The Case Against ETFs

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jdilla1107
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Re: The Case Against ETFs

Post by jdilla1107 » Thu Jun 13, 2019 11:15 pm

schooner wrote:
Thu Jun 13, 2019 9:27 pm
jdilla1107 wrote:
Thu Jun 13, 2019 9:17 pm
In addition to #2 being wrong, #3 is also wrong. The liquidity of the ETF is expressed in the bid/ask spread, which is exactly where it should be expressed. The liquidity of the mutual fund is expressed with a made up number. (NAV)

If lots of people sell a mutual fund in an illiquid market, it can hurt the investors who aren't selling. The illiquid sale is forced onto the existing members and the mutual fund administrators are forced to make up a number to try and make it fair. (mark to model) With an ETF, only the actual sellers affect themselves.

The execution model of an etf is superior and results in lower costs.
The NAV expresses the price of the underlying securities at market close. How is that a made up number?
Because there is no market to buy or sell the NAV number. The fund has to wait until the next day and maybe get a completely different price. (Although they usually hold cash to try and minimize this. This is a drag on returns.)

Also, in an illiquid market, the NAV gets much more fuzzy. For years, trading firms milked millions out of mutual funds by trading around NAVs. This particular problem has been mostly eliminated today with all sort of complex trading controls. But, this was a big problem for years and remains in pockets. These trading controls are complex and expensive to implement. But, they are required to prop up the fake number. (You know its fake because funds are not letting just anyone trade against them.)

Demisaba
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Re: The Case Against ETFs

Post by Demisaba » Thu Jun 13, 2019 11:28 pm

The only scary scenario I see is this:

If Authorized Participants decide to stay in the sidelines when there is a price dislocation between ETF shares and their NAV.

Source: In a previous life, I used to design and bring new ETFs to the market.

sabhen
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Re: The Case Against ETFs

Post by sabhen » Thu Jun 13, 2019 11:46 pm

Not sure I agree. I have bought and held VGT (technology sector ETF) for more than a decade and no surprise it did pretty well. I intend to keep it for another decade or more.

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nisiprius
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A "case" against mutual funds

Post by nisiprius » Fri Jun 14, 2019 5:37 am

I dislike ETFs. I've used them occasionally. Count me personally in the mutual fund camp. However, I don't think any of schooner's remarks constitute a compelling "case against ETFs," certainly not a case strong enough to justify telling other people to avoid all ETFs.

But testy exchange in another thread did get me thinking of a potential "case" against mutual funds. The "case" involves the complex and secretive business arrangements that govern mutual funds when bought through brokerages and advisors. If we are even aware that you couldn't always buy mutual funds at brokerages, we usually think that the ability to buy them at brokerages ("invented" by Schwab in the mid-1980s) is a good thing. It certainly led to a rise in the use of no-load funds.

However, there has always been something murky and mysterious about the business arrangements surrounding mutual fund sales through advisors and brokerages. It's not quite clear what "no-transaction-fee" funds are doing in order for the brokerage to offer them with no transaction fee. When transaction fees do exist--and they usually do exist for e.g. Vanguard index funds--they are very high by 2019 standards.

Obviously there is money changing hands behind the scenes. I am not clear who is paying whom how much, and what they get for it in return. Nor is it clear to me whether people who buy the mutual fund directly (not that people do that much any more) are affected by this.

I was intrigued when Taylor Larimore linked to this Morgan Stanley document: Revenue Sharing Fund Families.

It contains an interesting statement, and a not totally convincing disclaimer. The boldfacing is mine:
Although we seek to charge all fund families the same revenue sharing fee rate, in aggregate Morgan Stanley receives significantly more revenue sharing from the families with the largest client fund share holdings at our firm. This fact presents a conflict of interest for Morgan Stanley to promote and recommend funds from those fund families rather than funds from families that in aggregate pay us less revenue sharing. In order to mitigate this conflict, Financial Advisors and their Branch Office Managers do not receive additional compensation as a result of these revenue sharing payments received by Morgan Stanley.
Before I get to this list, let me emphasize. To me, ETFs seem to be designed to seduce, but not compel, investors into acting against their own best interests.

Very well. Mutual funds, particularly when offered through third parties, seem to have designed-in conflicts of interest that seduce, but do not compel, those third parties to steer clients and investors toward icky funds.

In the Morgan Stanley document, the list of so-called "revenue sharing" fund families is not alphabetized, which is... strange, isn't it? Allow me to alphabetize it. What sticks out in my mind is that it is oddly familiar list in terms of having names that seem to come up when people post long lists of two dozen funds that their advisors recommended, that are otherwise rarely mentioned in the forum. When's the last time you've seen a posting about a Lord Abbett fund, except in a request for portfolio advice?

It's worth noting that Vanguard, Fidelity, and Dimensional Fund Advisors are conspicuously absent.

Here are the funds that Morgan Stanley says "present a conflict of interest" (but not to worry because they "mitigate" it).

1919 Investment Counsel, LLC
Abbey Capital Limited Innealta
Aberdeen Asset Management Inc.
Advisors Asset Management**
Alliance Bernstein Funds*
Alpine Funds ALPS
Altegris Funds American Beacon Angel Oak Arbitrage
American Funds
Aquila Group of Funds
Arrow
Ashmore
Astor Asset Management
Babson Capital Management
BlackRock Funds*
BlackRock Offshore
Brandes**
Brookfield
Calamos Funds
Calvert Group
Cohen & Steers
Columbia Management*
Credit Suisse
Davis Advisors Transamerica IDEX Allianz*
Delaware Investments*
Destra
Diamond Hill
Direxion
Domini
Dreyfus Premier Funds**
DWS (Deutsche) Funds**
Eagle Fund Distributors, Inc.
Eaton Vance Group *
Equinox
Fidelity Advisors* Ivy Funds* Putnam Funds* PIMCO*
Fidelity Offshore BNY Mellon Offshore Janus Offshore
First Eagle Funds*
First Trust*
Forward Funds
Frank Russell
Franklin Templeton
Fred Alger & Company
Good Harbor Financial, LLC
Guardian Investor Services LLC
Hancock Horizon Investments
Hartford Funds** Mainstay (NY Life)* Federated Securities* Goldman Sachs* Virtus*
Hatteras Capital Distributors, LLC
Henderson Global Investments**
Highland Capital Management American Century Investments**
Invesco*
Investec Offshore
IVA Funds
Janus Capital Group** Gabelli Funds
John Hancock Funds* Franklin
JP Morgan Offshore
JP Morgan*
Keeley Investment Corp.
Kinetics Asset Management, Inc.
Kopernik
Legg Mason Offshore
Legg Mason*
Liberty Street
LoCorr
Lord Abbett Funds*
MFS Investments
MFS Offshore
Mirae Asset Nationwide Olstein Financial Ramius RidgeWorth Funds Salient Partners Tortoise
Morgan Stanley Funds*
Natixis Funds
Neuberger Berman Management Inc.**
Nuveen Funds*
Oak Ridge
Oppenheimer*
Pacific Select Distributors, Inc.
Pax World
Pictet Funds (Europe) S.A.
PIMCO Europe LTD Lateef Fund
Pioneer Funds*
Pioneer Offshore
Polen Offshore
Principal Funds**
Prudential Investments*
Robeco
Royce
Schroder Offshore
Selector Advisors LTD
Sentinel Investments
Snow Capital
SunAmerica Funds Guggenheim*
Templeton Offshore
Third Avenue Offshore
Thornburg*
Touchstone Family of Funds**
UBS Global Asset Management
Van Eck Management
Victory Funds
VOYA Investments, LLC**
Wells Fargo

*Denotes global Partner Fund Family
**Denotes emerging Partner Fund Family
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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 7:13 am

jdilla1107 wrote:
Thu Jun 13, 2019 11:15 pm
schooner wrote:
Thu Jun 13, 2019 9:27 pm
jdilla1107 wrote:
Thu Jun 13, 2019 9:17 pm
In addition to #2 being wrong, #3 is also wrong. The liquidity of the ETF is expressed in the bid/ask spread, which is exactly where it should be expressed. The liquidity of the mutual fund is expressed with a made up number. (NAV)

If lots of people sell a mutual fund in an illiquid market, it can hurt the investors who aren't selling. The illiquid sale is forced onto the existing members and the mutual fund administrators are forced to make up a number to try and make it fair. (mark to model) With an ETF, only the actual sellers affect themselves.

The execution model of an etf is superior and results in lower costs.
The NAV expresses the price of the underlying securities at market close. How is that a made up number?
Because there is no market to buy or sell the NAV number. The fund has to wait until the next day and maybe get a completely different price. (Although they usually hold cash to try and minimize this. This is a drag on returns.)

Also, in an illiquid market, the NAV gets much more fuzzy. For years, trading firms milked millions out of mutual funds by trading around NAVs. This particular problem has been mostly eliminated today with all sort of complex trading controls. But, this was a big problem for years and remains in pockets. These trading controls are complex and expensive to implement. But, they are required to prop up the fake number. (You know its fake because funds are not letting just anyone trade against them.)
Yes there is a market - market on close orders.

Re illiquid securities, the issue is just taken off book for ETFs by the APs. Academic research shows that this creates problems and ends up costing investors over time:

https://www.aeaweb.org/conference/2018/ ... r/HGzHsdRe

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 7:17 am

longinvest wrote:
Thu Jun 13, 2019 11:06 pm
schooner wrote:
Thu Jun 13, 2019 2:14 pm
Bogle advocates for traditional index mutual funds over ETFs. He was right!
In his book The Clash of the Cultures, Jack Bogle wrote:
Rarely are my views on ETFs aptly characterized. So let me be clear: I remain positive on the concept, but only when the right kinds of ETFs are (a) used properly and (b) used for investment and not speculation.
He considered broad-market index ETFs as the right kind of ETFs, as opposed to narrow sector ETFs and leveraged ones.


The data shows that many investors are doing the exact opposite - just look at the number of ETFs and their trading volume - even at Vanguard Brokerage! It’s stratospheric: 1800 commission free ETFS. Volume that rivals the largest equities. Guess who’s making money on all of that trading? It’s not Bogleheads

You’re right on Bogle, but he still advocated traditional index mutual funds over ETFs!

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jeffyscott
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Re: A "case" against mutual funds

Post by jeffyscott » Fri Jun 14, 2019 7:39 am

nisiprius wrote:
Fri Jun 14, 2019 5:37 am
But testy exchange in another thread did get me thinking of a potential "case" against mutual funds. The "case" involves the complex and secretive business arrangements that govern mutual funds when bought through brokerages and advisors.
There's that, but there is also the mysterious (to me anyway) arrangements that somehow allow unlimited free trading of ETFs at brokerages. Vanguard's brokerage is the most extreme example, allowing nearly every ETF in existence to be traded with no commission.
Time is your friend; impulse is your enemy. - John C. Bogle

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vineviz
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 7:56 am

schooner wrote:
Fri Jun 14, 2019 7:17 am
longinvest wrote:
Thu Jun 13, 2019 11:06 pm
schooner wrote:
Thu Jun 13, 2019 2:14 pm
Bogle advocates for traditional index mutual funds over ETFs. He was right!
In his book The Clash of the Cultures, Jack Bogle wrote:
Rarely are my views on ETFs aptly characterized. So let me be clear: I remain positive on the concept, but only when the right kinds of ETFs are (a) used properly and (b) used for investment and not speculation.
He considered broad-market index ETFs as the right kind of ETFs, as opposed to narrow sector ETFs and leveraged ones.


The data shows that many investors are doing the exact opposite - just look at the number of ETFs and their trading volume - even at Vanguard Brokerage! It’s stratospheric: 1800 commission free ETFS. Volume that rivals the largest equities. Guess who’s making money on all of that trading? It’s not Bogleheads
Does it really? What data show that?

Certainly not this data from Vanguard:
In fact, we found little evidence of speculative behavior in either share structure. Figure 2 shows a distribution of investments held for longer than one year sorted by the average annual rate of investment reversals. As shown, 99% of traditional mutual fund investments and 95% of ETF investments do not exceed a rate of four reversals per year—which hardly paints an image of a day-trading ETF investor. Moreover, less than 1% of our ETF positions averaged more than one investment reversal per month.
Image

https://personal.vanguard.com/pdf/s318.pdf
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 7:57 am

schooner wrote:
Fri Jun 14, 2019 7:13 am
Yes there is a market - market on close orders.
Market on close orders don't set the NAV for ETFs (or for mutual funds, for that matter).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

typical.investor
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Re: The Case Against ETFs

Post by typical.investor » Fri Jun 14, 2019 8:12 am

schooner wrote:
Thu Jun 13, 2019 6:06 pm
HEDGEFUNDIE wrote:
Thu Jun 13, 2019 5:40 pm
schooner wrote:
Thu Jun 13, 2019 5:24 pm
vineviz wrote:
Thu Jun 13, 2019 5:18 pm
schooner wrote:
Thu Jun 13, 2019 4:56 pm
I agree that active mutual funds are bad. But I’d argue that “passive” ETFs have encouraged investors to trade more frequently. And this hurts returns.
You could argue it, but without any evidence how convinced should anyone be by that argument?
SPIVA and DALBAR both report active performance every year. The performance is abysmal.

Also, check out William Sharpe’s Arithmetic of Active Management. It’s a short article by a Noble Prize winner available online
These reports do nothing to support your argument.

Show me a report that says ETF investors receive worse returns than mutual fund investors. Or that ETF investors trade more often than mutual fund investors.
“arbitrage activity negatively predicts subsequent returns and ETF investors, in aggregate, underperform benchmarks.”

Source: https://www.aeaweb.org/conference/2018/ ... r/HGzHsdRe

Read it and you'll see it's non-sense.

1) First, take their claim that "we find that the representative investor in SPY, the largest ETF which accounts for almost
10% of the value in all ETFs, underperformed by 145 basis points per annum." Then look at actual results. Over 22 years, SWPPX (Schwab's S&P 500 mutual fund) only beat SPY by 0.01%. Given that SPY is 0.05% more expensive, it's hardly surprising. In any case, where is the underperformance?

2) Second, actually consider their real claim -
As such, our aim is
not to attribute price distortions squarely on the shoulders of arbitrageurs, nor is it to make
welfare claims about the ETF mechanism. Instead, we show that market participants are
dismissing valuable public information.
Get it? It's not the ETF causing the problem.

All the study shows is the investors have poor timing because they buy what is doing well and sell that which isn't.
A trading strategy that buys stocks held by ETFs with extreme outflows and sells stocks
held by ETFs with extreme inflows generates a statistically significant four-factor alpha of
7% per annum.
That is their basis for saying SPY underperforms.
As money flows into (out of) ETFs, cumulative abnormal returns rise (fall), creating a return difference of nearly
1%. However, the return gap quickly reverses in the following month. The figure suggests
that prices rise (fall) as investors flow into (out of) ETFs, but this price increase (decrease)
represents a temporary dislocation that will predictably reverse over one to three months.
Investor behavior is causing this. I don't think it matters if people used ETFs or individual stocks or mutual funds. If you try to buy what's hot and ditch what's cold, you won't do well.

The Mutual fund structure could go out of existence, and I would care less. If the ETF structure disappeared, many people would be left only able to buy individual stocks (due to US tax law requiring US citizens to hold US traded products and restrictions on sales of US mutual funds to Americans not physically present in America). Thus, actually ETFs enable many to be the type of investor Bogle suggested.

Actually, the cited article seems mostly out to encourage active management than it does to show mutual funds are better than ETFs. Just don't go chasing recent good results by staying to your AA, and active management isn't necessary at all.
schooner wrote:
Thu Jun 13, 2019 6:06 pm
Can you find an academic study that shows ETF investors perform better than traditional index mutual fund investors who match NAV and benchmarks less expense ratio.
It's easy to see for anyone doing taxable investing. Mutual funds that do not have an ETF share class such as SWPPX will generally have yearly capital gains distributions, while SPY won't.

JTColton
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Re: The Case Against ETFs

Post by JTColton » Fri Jun 14, 2019 8:17 am

This is the study of 8,000 German investors? If anything, ETFs make more sense to me.

- Real time pricing/buying
- No minimums
- Low ER
- Tax efficient
- Can move brokerages with them

The inability of people to adhere to an investment strategy is no more a reason to hate ETFs than to hate smartphones because expenditures increase after using them since they make it easier for people to buy meaningless junk.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 8:26 am

JTColton wrote:
Fri Jun 14, 2019 8:17 am
This is the study of 8,000 German investors? If anything, ETFs make more sense to me.

- Real time pricing/buying
- No minimums
- Low ER
- Tax efficient
- Can move brokerages with them

The inability of people to adhere to an investment strategy is no more a reason to hate ETFs than to hate smartphones because expenditures increase after using them since they make it easier for people to buy meaningless junk.
I agree the study is small, but it’s more reason to tread carefully and not go all in on ETFs. I can’t find a single academic study that looks at the switch on a large scale in the US. Presumably, Vanguard has the performance data of investors who convert their MF to ETF. Is there a change in performance?

Nummerkins
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Re: The Case Against ETFs

Post by Nummerkins » Fri Jun 14, 2019 8:39 am

I converted my Vanguard mutual funds to ETFs. Now I can move my accounts to different brokerages and pick up bonuses along the way.

I dont get all the hand-wringing. For a Boglehead the distinction should be meaningless. Buy and hold; occasionally rebalance if that's your thing. If you have an IPS, why does it matter if you have ETFs or MFs?

The industy is heading towards brokerage's and ETFs -- Vanguard included. Doesn't mean it's good or bad, it just is.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 8:46 am

Nummerkins wrote:
Fri Jun 14, 2019 8:39 am
I converted my Vanguard mutual funds to ETFs. Now I can move my accounts to different brokerages and pick up bonuses along the way.

I dont get all the hand-wringing. For a Boglehead the distinction should be meaningless. Buy and hold; occasionally rebalance if that's your thing. If you have an IPS, why does it matter if you have ETFs or MFs?

The industy is heading towards brokerage's and ETFs -- Vanguard included. Doesn't mean it's good or bad, it just is.
True, but where is the data to back up the switch? Vanguard is responsible to its investors not shareholders. Are investors, as a whole, better off or worse off?

The irony is that Vanguard must know the answer. But I can’t find a single report on performance before and after folks switched to a brokerage account

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unclescrooge
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Re: The Case Against ETFs

Post by unclescrooge » Fri Jun 14, 2019 8:48 am

moneyman11 wrote:
Thu Jun 13, 2019 3:06 pm
schooner wrote:
Thu Jun 13, 2019 2:14 pm
3) Liquidity: Many ETFs now track relatively illiquid assets. The backbone of the ETF is the Authorized Participant (AP). The APs are key to the creation and redemption process. But they are not contractually obligated to play that role. This is a moot point for highly liquid, publicly traded securities. There will always be someone to step in to arbitrage any mismatch in price. But what happens when the ETF has illiquid assets such as junk bonds or "alternative" assets. According to one academic study, "this liquidity mismatch can reduce market eciency and increase the fragility of these ETFs."

This one is the biggest reason I will never again invest in Bond ETFs after the experience in them during the 2008 financial crisis.

During this time (specifically Oct 2008), Bond ETFs containing corporate bonds completely lost connection to their underlying NAVs - or at least the NAVs that the corresponding mutual funds were being priced at - and proved to be completely broken. Even the venerable BND.

This proved to be a great opportunity for those with cash to buy these underpriced ETFs. But for those looking to sell bond ETFs to rebalance into the plummeting stocks of the time, you would have had to sell your bond ETFs at a serious discount to NAV.

At the time, on these boards, many people tried to explain it with some rational sounding explanations but after the smoke had cleared it because clear that in a liquidity crisis, ETFs containing corporate bonds can be seriously problematic. I recall that some time afterward, even Rick Ferri stating that he didn't want to deal with bond ETFs that weren't all nominal treasury because of this.


If you feel like going in a time machine back to this fun time: viewtopic.php?f=10&t=25211&p=298211#p298211
You have backwards. If you hold an ETF thorough the volatility you come out fine.
If you panic and sold, you hurt yourself.

OTOH, when faced with mass redemptions, mutual fund mangers may be have sold illiquid assets at a loss, generating losses for ALL shareholders.

If you want exotic, or illiquid investments the best vehicle is a closed end fund, provided you buy at a discount to net asset value.
Last edited by unclescrooge on Fri Jun 14, 2019 9:13 am, edited 1 time in total.

Chip
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Re: The Case Against ETFs

Post by Chip » Fri Jun 14, 2019 9:02 am

schooner wrote:
Fri Jun 14, 2019 8:26 am
it’s more reason to tread carefully and not go all in on ETFs.
OP, do you actually have any experience using ETFs? How long have you been investing?

For what it's worth, I have a portfolio of mostly Vanguard ETFs, held at Fidelity. The first was purchased 12 years ago. I like the fact that I can get Vanguards superior asset management ability along with Fidelity's customer service, all at very low cost. Plus I really like the tax efficiency of ETFs in my taxable account.

I feel no more urge to frenetically trade ETFs than I do to trade individual stocks, options, futures, commodities, etc.

longinvest
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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 9:20 am

schooner wrote:
Fri Jun 14, 2019 8:26 am
I agree the study is small, but it’s more reason to tread carefully and not go all in on ETFs.
Let's make this more concrete and less theoretical.

My entire portfolio is invested into a single ETF, Vanguard Balanced ETF Portfolio (VBAL), which invests into more than 25,000 stocks and bonds worldwide. I regularly buy more of it as part of my retirement investment plan.

Please explain why you think that I'm mistaken to have gone all in on this globally-diversified balanced index ETF, knowing that the cheapest globally-diversified balanced index mutual fund (the Tangerine Balanced Portfolio), in Canada, has an expense ratio that is 4 times VBAL's expense ratio.
Last edited by longinvest on Fri Jun 14, 2019 9:25 am, edited 4 times in total.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 9:22 am

Chip wrote:
Fri Jun 14, 2019 9:02 am
schooner wrote:
Fri Jun 14, 2019 8:26 am
it’s more reason to tread carefully and not go all in on ETFs.
OP, do you actually have any experience using ETFs? How long have you been investing?

For what it's worth, I have a portfolio of mostly Vanguard ETFs, held at Fidelity. The first was purchased 12 years ago. I like the fact that I can get Vanguards superior asset management ability along with Fidelity's customer service, all at very low cost. Plus I really like the tax efficiency of ETFs in my taxable account.

I feel no more urge to frenetically trade ETFs than I do to trade individual stocks, options, futures, commodities, etc.
I agree that it works for some people. But there is a casino like atmosphere in ETFs. Just look at at the wacky ticker symbols and plethora of funds. And a lot of people are not behaving like you.

Re tax efficiency, Vanguard SP500 fund had minimal cap gains before 2000’s patent. Less than 50 basis points, sometimes much less. It is really the low turnover

I invested in a few ETFs a decade ago but now hold traditional index MF

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 9:25 am

longinvest wrote:
Fri Jun 14, 2019 9:20 am
schooner wrote:
Fri Jun 14, 2019 8:26 am
I agree the study is small, but it’s more reason to tread carefully and not go all in on ETFs.
Let's make this more concrete and less theoretical.

My entire portfolio is invested into a single ETF, Vanguard Balanced ETF Portfolio (VBAL), which invests into more than 25,000 stocks and bonds worldwide. I regularly buy more of it as part of my retirement investment plan.

Please explain why you think that I'm mistaken to have gone all in on this ETF, knowing that the cheapest globally-diversified balanced index mutual fund (the Tangerine Balanced Portfolio), in Canada, has an expense ratio that is 4.3 times higher than Vanguard's VBAL ETF.
Interesting, I don’t know anything about what’s available in Canada. The Bogleheads 3 fund page lists 3 traditional index mutual funds. And you don’t have to worry about fractional shares. Just auto invest a set amount of money

longinvest
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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 9:33 am

schooner wrote:
Fri Jun 14, 2019 9:25 am
longinvest wrote:
Fri Jun 14, 2019 9:20 am
schooner wrote:
Fri Jun 14, 2019 8:26 am
I agree the study is small, but it’s more reason to tread carefully and not go all in on ETFs.
Let's make this more concrete and less theoretical.

My entire portfolio is invested into a single ETF, Vanguard Balanced ETF Portfolio (VBAL), which invests into more than 25,000 stocks and bonds worldwide. I regularly buy more of it as part of my retirement investment plan.

Please explain why you think that I'm mistaken to have gone all in on this ETF, knowing that the cheapest globally-diversified balanced index mutual fund (the Tangerine Balanced Portfolio), in Canada, has an expense ratio that is 4.3 times higher than Vanguard's VBAL ETF.
Interesting, I don’t know anything about what’s available in Canada. The Bogleheads 3 fund page lists 3 traditional index mutual funds. And you don’t have to worry about fractional shares. Just auto invest a set amount of money
We don't really have low-cost index mutual funds, in Canada. The cheapest bond index mutual fund (part of the TD e-series), for example, has an expense ratio of 0.50%! And, mutual funds are awful in taxable accounts.

It's difficult to explain the simplicity of an all-in-one investment to people who enjoy discussing investments. But, I can assure you that it made a significant difference for my wife (and even for me!) when we switched from a 4-ETF portfolio to a single all-in-one ETF in all accounts. No more rebalancing calculations, no more seeing assets in isolation. The single ETF even helped me get over my somewhat irrational biases against currency-hedged international bonds.

As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

MnD
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Re: The Case Against ETFs

Post by MnD » Fri Jun 14, 2019 9:46 am

We have a collection of accumulating CIT's, index and low cost active traditional mutual funds and ETF's. We don't suffer from the various behavioral errors and other maladies that the OP is convinced are ubiquitous to ETF's. If you are predisposed to being stupid with investments, any sort of position with a non-fixed asset value can be abused. I've seen federal employees engage in ultra-frequent trading of their thrift savings plan funds based on market timing newsletter tips such that plan changes had to be implemented.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

moneyman11
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Re: The Case Against ETFs

Post by moneyman11 » Fri Jun 14, 2019 10:00 am

unclescrooge wrote:
Fri Jun 14, 2019 8:48 am
moneyman11 wrote:
Thu Jun 13, 2019 3:06 pm
schooner wrote:
Thu Jun 13, 2019 2:14 pm
3) Liquidity: Many ETFs now track relatively illiquid assets. The backbone of the ETF is the Authorized Participant (AP). The APs are key to the creation and redemption process. But they are not contractually obligated to play that role. This is a moot point for highly liquid, publicly traded securities. There will always be someone to step in to arbitrage any mismatch in price. But what happens when the ETF has illiquid assets such as junk bonds or "alternative" assets. According to one academic study, "this liquidity mismatch can reduce market eciency and increase the fragility of these ETFs."

This one is the biggest reason I will never again invest in Bond ETFs after the experience in them during the 2008 financial crisis.

During this time (specifically Oct 2008), Bond ETFs containing corporate bonds completely lost connection to their underlying NAVs - or at least the NAVs that the corresponding mutual funds were being priced at - and proved to be completely broken. Even the venerable BND.

This proved to be a great opportunity for those with cash to buy these underpriced ETFs. But for those looking to sell bond ETFs to rebalance into the plummeting stocks of the time, you would have had to sell your bond ETFs at a serious discount to NAV.

At the time, on these boards, many people tried to explain it with some rational sounding explanations but after the smoke had cleared it because clear that in a liquidity crisis, ETFs containing corporate bonds can be seriously problematic. I recall that some time afterward, even Rick Ferri stating that he didn't want to deal with bond ETFs that weren't all nominal treasury because of this.


If you feel like going in a time machine back to this fun time: viewtopic.php?f=10&t=25211&p=298211#p298211
If you panic and sold, you hurt yourself.
I'm well aware of that, thanks. I didn't sell my bond ETF at that time.

The issue with the specific period in question (October 9-10 2008), wasn't that I wanted to "panic" out of my bond ETF ... it was that I wanted to sell BND to buy stocks, which at the time were plunging.

The point is if I had been invested in VBTLX instead of BND, I could have rebalanced out of my bond fund at 6% more value - even though they ostensibly represent the same investment. I didn't rebalance out of BND until the price of BND moved back up to parity with the NAV, and the massive discount mostly disappeared.

I was told by vineviz in this thread that what I experienced back then was "not true" and an "illusion". If you read on in this thread, I proved that it indeed did happen.

That vineviz quietly changed from arguing that it didn't happen, to arguing that the 6% lower ETF price was actually "more accurate", I'll take as his admission that the huge difference in what you could have sold VBTLX for vs BND during that time actually did exist, and that he was wrong to doubt it.
Last edited by moneyman11 on Fri Jun 14, 2019 10:10 am, edited 5 times in total.

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schooner
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Re: A "case" against mutual funds

Post by schooner » Fri Jun 14, 2019 10:03 am

jeffyscott wrote:
Fri Jun 14, 2019 7:39 am
nisiprius wrote:
Fri Jun 14, 2019 5:37 am
But testy exchange in another thread did get me thinking of a potential "case" against mutual funds. The "case" involves the complex and secretive business arrangements that govern mutual funds when bought through brokerages and advisors.
There's that, but there is also the mysterious (to me anyway) arrangements that somehow allow unlimited free trading of ETFs at brokerages. Vanguard's brokerage is the most extreme example, allowing nearly every ETF in existence to be traded with no commission.
I’ve wondered the same thing. I think they are either selling ETF order flow or using a few ETFs as loss leaders to sell higher priced services. With 1800 ETFs (like Vanguard now offers), you’ll need an “advisor” to select the best options.

I expect it at most brokerage firms, but it’s disappointing to see Vanguard go the same route

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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:11 am

longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 10:17 am

longinvest wrote:
Fri Jun 14, 2019 10:11 am
longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.

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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:21 am

schooner wrote:
Fri Jun 14, 2019 10:17 am
longinvest wrote:
Fri Jun 14, 2019 10:11 am
longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the price of the ETFs were $25 each, and I had $33 left in cash into one of my accounts, I would buy one of the three ETFs with the money, and reduce this to $7 sitting in cash.

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 10:27 am

longinvest wrote:
Fri Jun 14, 2019 10:21 am
schooner wrote:
Fri Jun 14, 2019 10:17 am
longinvest wrote:
Fri Jun 14, 2019 10:11 am
longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.

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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:30 am

schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am
schooner wrote:
Fri Jun 14, 2019 10:17 am
longinvest wrote:
Fri Jun 14, 2019 10:11 am
longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?

Less than $100 sitting across accounts (an average of less than $15 per account) isn't "a real drag". I've shown the calculations above.
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BigMoneyNoWhammies
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Re: The Case Against ETFs

Post by BigMoneyNoWhammies » Fri Jun 14, 2019 10:34 am

sketchy9 wrote:
Thu Jun 13, 2019 3:15 pm
HEDGEFUNDIE wrote:
Thu Jun 13, 2019 2:48 pm
Two thoughts:

1. The vast majority of actively managed funds are actually mutual funds, not ETFs. This is because ETFs are required to report their holdings daily, which would give away the active manager's strategy.

https://www.fidelity.com/learning-cente ... ly-managed

2. The single worst-conceived fund ever created is a mutual fund, not an ETF. I'm referring to BLPIX, a leveraged fund that tracks 1x the performance of the S&P 500. That's right, a fund that borrows money to match (not exceed) the S&P. It also happens to have a 1.44% ER.

https://www.profunds.com/media/fact_she ... 0455101997
While interesting information, I'm not sure that refutes any of the points made by the OP. When I first started investing, I was an ETF guy because of their low expenses with small amounts of money. However, not being able to buy fractional shares and dealing with bid/ask spreads made me more and more annoyed with them and I finally switched over to mutual funds. I've been happy with them since and have no desire to go back.
Assuming you're following a boglehead style investing plan, the ask-bid on the types of broad market ETFs you would own would be a cent or 2 at most. If that's a major cause of consternation, you have bigger fish to fry. And as mentioned previously, unless you're buying quite frequently the fractional share issue is negligible because at most you're missing out on a percentage of a single share.

I personally prefer ETFs. I like the liquidity, being able to sell mid day while knowing the exact price I'm getting, they often times have a slightly lower ER than their equivalent MFs, the core ETF holding I buy (VTI) has no transaction costs, more tax efficiency, and the negatives mentioned thus far are either a result of lack of investor discipline (not an issue for me) or are negligible to the point of not being worth a second thought, like ask-bid price. YMMV but they work perfectly fine for me. I see no need to ever hold the mutual fund equivalent of my broad market ETFs.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 10:38 am

longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am
schooner wrote:
Fri Jun 14, 2019 10:17 am
longinvest wrote:
Fri Jun 14, 2019 10:11 am


You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark

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vineviz
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 10:43 am

schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Any investor who believes that it's imperative that they manage their asset allocation to within less than 0.5% has much bigger problems than cash drag.

Neither my wife nor I own a single mutual fund in our IRAs, and our uninvested cash right now is less than 0.05% of our account balances. I don't even think about investing cash until that number hits at least 0.10%. If I replicated my asset allocation using a 3-fund Vanguard mutual fund portfolio, those mutual funds would have a total of over 2% of their holdings in cash whereas my ETFs average just 0.07% in cash (and 60% of THAT cash will be distributed as a dividend in a week or so).

I can see how buying funds in dollar amounts rather than number of shares might satisfy those with severe OCD, but economically it is a non-issue.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:43 am

schooner wrote:
Fri Jun 14, 2019 10:38 am
longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am
schooner wrote:
Fri Jun 14, 2019 10:17 am


The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.

"When there are multiple solutions to a problem, choose the simplest one." -- Jack Bogle
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

longinvest
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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:49 am

longinvest wrote:
Fri Jun 14, 2019 10:43 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.
Or, if I was a US investor, I might consider buying Vanguard's LifeStrategy Moderate Growth Fund, instead. :wink:
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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 10:50 am

longinvest wrote:
Fri Jun 14, 2019 10:43 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am


If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.

"When there are multiple solutions to a problem, choose the simplest one." -- Jack Bogle
OK, but how much time do you spend calculating the lagging ETF? Why not just use traditional index mutual funds?

I have a hard time believing that many people are as disciplined as you. It can be tempting to “try out” one of the other 1799 Commission Free ETFs at Vanguard with the leftover funds. To start trading a little more, and a little more because it’s so easy and you can do it real time, all day

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Re: The Case Against ETFs

Post by longinvest » Fri Jun 14, 2019 10:52 am

schooner wrote:
Fri Jun 14, 2019 10:50 am
longinvest wrote:
Fri Jun 14, 2019 10:43 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am


True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.

"When there are multiple solutions to a problem, choose the simplest one." -- Jack Bogle
OK, but how much time do you spend calculating the lagging ETF? Why not just use traditional index mutual funds?

I have a hard time believing that many people are as disciplined as you. It can be tempting to “try out” one of the 1799 Commission Free ETFs at Vanguard with the leftover funds. To start trading a little more, and a little more because it’s so easy and you can do it real time, all day
I told you: I use an all-in-one ETF that holds over 25,000 stocks and bonds worldwide. A US investors can do the same with a Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) and never worry about rebalancing.
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 10:52 am

longinvest wrote:
Fri Jun 14, 2019 10:49 am
longinvest wrote:
Fri Jun 14, 2019 10:43 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.
Or, if I was a US investor, I might consider buying Vanguard's LifeStrategy Moderate Growth Fund, instead. :wink:
There's also always iShares Core Growth Allocation ETF (AOR) . . . .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: The Case Against ETFs

Post by jeffyscott » Fri Jun 14, 2019 10:56 am

schooner wrote:
Fri Jun 14, 2019 10:38 am
longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am
schooner wrote:
Fri Jun 14, 2019 10:17 am


The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I prefer mutual funds and have never bought an ETF, but this really is a non-issue. You get another paycheck in 1 week to 1 month. You have an existing balance that is or soon will be far greater than $500. If you have $100 in cash or an extra $100 in stocks or bonds vs. your precise asset allocation for a couple weeks, so what?
Time is your friend; impulse is your enemy. - John C. Bogle

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 10:59 am

vineviz wrote:
Fri Jun 14, 2019 10:52 am
longinvest wrote:
Fri Jun 14, 2019 10:49 am
longinvest wrote:
Fri Jun 14, 2019 10:43 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I would invest the entire ($500 + the cash sitting into the account - the portion of 1 ETF share that can't be bought) into the ETF most lagging its target allocation. I would repeat this process on every pay day. Once a year, on my birthday, I would look to see of any of the three ETFs has diverged too far from target and, if yes, I would rebalance the portfolio.
Or, if I was a US investor, I might consider buying Vanguard's LifeStrategy Moderate Growth Fund, instead. :wink:
There's also always iShares Core Growth Allocation ETF (AOR) . . . .
AOR? It’s an active ETF with capital gain distributions, yikes!

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vineviz
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 10:59 am

schooner wrote:
Fri Jun 14, 2019 10:59 am
AOR? It’s an active ETF with capital gain distributions, yikes!
I think you need to look again.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

JackoC
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Re: The Case Against ETFs

Post by JackoC » Fri Jun 14, 2019 11:03 am

JTColton wrote:
Fri Jun 14, 2019 8:17 am
This is the study of 8,000 German investors? If anything, ETFs make more sense to me.

- Real time pricing/buying
- No minimums
- Low ER
- Tax efficient
- Can move brokerages with them

The inability of people to adhere to an investment strategy is no more a reason to hate ETFs than to hate smartphones because expenditures increase after using them since they make it easier for people to buy meaningless junk.
I agree with those advantages and there's a another significant one, which is that you use the ability to borrow on margin against ETF's, for a moderate % at which there's negligible chance of a margin call, as a source of emergency liquidity. The advantage of that in holding less cash at low rates completely swamps the OP's original point about a little more money sitting around time from ETF distributions which would instantly be reinvested by MF's.

But I also agree with the non-validity of the 'behavioral' arguments against ETF's from an *individual POV*. Some people think they are immune to doing counterproductive trading but they still do it. But I just don't do it, nor do I care if disembodied voices on the internet don't believe me :happy . The behavioral type arguments against ETF's amount to zero, for me.

The liquidity issue, of underlying asset or the 'package' (ETF or MF), is worth considering but it's actually pretty complicated. The MF structure doesn't magically insulate you from *any* liquidity crisis scenario. At some point a MF's willingness to trade at a fixed NAV can work against *non-selling* holders where *non selling* ETF share holders would not be hurt. One structure doesn't simply reduce liquidity risks and the other not.

On tax, as should be well known, Vanguard MF and ETF shares of the same funds have the same tax characteristics so for Vanguard fans that's not an issue either way.

Most of my stock and bond assets are in MF's, mainly a 'legacy' thing rather than in proportion to current preference. You can convert most Vang MF shares which have an ETF class to ETF (though not other direction). One significant Vang fund of mine I might convert to ETF, then shift it to Interactive Brokers along with ETF's I bought in later years and thus add to my ability to borrow when needed without overly large cash reserve (in liquidity emergencies as in my general point, but for me it's also to make bridge loans to my real estate LLC when needed). Recently I opened a Merrill taxable account pretty much for the sign up bonus: I put the cash I moved over along with one stock ETF position, to get the needed asset level, into a short term Vang bond fund set on auto-reinvest. That's more convenient than small ETF trades and/or leaving cash at poor rate Merrill give (v good rate, for cash, I get in the VMFXX settlement fund at Vang). So I can still see some cases where'd I buy either a MF or ETF.
Last edited by JackoC on Fri Jun 14, 2019 11:07 am, edited 3 times in total.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 11:03 am

jeffyscott wrote:
Fri Jun 14, 2019 10:56 am
schooner wrote:
Fri Jun 14, 2019 10:38 am
longinvest wrote:
Fri Jun 14, 2019 10:30 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
longinvest wrote:
Fri Jun 14, 2019 10:21 am


If I had a 3-ETF portfolio, and the cost of the ETFs were $25 each, and I had $33 left in cash into one of my accounts. Couldn't I buy one of the three ETFs with the money?

The number of ETFs in the portfolio doesn't matter. The only thing that matters is the number of investment accounts, and the price of the ETFs. At the end of the day, we're probably talking about less than $100 sitting in cash across all accounts, for most Bogleheads-type index ETF investors.
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
Not following AA? What do you mean?
Imagine you are investing $500 on pay day in 3 ETFs:

VTI - $147
VXUS - $51
BND - $82

How can you maintain aa if you take the remainder and buy whatever fund you can with the leftover money? With small amounts, your aa percentage is going to fluctuate wildly or tilt one way just because of an arithmetic quark
I prefer mutual funds and have never bought an ETF, but this really is a non-issue. You get another paycheck in 1 week to 1 month. You have an existing balance that is or soon will be far greater than $500. If you have $100 in cash or an extra $100 in stocks or bonds vs. your precise asset allocation for a couple weeks, so what?
Sitting in cash when you don’t want to is an opportunity cost. Many folks are not even in a high yield account. Their broker is making money off of the interest. And that opportunity cost, even if a few basis points of your portfolio, compounds over decades.
Last edited by schooner on Fri Jun 14, 2019 11:08 am, edited 1 time in total.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 11:07 am

vineviz wrote:
Fri Jun 14, 2019 10:59 am
schooner wrote:
Fri Jun 14, 2019 10:59 am
AOR? It’s an active ETF with capital gain distributions, yikes!
I think you need to look again.
According to the fund’s webpage, it distributed both LT and ST capital gains on December 28, 2017:
https://www.ishares.com/us/products/239 ... ionsDialog

chisey
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Re: The Case Against ETFs

Post by chisey » Fri Jun 14, 2019 11:09 am

schooner wrote:
Fri Jun 14, 2019 10:27 am
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
You are seriously overstating how much drag results from this issue.

Let's take a particularly bad hypothetical situation where you have $500 to invest into a 3-ETF portfolio each month (split 1/3-1/3-1/3), and each ETF costs you $126 to invest in. Suppose your portfolio returns 12% and cash only returns 1%.

In the first month, you can buy a share of each but it leaves you with $122 left in cash for a whole month. Each month, you add another $500 but only buy shares if you can buy them in proper proportion.

Do this for 30 years. How much does the cash drag hurt you?

The answer: 1.7 basis points in annual returns over 30 years. In dollars? $1,520,866 vs $1,526,007.

It's a tiny effect because over time, the average cash balance is only $190 vs. a portfolio that gets several orders of magnitude larger than that within a few years.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 11:13 am

chisey wrote:
Fri Jun 14, 2019 11:09 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
You are seriously overstating how much drag results from this issue.

Let's take a particularly bad hypothetical situation where you have $500 to invest into a 3-ETF portfolio each month (split 1/3-1/3-1/3), and each ETF costs you $126 to invest in. Suppose your portfolio returns 12% and cash only returns 1%.

In the first month, you can buy a share of each but it leaves you with $122 left in cash for a whole month. Each month, you add another $500 but only buy shares if you can buy them in proper proportion.

Do this for 30 years. How much does the cash drag hurt you?

The answer: 1.7 basis points in annual returns over 30 years. In dollars? $1,520,866 vs $1,526,007.

It's a tiny effect because over time, the average cash balance is only $190 vs. a portfolio that gets several orders of magnitude larger than that within a few years.
True, but why give up $6,000 for ETFs? Plus the costs from the bid ask spread. When you can use a traditional index mutual fund?

chisey
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Re: The Case Against ETFs

Post by chisey » Fri Jun 14, 2019 11:26 am

schooner wrote:
Fri Jun 14, 2019 11:13 am
chisey wrote:
Fri Jun 14, 2019 11:09 am
schooner wrote:
Fri Jun 14, 2019 10:27 am
True, but you would not be following your AA anymore. Plus, ordinary investors are putting away smaller amounts through DCA. If you’re investing $500 every paycheck, that’s real drag, with opportunity costs compounded over decades.
You are seriously overstating how much drag results from this issue.

Let's take a particularly bad hypothetical situation where you have $500 to invest into a 3-ETF portfolio each month (split 1/3-1/3-1/3), and each ETF costs you $126 to invest in. Suppose your portfolio returns 12% and cash only returns 1%.

In the first month, you can buy a share of each but it leaves you with $122 left in cash for a whole month. Each month, you add another $500 but only buy shares if you can buy them in proper proportion.

Do this for 30 years. How much does the cash drag hurt you?

The answer: 1.7 basis points in annual returns over 30 years. In dollars? $1,520,866 vs $1,526,007.

It's a tiny effect because over time, the average cash balance is only $190 vs. a portfolio that gets several orders of magnitude larger than that within a few years.
True, but why give up $6,000 for ETFs? Plus the bid ask spread. When you can use a traditional index mutual fund?
First of all, the savings due to ER alone make the final balance a wash, and that's if you have access to VG Admiral shares or the like.

Second, the Bid-Ask is tiny for broad-market index ETFs. For BND, for example, it's 0.01% of the share price. You also only pay it once when you buy and again when you sell. For all the growth in between the bid-ask is irrelevant.

So in the end, for many people, the ETF will be less costly, all things considered. And that's on top of the convenience of portability and choice of brokerage.

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Re: The Case Against ETFs

Post by unclescrooge » Fri Jun 14, 2019 11:29 am

moneyman11 wrote:
Fri Jun 14, 2019 10:00 am
unclescrooge wrote:
Fri Jun 14, 2019 8:48 am
moneyman11 wrote:
Thu Jun 13, 2019 3:06 pm
schooner wrote:
Thu Jun 13, 2019 2:14 pm
3) Liquidity: Many ETFs now track relatively illiquid assets. The backbone of the ETF is the Authorized Participant (AP). The APs are key to the creation and redemption process. But they are not contractually obligated to play that role. This is a moot point for highly liquid, publicly traded securities. There will always be someone to step in to arbitrage any mismatch in price. But what happens when the ETF has illiquid assets such as junk bonds or "alternative" assets. According to one academic study, "this liquidity mismatch can reduce market eciency and increase the fragility of these ETFs."

This one is the biggest reason I will never again invest in Bond ETFs after the experience in them during the 2008 financial crisis.

During this time (specifically Oct 2008), Bond ETFs containing corporate bonds completely lost connection to their underlying NAVs - or at least the NAVs that the corresponding mutual funds were being priced at - and proved to be completely broken. Even the venerable BND.

This proved to be a great opportunity for those with cash to buy these underpriced ETFs. But for those looking to sell bond ETFs to rebalance into the plummeting stocks of the time, you would have had to sell your bond ETFs at a serious discount to NAV.

At the time, on these boards, many people tried to explain it with some rational sounding explanations but after the smoke had cleared it because clear that in a liquidity crisis, ETFs containing corporate bonds can be seriously problematic. I recall that some time afterward, even Rick Ferri stating that he didn't want to deal with bond ETFs that weren't all nominal treasury because of this.


If you feel like going in a time machine back to this fun time: viewtopic.php?f=10&t=25211&p=298211#p298211
If you panic and sold, you hurt yourself.
I'm well aware of that, thanks. I didn't sell my bond ETF at that time.

The issue with the specific period in question (October 9-10 2008), wasn't that I wanted to "panic" out of my bond ETF ... it was that I wanted to sell BND to buy stocks, which at the time were plunging.

The point is if I had been invested in VBTLX instead of BND, I could have rebalanced out of my bond fund at 6% more value - even though they ostensibly represent the same investment. I didn't rebalance out of BND until the price of BND moved back up to parity with the NAV, and the massive discount mostly disappeared.

I was told by vineviz in this thread that what I experienced back then was "not true" and an "illusion". If you read on in this thread, I proved that it indeed did happen.

That vineviz quietly changed from arguing that it didn't happen, to arguing that the 6% lower ETF price was actually "more accurate", I'll take as his admission that the huge difference in what you could have sold VBTLX for vs BND during that time actually did exist, and that he was wrong to doubt it.
Maybe the truth was somewhere between the your two viewpoints.

Even if you are completely correct, I'm not going to change my mind based on an event that is likely to occur once a decade or two.

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unclescrooge
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Re: The Case Against ETFs

Post by unclescrooge » Fri Jun 14, 2019 11:36 am

schooner wrote:
Fri Jun 14, 2019 10:17 am
longinvest wrote:
Fri Jun 14, 2019 10:11 am
longinvest wrote:
Fri Jun 14, 2019 9:33 am
As for the unavailability of fractional shares, it isn't an issue. Between my wife and I, we have 7 accounts (2 tax-deferred, 2 tax-free, 1 "locked-in" tax-deferred, and 2 taxable). The price of VBAL is a little bit over $25. This means that, on average, we have (7 X ($25 / 2)) = $87.50 sitting in cash in our investment accounts. Assuming 6% nominal portfolio returns, we're losing ($87.50 X 6%) = $5.25 per year across all accounts (we pay no commissions to buy the ETF). That shouldn't break our retirement plan. :wink:
You could even change that into a Dave Ramsey 12% return, and it still wouldn't matter. :wink:

The "whole share" issue of ETFs is being blown out of proportion.
The whole share issue multiples for each additional fund in your portfolio (if you have a Boglehead 3 fund, you’ll have a fraction for each fund every time you invest, assuming you follow your AA). Plus, you’re out more than that amount because you’re missing out on compounding.

It’s similar to Bogle’s tyranny of compounding fees.
Most mutual funds hold 0.5% to 3% cash so this isn't as onerous as people think.

Additionally, early in your career your savings rate is more important than the returns.

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Re: The Case Against ETFs

Post by KyleAAA » Fri Jun 14, 2019 11:47 am

I am not aware of any academic literature that concludes ETFs, as a form, are bad for investors. Even the ones you linked simply conclude they don't make investors better off. Bad behavior is equally easy with traditional mutual funds.

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schooner
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Re: The Case Against ETFs

Post by schooner » Fri Jun 14, 2019 11:57 am

KyleAAA wrote:
Fri Jun 14, 2019 11:47 am
I am not aware of any academic literature that concludes ETFs, as a form, are bad for investors. Even the ones you linked simply conclude they don't make investors better off. Bad behavior is equally easy with traditional mutual funds.
Where are the studies to support ETFs? Vanguard has migrated a lot of investors from MFs to ETFs. Where is the performance data on that transition?

Vanguard has 129 mutual funds but offers 1,800 commission free ETFs. Those are a lot of funds. Hard to believe the move to ETFs isn't causing people to trade more often, hurting returns.

You can't trade a mutual fund during the day. You can trade ETFs, a lot. Vanguard also has additional trading limitations for its mutual funds.

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vineviz
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Re: The Case Against ETFs

Post by vineviz » Fri Jun 14, 2019 12:08 pm

schooner wrote:
Fri Jun 14, 2019 11:57 am
Hard to believe the move to ETFs isn't causing people to trade more often, hurting returns.
I'm now sure why it's hard for you to believe: I generally find it easier to believe things for which I have evidence than things for which I have none.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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