only real difference is price. You can cut your expenses by 10% by moving to a ETF structure, greatly improving your market position. And this is the last of the big stones you can move.

Now, does math line up with reality? $10 per year per 100k might be chump change to you, but it is kind of make or break in the razor thin margins of big funds, and it is one of the areas of expense that is under their control. You might not care, but the people on the other side of the table do care.

Take a look at what funds are offering. They are launching new ETFs, not mutual funds.
BTW, there is a discussion now on another thread about the purchase fees on the Vanguard Long Term Bond Index Fund (viewtopic.php?f=10&t=281104). What is interesting in that discussion is how the bid/ask spread costs are externalized by the Fund to the ETF holder when you look at the Mutual Fund vs the ETF.

Those fees on the mutual fund purchase are essentially externalizing the cost of the mutual fund having to transact for each purchase. Folks really don't like fees, but the don't see the bid/ask spread as a "fee" per se, but it is definitely a cost.

The more I think about it, the more I understand how the ETF is "fairer" to share holders since those costs are externalized and allow long-term share holders and day-traders co-exist with little friction....

While I am still primarily holding mutual funds, I can see why the migration is happening. It really is in the long-run from a purely cost perspective in the interest of all parties.

Now if they can just come up with a trivial way at the brokerage to execute a "Market on Close" order that simulates a daily mutual fund purchase and the convenience advantage of the mutual fund goes away and no would really care.

Or course this poster in yet another thread points out that there can be fees by a broker significant spread costs to employ such a feature (see: viewtopic.php?f=10&t=281233)

[edited for clarity on the other thread.]

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Re: Will ETFs Replace Traditional Funds

Post by Geologist » Thu May 16, 2019 4:04 pm

alex_686 wrote:
Thu May 16, 2019 12:30 pm
stan1 wrote:
Thu May 16, 2019 8:15 am
Let's do the math. Hypothetical drop from 10 basis points to 9 basis points on $100K investment is $10 per year. It is reasonable that convenience of purchasing mutual funds in dollars not ETFs in integer shares is worth $10 per year to someone.
Yes, let us do the math - but let us do it from the other end. You are a fund family selling a commodity product - because that is what an index fund does. You really can't differentiate on the product you are selling. The only real difference is price. You can cut your expenses by 10% by moving to a ETF structure, greatly improving your market position. And this is the last of the big stones you can move.

Now, does math line up with reality? $10 per year per 100k might be chump change to you, but it is kind of make or break in the razor thin margins of big funds, and it is one of the areas of expense that is under their control. You might not care, but the people on the other side of the table do care.

Take a look at what funds are offering. They are launching new ETFs, not mutual funds.
However, Fidelity launched a new index fund with a zero expense ratio and it is a mutual fund not an ETF.

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Re: Will ETFs Replace Traditional Funds

Post by Geologist » Thu May 16, 2019 4:05 pm

I am certainly with nisiprius overall.

I will also mention that when I first became interested in investing in the mid-1980’s, people were arguing (correctly, in my opinion) that there was no longer any reason for anyone to invest in load mutual funds. It is now more than 30 years and load mutual funds have not disappeared. People still even discuss on this board about the merits of the American Funds (load funds).

Therefore, I see no reason to assume that mutual funds in general will disappear anytime soon when the cost differential between load and no-load funds is much greater than the expense differential between mutual funds and ETF’s, such as it is.

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Re: Will ETFs Replace Traditional Funds

Post by vineviz » Thu May 16, 2019 4:12 pm

Silence Dogood wrote:
Thu May 16, 2019 11:10 am
I was simply pointing out that the major benefit of ETFs (they are called exchange-traded funds for a reason) is that you can buy and sell them intra-day.
Intraday-trading is ONE benefit of ETFs, but probably not a major one for individual investors (the average holding period for ETF shares is over five years) and certainly not the most significant benefit.

In fact, according to the latest BlackRock survey "buy or sell during the trading day" ranked as the fifth most important benefit.
Last edited by vineviz on Thu May 16, 2019 4:15 pm, edited 1 time in total.
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 4:12 pm

Geologist wrote:
Thu May 16, 2019 4:04 pm
However, Fidelity launched a new index fund with a zero expense ratio and it is a mutual fund not an ETF.
The exception to the rule. Which one? And there are exceptions. 401(k) need mutual funds - or CIT. Illiquid and broad markets - like International bond. But I see these more as hurdles be be overcome, not insurmountable obstacles.

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Re: Will ETFs Replace Traditional Funds

Post by retiringwhen » Thu May 16, 2019 4:15 pm

Geologist wrote:
Thu May 16, 2019 4:04 pm
alex_686 wrote:
Thu May 16, 2019 12:30 pm
stan1 wrote:
Thu May 16, 2019 8:15 am
Let's do the math. Hypothetical drop from 10 basis points to 9 basis points on $100K investment is $10 per year. It is reasonable that convenience of purchasing mutual funds in dollars not ETFs in integer shares is worth $10 per year to someone.
Yes, let us do the math - but let us do it from the other end. You are a fund family selling a commodity product - because that is what an index fund does. You really can't differentiate on the product you are selling. The only real difference is price. You can cut your expenses by 10% by moving to a ETF structure, greatly improving your market position. And this is the last of the big stones you can move.

Now, does math line up with reality? $10 per year per 100k might be chump change to you, but it is kind of make or break in the razor thin margins of big funds, and it is one of the areas of expense that is under their control. You might not care, but the people on the other side of the table do care.

Take a look at what funds are offering. They are launching new ETFs, not mutual funds.
However, Fidelity launched a new index fund with a zero expense ratio and it is a mutual fund not an ETF.
And Fidelity is subsidizing those funds to the tune of 4.5bps (as disclosed in their prospectus). Don't confuse cost with price. The Zero Funds are not indicative of lower fund operating costs only a marketing model to increase AUM and capture new investors (one that appears to be working on that measure quite well.)

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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 4:17 pm

Geologist wrote:
Thu May 16, 2019 4:05 pm
I will also mention that when I first became interested in investing in the mid-1980’s, people were arguing (correctly, in my opinion) that there was no longer any reason for anyone to invest in load mutual funds. It is now more than 30 years and load mutual funds have not disappeared.
Haven't they? I will point out that most inflows into loaded share classes, the load is waived. Good examples are AUM or wrap fee accounts.

Fading, fading, fading. I will point out that closed end funds were very popular back in 20s to 50s and that many of these still do exist. But it is a niche product, having given up the ghost to open ended funds.

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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 4:30 pm

alex_686 wrote:
Thu May 16, 2019 12:30 pm
Take a look at what funds are offering. They are launching new ETFs, not mutual funds.
Why should an investor care about this? The financial industry is always trying to sell more products.

There are a lot of bad mutual funds/ETFs out there.

I invest in total market funds. These are offered as both mutual funds and ETFs.

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Re: Will ETFs Replace Traditional Funds

Post by retiringwhen » Thu May 16, 2019 4:31 pm

alex_686 wrote:
Thu May 16, 2019 4:12 pm
Geologist wrote:
Thu May 16, 2019 4:04 pm
However, Fidelity launched a new index fund with a zero expense ratio and it is a mutual fund not an ETF.
The exception to the rule. Which one? And there are exceptions. 401(k) need mutual funds - or CIT. Illiquid and broad markets - like International bond. But I see these more as hurdles be be overcome, not insurmountable obstacles.
Heck, why can't Vanguard create a pile of CIT's that hold the underlying ETF? that would make the need for the MF go away for 401K.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 4:38 pm

Silence Dogood wrote:
Thu May 16, 2019 4:30 pm
Why should an investor care about this? The financial industry is always trying to sell more products.
My father strong believes in the superior nature of American rear wheel drive V8 sedans. He cities their superior performance in snow. He preferred carbureted models for their lower maitiance costs. He now pays quite a bit of money to keep his superior cars running.

I don't think mutual funds are bad. I am just aware of their high cost structure, why they have a higher cost structure, and what the tides of history are.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 4:42 pm

retiringwhen wrote:
Thu May 16, 2019 4:31 pm
Heck, why can't Vanguard create a pile of CIT's that hold the underlying ETF? that would make the need for the MF go away for 401K.
Because that would be more expensive. CITs fall under DOL regulations which cover retirement plans. CITs are cheaper to run than either a ETF or a mutual fund. ETFs fall under SEC regs. Offering a ETF in a retirement plan - weather or not it is in a CIT - would mean it would have to fill out the DOL paperwork in addition to the SEC paperwork.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 4:57 pm

alex_686 wrote:
Thu May 16, 2019 4:38 pm
Silence Dogood wrote:
Thu May 16, 2019 4:30 pm
Why should an investor care about this? The financial industry is always trying to sell more products.
My father strong believes in the superior nature of American rear wheel drive V8 sedans. He cities their superior performance in snow. He preferred carbureted models for their lower maitiance costs. He now pays quite a bit of money to keep his superior cars running.

I don't think mutual funds are bad. I am just aware of their high cost structure, why they have a higher cost structure, and what the tides of history are.
Huh? Mutual funds are V8 sedans? Am I your old man in this situation? :?

Vehicles have a lot to be improved upon (safety, efficiency, etc.). Total market mutual funds, with rock bottom expenses, don't have all that much to improve upon.

Mutual funds are not inferior to ETFs, and have certain benefits over ETFs.

ETFs are not inferior to mutual funds, and have certain benefits over mutual funds.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 5:08 pm

Silence Dogood wrote:
Thu May 16, 2019 4:57 pm
Huh? Mutual funds are V8 sedans? Am I your old man in this situation? :?

Vehicles have a lot to be improved upon (safety, efficiency, etc.). Total market mutual funds, with rock bottom expenses, don't have all that much to improve upon.

Mutual funds are not inferior to ETFs, and have certain benefits over ETFs.

ETFs are not inferior to mutual funds, and have certain benefits over mutual funds.
Yes, you are like my father here. :happy

The best point might be the carbureted (mutual funds) verse fuel injection (ETFs). You might like carburetors, but as fuel mileage became more important fuel injectors won.

Now, can you name an advantage that a mutual fund has over a ETF from the fund perspective? My argument is that ETFs are clearly dominate from the fund perspective so they are going to simply stop offering mutual funds, but like car manufacturers stopped offering carburetored cars.

retiringwhen
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Re: Will ETFs Replace Traditional Funds

Post by retiringwhen » Thu May 16, 2019 5:23 pm

alex_686 wrote:
Thu May 16, 2019 4:42 pm
retiringwhen wrote:
Thu May 16, 2019 4:31 pm
Heck, why can't Vanguard create a pile of CIT's that hold the underlying ETF? that would make the need for the MF go away for 401K.
Because that would be more expensive. CITs fall under DOL regulations which cover retirement plans. CITs are cheaper to run than either a ETF or a mutual fund. ETFs fall under SEC regs. Offering a ETF in a retirement plan - weather or not it is in a CIT - would mean it would have to fill out the DOL paperwork in addition to the SEC paperwork.
Hmm, as per the prospectus of my holding in the Vanguard Fiduciary Trust Company Institutional 500 Index Trust https://retirementplans.vanguard.com/pe/pdfs/AR2040.pdf,
100% of the holdings in the CIT consist of the "Vanguard 500 Index Fund Institutional Select Shares"

It seems like they could do a mutual fund share to ETF share conversion just like any other shareholder and reap lower costs (if the ETF is actually lower ER than the Institutional Select Shares). Either way, the 401K requirement is not a hindrance to do away with the mutual funds, it appears that CITs would be a fully sufficient replacement. At this time only one of the Vanguard Index funds offered in my company's 401K is NOT a CIT.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 5:24 pm

alex_686 wrote:
Thu May 16, 2019 5:08 pm
Silence Dogood wrote:
Thu May 16, 2019 4:57 pm
Huh? Mutual funds are V8 sedans? Am I your old man in this situation? :?

Vehicles have a lot to be improved upon (safety, efficiency, etc.). Total market mutual funds, with rock bottom expenses, don't have all that much to improve upon.

Mutual funds are not inferior to ETFs, and have certain benefits over ETFs.

ETFs are not inferior to mutual funds, and have certain benefits over mutual funds.
Yes, you are like my father here. :happy

The best point might be the carbureted (mutual funds) verse fuel injection (ETFs). You might like carburetors, but as fuel mileage became more important fuel injectors won.

Now, can you name an advantage that a mutual fund has over a ETF from the fund perspective? My argument is that ETFs are clearly dominate from the fund perspective so they are going to simply stop offering mutual funds, but like car manufacturers stopped offering carburetored cars.
If I am your father, you must be very, very, young - and extremely smart for your age. :P

Advantages for companies offering mutual funds?

What about the fact that mutual funds are not as portable? There is a reason why Fidelity doesn't offer their zero cost funds as ETFs.

What about the fact that mutual funds are easier to buy and sell? Have you ever helped a non-financially-inclined person set up an account? I have.

ralph124cf
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Re: Will ETFs Replace Traditional Funds

Post by ralph124cf » Thu May 16, 2019 5:59 pm

You can do limit orders and trailing stop orders on ETFs but not mutual funds.

Ralph

DB2
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Re: Will ETFs Replace Traditional Funds

Post by DB2 » Thu May 16, 2019 6:08 pm

I would think just having actively managed mutual funds alone will always keep them alive.

ftobin
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Re: Will ETFs Replace Traditional Funds

Post by ftobin » Thu May 16, 2019 6:51 pm

retiringwhen wrote:
Thu May 16, 2019 12:44 pm
Now if they can just come up with a trivial way at the brokerage to execute a "Market on Close" order that simulates a daily mutual fund purchase and the convenience advantage of the mutual fund goes away and no would really care.
Actually, I would recommend that the way to go is not market-on-close orders, but full-day VWAP orders. The more you spread the demand over time, the less impact you'll have. Brokers could aggregate and net demand from their client-base as well, making the process more efficient. This is also often similar to how dividends are re-invested.

As other posters have noted, a key feature of working with mutual funds is that you transact in dollars instead of shares. If brokerages came up with better tools to transact ETFs in dollars, handling all the partial-share complexities, this would be a boon.

Geologist
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Re: Will ETFs Replace Traditional Funds

Post by Geologist » Thu May 16, 2019 7:15 pm

alex_686 wrote:
Thu May 16, 2019 4:17 pm
Geologist wrote:
Thu May 16, 2019 4:05 pm
I will also mention that when I first became interested in investing in the mid-1980’s, people were arguing (correctly, in my opinion) that there was no longer any reason for anyone to invest in load mutual funds. It is now more than 30 years and load mutual funds have not disappeared.
Haven't they? I will point out that most inflows into loaded share classes, the load is waived. Good examples are AUM or wrap fee accounts.

Fading, fading, fading. I will point out that closed end funds were very popular back in 20s to 50s and that many of these still do exist. But it is a niche product, having given up the ghost to open ended funds.
Whether load funds are fading is not the point. They are still here (and American Funds has not dropped its load status even if much inflow is going in by some other mechanism) more than 30 years after it became known to the broader public (because that is where I was 30 years ago) that they weren't necessary. As the advantage of ETF's (to the owner) is less striking, then there is no reason to expect that mutual funds as a group won't still be around for decades yet.

This is not Euclidean geometry, where you can "prove" a theorem and it is all done.

Silence Dogood
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Re: Will ETFs Replace Traditional Funds

Post by Silence Dogood » Thu May 16, 2019 8:10 pm

Also, how do we know that mutual fund expenses won't continue to go down?

10 years ago (2009), VTSAX (Vanguard Total Stock Market Admiral) had a $50,000 minimum with a 0.07% expense ratio.

Today (2019), VTSAX has a $3,000 minimum with a 0.04% expense ratio.

Is there any reason to believe that both the minimum and expense ratio won't continue to go down?

columbia
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Re: Will ETFs Replace Traditional Funds

Post by columbia » Thu May 16, 2019 8:33 pm

If Vanguard really wants to vanquish mutual funds, they need to make it possible for their customers to purchase partial shares of ETFs.

Until then, I’ll own mutual funds.

latak215
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Re: Will ETFs Replace Traditional Funds

Post by latak215 » Thu May 16, 2019 8:39 pm

I believe that there is a place for etf s because the options can be used to reduce the risks in the current roller-coaster situation created by our beloved person"s tweets.

alex_686
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Re: Will ETFs Replace Traditional Funds

Post by alex_686 » Thu May 16, 2019 9:24 pm

Silence Dogood wrote:
Thu May 16, 2019 8:10 pm
Also, how do we know that mutual fund expenses won't continue to go down?
They will go down, but ETFs will always be lower. It is a structural issue. You can go down the list of expenses. Some are identical because they have to do exactly the same thing. Tax prep is exactly the same, annual reporting requirements are exactly the same, etc. However, ETFs get to drop some of these expenses, mostly tied to record keeping. Other expenses are lower, such as networking and some aspects of portfolio management. I am specifically thinking about the trading desk

AlohaJoe
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Re: Will ETFs Replace Traditional Funds

Post by AlohaJoe » Thu May 16, 2019 9:44 pm

ftobin wrote:
Thu May 16, 2019 6:51 pm
If brokerages came up with better tools to transact ETFs in dollars, handling all the partial-share complexities, this would be a boon.
Brokerages don't need to "come up" with anything. They all have this and they all offer it to customers.
retiringwhen wrote:
Thu May 16, 2019 12:44 pm
Now if they can just come up with a trivial way at the brokerage to execute a "Market on Close" order that simulates a daily mutual fund purchase and the convenience advantage of the mutual fund goes away and no would really care.
All brokerages have this already and offer it to customers. (Though i don't think they do it with Market On Close, I think they do it at market open but I honestly haven't looked into it much.)
TheGipper wrote:
Thu May 16, 2019 8:41 am
Anybody know which brokerages (if any) allow automated Vanguard ETF market order monthly purchases? Hopefully VG will soon. Eventually, if ETF/admiral MF expense gap widens, I’ll swap, but prefer autopilot.
All brokerages offer this to customers. Vanguard already offers this.

I sound like a broken record and keep repeating this because there is no technical reason ETFs can't behave exactly like mutual funds, at least in terms of "purchase in dollars" and "let my brokerage worry about bid/ask spreads and NAV divergences" and "automated monthly purchases".

Fidelity already does it. Schwab already does it. And, as I already said, Vanguard already does it. E-Trade does it. And, obviously, Betterment, Wealthfront, Personal Capital, M1Finance, SoFi, WealthSimple, Ellevest, WiseBanyan, Acorns, and probably dozens of other places also do it.

They just don't do it for free. (Except M1Finance, I guess) because they've decided (Vanguard included) they can milk money from customers for doing it. (Notice how Vanguard PAS is not operated "at-cost" like Vanguard's funds are.)

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Re: Will ETFs Replace Traditional Funds

Post by jeffyscott » Thu May 16, 2019 10:42 pm

alex_686 wrote:
Thu May 16, 2019 9:24 pm
Silence Dogood wrote:
Thu May 16, 2019 8:10 pm
Also, how do we know that mutual fund expenses won't continue to go down?
They will go down, but ETFs will always be lower. It is a structural issue. You can go down the list of expenses. Some are identical because they have to do exactly the same thing. Tax prep is exactly the same, annual reporting requirements are exactly the same, etc. However, ETFs get to drop some of these expenses, mostly tied to record keeping. Other expenses are lower, such as networking and some aspects of portfolio management. I am specifically thinking about the trading desk
The record keeping costs may not be paid by the ETF, but the cost still exists. It's just being paid some other way, the ETF is being allowed to externalize that cost.
Time is your friend; impulse is your enemy. - John C. Bogle

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