Why mutual funds are more dangerous than ETFs

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HEDGEFUNDIE
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Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

So many posts by mutual fund lovers these days. Here is a strong counterpoint:

https://www.wsj.com/articles/floor-trad ... yURL_share

Basically, human error by floor traders can affect closing prices, when mutual funds make their trades. ETFs trade every second the market is open, so they are much less susceptible to a human-error-generated price.
Big Dog
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Re: Why mutual funds are more dangerous than ETFs

Post by Big Dog »

Basically, human error by floor traders can affect closing prices, when mutual funds make their trades.
Perhaps possible, but the article gave no such example as it focused on one example of an opening price issue. But it is my understanding that errors can be corrected after the closing 'bell' which is why the bell does not represent the final-final close price.
surfstar
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Re: Why mutual funds are more dangerous than ETFs

Post by surfstar »

If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
latak215
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Re: Why mutual funds are more dangerous than ETFs

Post by latak215 »

I think this title s purpose is to grab attention. Looks like the author succeeded
wander
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Re: Why mutual funds are more dangerous than ETFs

Post by wander »

I have both. No issue.
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HEDGEFUNDIE
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Re: Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Metx
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Re: Why mutual funds are more dangerous than ETFs

Post by Metx »

One thing I've wondered about: If there is a large amount of redemptions on a mutual fund, it might be forced to sell holdings on the market to generate enough cash. This would be to the detriment of the fund. I don't see how any amount of trading on ETFs would cause a similar outcome. So are ETFs a positive feature for people investing in the underlying mutual fund? Is there some feature of ETFs that has a detrimental effect on the underlying mutual fund?
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Toons
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Re: Why mutual funds are more dangerous than ETFs

Post by Toons »

Dangerous?
??


:mrgreen:
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HomerJ
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Re: Why mutual funds are more dangerous than ETFs

Post by HomerJ »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 11:34 am So many posts by mutual fund lovers these days. Here is a strong counterpoint:

https://www.wsj.com/articles/floor-trad ... yURL_share

Basically, human error by floor traders can affect closing prices, when mutual funds make their trades. ETFs trade every second the market is open, so they are much less susceptible to a human-error-generated price.
This is a silly article. If you're not trading daily, the ETF has the same issues as the mutual fund.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: Why mutual funds are more dangerous than ETFs

Post by HomerJ »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 12:11 pm
surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Yeah, I don't buy or sell often, so it doesn't matter. Silly article.

Don't double down on it.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HEDGEFUNDIE
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Re: Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

HomerJ wrote: Sat Jul 13, 2019 9:54 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 12:11 pm
surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Yeah, I don't buy or sell often, so it doesn't matter. Silly article.

Don't double down on it.
I buy mutual funds automatically every two weeks on payday, as I assume most investors do through their 401ks.

Therefore I am exposed to significant risk if there is a human error that causes the end-of-day execution price to be much higher than usual.

If there was a 401k provider that used only ETFs and promised execution at a random time during the day, this risk would be eliminated.
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HomerJ
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Re: Why mutual funds are more dangerous than ETFs

Post by HomerJ »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 9:59 pmI am exposed to significant risk if there is a human error that causes the end-of-day execution price to be much higher than usual.
I disagree it's "significant". But if you feel strongly about this, I'm willing to agree to disagree.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
lazyeval
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Re: Why mutual funds are more dangerous than ETFs

Post by lazyeval »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 9:59 pm
HomerJ wrote: Sat Jul 13, 2019 9:54 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 12:11 pm
surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Yeah, I don't buy or sell often, so it doesn't matter. Silly article.

Don't double down on it.
I buy mutual funds automatically every two weeks on payday, as I assume most investors do through their 401ks.

Therefore I am exposed to significant risk if there is a human error that causes the end-of-day execution price to be much higher than usual.

If there was a 401k provider that used only ETFs and promised execution at a random time during the day, this risk would be eliminated.
Perhaps so, but the you would be exposed to the risks that ETFs carry. Remember the flash crash days? No way the mutual funds would be caught in that.
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Re: Why mutual funds are more dangerous than ETFs

Post by TropikThunder »

lazyeval wrote: Sat Jul 13, 2019 11:58 pm Perhaps so, but the you would be exposed to the risks that ETFs carry. Remember the flash crash days? No way the mutual funds would be caught in that.
And no ETF investor who wasn’t trading at that moment was affected either. But let’s not re-litigate the ETF v Mutual Fund war in a light-hearted quasi-troll post. :P
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Re: Why mutual funds are more dangerous than ETFs

Post by anakinskywalker »

Metx wrote: Sat Jul 13, 2019 9:26 pm One thing I've wondered about: If there is a large amount of redemptions on a mutual fund, it might be forced to sell holdings on the market to generate enough cash. This would be to the detriment of the fund. I don't see how any amount of trading on ETFs would cause a similar outcome. So are ETFs a positive feature for people investing in the underlying mutual fund? Is there some feature of ETFs that has a detrimental effect on the underlying mutual fund?
If there is heavy selling pressure on the ETF shares then that will translate into equally heavy selling of the underlying assets by the authorized participants. They will buy ETF shares and convert them into underlying baskets in creation unit chunks.
lostdog
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Re: Why mutual funds are more dangerous than ETFs

Post by lostdog »

Click bait noise to generate ad revenue. This stuff seems to be getting worse with junk articles like this.
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iamlucky13
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Re: Why mutual funds are more dangerous than ETFs

Post by iamlucky13 »

Why mutual funds are more dangerous than ETFs
"Dangerous" suggests something a lot worse than the described risk of modest, relatively rare trading errors.

If I found out one of my biweekly contributions of roughly 0.13% of all my planned retirement contributions ended up misvalued by 3% to my detriment, I would be irritated, to be sure. But more likely than not, I would avoid financial ruin from it.

That's a far, far different level of risk than that my equity funds might drop by half and remain significantly depressed for extended periods of time during my drawdown phase. The latter is a reason I'd consider an investing decision like maintaining a very large allocation to stocks during retirement potentially "dangerous."
TropikThunder
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Re: Why mutual funds are more dangerous than ETFs

Post by TropikThunder »

anakinskywalker wrote: Sun Jul 14, 2019 7:49 am If there is heavy selling pressure on the ETF shares then that will translate into equally heavy selling of the underlying assets by the authorized participants. They will buy ETF shares and convert them into underlying baskets in creation unit chunks.
I don’t think this is necessarily so. When a mutual fund has large outflows, net redemptions cause the number of shares outstanding to decline, and the mutual fund company has to sell the underlying securities. But when an ETF is sold, someone else is buying it. No change in the number of shares outstanding, no change in the fund ownership of the underlying security. The creation/redemption process is more for managing the premium/discount, which is affected by selling (and buying) pressure.
jdilla1107
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Re: Why mutual funds are more dangerous than ETFs

Post by jdilla1107 »

HomerJ wrote: Sat Jul 13, 2019 9:53 pm
This is a silly article. If you're not trading daily, the ETF has the same issues as the mutual fund.
This is not correct. Liquidity issues in an ETF are forced entirely onto the seller/buyer of the ETF. Liquidity issues on a mutual fund are shared by all participants in the fund whether they take any action or not. For large and liquid mutual funds, it doesn't matter in practice. But, they are certainly not "the same".

Also, the article says nothing about what you are commenting on, so I have no idea why you think it's silly. It wasn't written for you, but rather for market execution participants, who this is very relevant for.
Last edited by jdilla1107 on Sun Jul 14, 2019 12:40 pm, edited 3 times in total.
jdilla1107
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Re: Why mutual funds are more dangerous than ETFs

Post by jdilla1107 »

lazyeval wrote: Sat Jul 13, 2019 11:58 pm Perhaps so, but the you would be exposed to the risks that ETFs carry. Remember the flash crash days? No way the mutual funds would be caught in that.
Mutual funds buy and sell underlying assets during the day and can definitely be affected by a flash crash.
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Re: Why mutual funds are more dangerous than ETFs

Post by jdilla1107 »

lostdog wrote: Sun Jul 14, 2019 10:52 am Click bait noise to generate ad revenue. This stuff seems to be getting worse with junk articles like this.
Did you read the article? The OP jumped to their own conclusion not made in the article, so what are you saying is junk?
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Re: Why mutual funds are more dangerous than ETFs

Post by lazyeval »

jdilla1107 wrote: Sun Jul 14, 2019 12:19 pm
lazyeval wrote: Sat Jul 13, 2019 11:58 pm Perhaps so, but the you would be exposed to the risks that ETFs carry. Remember the flash crash days? No way the mutual funds would be caught in that.
Mutual funds buy and sell underlying assets during the day and can definitely be affected by a flash crash.
Thanks. Because they trade after the close I didn't think or know about how they deal with the underlying assets. I've learnt something if what you say is correct.
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Re: Why mutual funds are more dangerous than ETFs

Post by H-Town »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 9:59 pm
HomerJ wrote: Sat Jul 13, 2019 9:54 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 12:11 pm
surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Yeah, I don't buy or sell often, so it doesn't matter. Silly article.

Don't double down on it.
I buy mutual funds automatically every two weeks on payday, as I assume most investors do through their 401ks.

Therefore I am exposed to significant risk if there is a human error that causes the end-of-day execution price to be much higher than usual.

If there was a 401k provider that used only ETFs and promised execution at a random time during the day, this risk would be eliminated.
Mutual funds have internal control procedures to spot those human mistakes. They are also required to have audits to prevent fraud.

You'll get what yours, nothing more, nothing less.
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Thesaints
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Re: Why mutual funds are more dangerous than ETFs

Post by Thesaints »

HEDGEFUNDIE wrote: Sat Jul 13, 2019 11:34 am So many posts by mutual fund lovers these days. Here is a strong counterpoint:

https://www.wsj.com/articles/floor-trad ... yURL_share

Basically, human error by floor traders can affect closing prices, when mutual funds make their trades. ETFs trade every second the market is open, so they are much less susceptible to a human-error-generated price.
Seems not likely in the least. It would take an error over many stocks, since any individual stock doesn't weigh more than a few percent on a fund worth of that name.
You can play with a pocket calculator and estimate the chances of a S&P500 fund price being affected by more that 5%, when as many as 50 of its underlying stocks are mispriced as much as 50%.
anakinskywalker
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Re: Why mutual funds are more dangerous than ETFs

Post by anakinskywalker »

TropikThunder wrote: Sun Jul 14, 2019 11:33 am
anakinskywalker wrote: Sun Jul 14, 2019 7:49 am If there is heavy selling pressure on the ETF shares then that will translate into equally heavy selling of the underlying assets by the authorized participants. They will buy ETF shares and convert them into underlying baskets in creation unit chunks.
I don’t think this is necessarily so. When a mutual fund has large outflows, net redemptions cause the number of shares outstanding to decline, and the mutual fund company has to sell the underlying securities. But when an ETF is sold, someone else is buying it. No change in the number of shares outstanding, no change in the fund ownership of the underlying security. The creation/redemption process is more for managing the premium/discount, which is affected by selling (and buying) pressure.
I think the flaw in your logic is that you're assuming that some investor (not an authorized participant) is buying the ETF shares that are being sold, but that equivalent buy orders are not being put in for the mutual fund. If we assume buy demand is balancing out the selling pressure (in both cases, as we should) then the mutual fund won't see any net change in the number of its outstanding shares, and doesn't need to sell any underlying holdings either.

Anakin
Thesaints
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Re: Why mutual funds are more dangerous than ETFs

Post by Thesaints »

The real reason is that even the largest mammoth funds own only a small fraction of the market. For instance, Vanguard's VFIAX has a portfolio worth about 250 billions, but the S&P 500 has a 25+ trillions capitalization. That is, Vanguard owns less than 1% of the market value. Even in terms of daily volume, one would have to assume Vanguard trying to unwind a large fraction of its portfolio, in order to really affect prices.
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Re: Why mutual funds are more dangerous than ETFs

Post by retiredflyboy »

ETF’s should be called ETMF for exchange traded mutual fund. ETF is still a mutual fund , however it trades during the day. No, mutual funds are not dangerous! “Shock jock” story.
Facts are stubborn things. Everything works until it doesn’t.
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HEDGEFUNDIE
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Re: Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

Thesaints wrote: Sun Jul 14, 2019 5:04 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 11:34 am So many posts by mutual fund lovers these days. Here is a strong counterpoint:

https://www.wsj.com/articles/floor-trad ... yURL_share

Basically, human error by floor traders can affect closing prices, when mutual funds make their trades. ETFs trade every second the market is open, so they are much less susceptible to a human-error-generated price.
Seems not likely in the least. It would take an error over many stocks, since any individual stock doesn't weigh more than a few percent on a fund worth of that name.
You can play with a pocket calculator and estimate the chances of a S&P500 fund price being affected by more that 5%, when as many as 50 of its underlying stocks are mispriced as much as 50%.
You must not have read the story:
Despite calm markets that day, 100 NYSE-listed stocks fell 3% or more at the open, more than any other day in 2017, according to an analysis by data firm MayStreet. Many stocks fell sharply at 9:30, then rebounded within minutes, a sign that their opening prices were likely distorted by the error.
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HEDGEFUNDIE
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Re: Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

H-Town wrote: Sun Jul 14, 2019 4:35 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 9:59 pm
HomerJ wrote: Sat Jul 13, 2019 9:54 pm
HEDGEFUNDIE wrote: Sat Jul 13, 2019 12:11 pm
surfstar wrote: Sat Jul 13, 2019 11:53 am If you're not buying/selling your fund daily, does it make a difference? Wouldn't any errors be smoothed out over time?

I see it not affecting a buy and hold boglehead
Do buy and hold investors not need to buy shares during their accumulating years and sell shares during their decumulating years?
Yeah, I don't buy or sell often, so it doesn't matter. Silly article.

Don't double down on it.
I buy mutual funds automatically every two weeks on payday, as I assume most investors do through their 401ks.

Therefore I am exposed to significant risk if there is a human error that causes the end-of-day execution price to be much higher than usual.

If there was a 401k provider that used only ETFs and promised execution at a random time during the day, this risk would be eliminated.
Mutual funds have internal control procedures to spot those human mistakes. They are also required to have audits to prevent fraud.

You'll get what yours, nothing more, nothing less.
How would a mutual fund’s internal procedures correct for pricing issues with its underlying stocks? The fix would have to come from the exchange.
Last edited by HEDGEFUNDIE on Sun Jul 14, 2019 6:43 pm, edited 1 time in total.
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nedsaid
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Re: Why mutual funds are more dangerous than ETFs

Post by nedsaid »

I should start a thread entitled, "Why closed end-mutual funds are more dangerous than active open ended funds which are more dangerous than ETFs that are more dangerous than indexed open ended mutual funds." So much danger out there, I feel like the Cowardly Lion. Lions and Tigers and Bears! Oh my!
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HEDGEFUNDIE
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Re: Why mutual funds are more dangerous than ETFs

Post by HEDGEFUNDIE »

nedsaid wrote: Sun Jul 14, 2019 6:43 pm I should start a thread entitled, "Why closed end-mutual funds are more dangerous than active open ended funds which are more dangerous than ETFs that are more dangerous than indexed open ended mutual funds." So much danger out there, I feel like the Cowardly Lion. Lions and Tigers and Bears! Oh my!
And I would read that thread!
Thesaints
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Re: Why mutual funds are more dangerous than ETFs

Post by Thesaints »

HEDGEFUNDIE wrote: Sun Jul 14, 2019 6:39 pm You must not have read the story:
Despite calm markets that day, 100 NYSE-listed stocks fell 3% or more at the open, more than any other day in 2017, according to an analysis by data firm MayStreet. Many stocks fell sharply at 9:30, then rebounded within minutes, a sign that their opening prices were likely distorted by the error.
That's not at close. And it would have to be the top 100 companies by capitalization in order to cause you a 3% loss. If it were the companies ranked 401-500, your loss would be about zero.
TropikThunder
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Re: Why mutual funds are more dangerous than ETFs

Post by TropikThunder »

Remember now, it’s not the tools it’s the fools. :P
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