I Just Don’t Understand ETFs

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Regal 56
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I Just Don’t Understand ETFs

Post by Regal 56 »

Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange, the same as a regular stock. But that’s a distinction without a difference. Is it crucially significant that an ETF can be bought or sold between 9:30-4:00, and a mutual fund can’t? Perhaps that’s crucial to those who want to wheel and deal on an hourly basis. But to a “buy and hold” investor, who cares?

ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.) ETFs supposedly have low turnover. But so can mutual funds. ETFs are purported as tax efficient. But so can mutual funds. Really, other than being exchange tradable, what’s the big diff?

• Mutual funds are a basket of investments. So are ETFs.
• Mutual funds mitigate risk by spreading it over many investments. So do ETFs.
• Mutual funds have expense ratios. So do ETFs.
• Mutual funds are constructed by fund managers. So are ETFs.

Perhaps I’m daft. But I’m not trolling. I truly don’t understand how an ETF is much different from a mutual fund. In fact, I don’t understand why ETFs exist at all. As far as I can tell, it’s a mutual fund for people who can’t tolerate waiting until 4:00. Other than that, an ETF is just a particular type of mutual fund.

What am I missing?
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JoMoney
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Re: I Just Don’t Understand ETFs

Post by JoMoney »

Mutual funds have a quicker settlement time than stocks (ETFs.)
Mutual funds trade at NAV of the fund, there's usually some spread on an ETF over NAV.
There are small (pennies) SEC fees for trading stocks/ETFs.
There are some fund companies that still allow you to buy their mutual fund and own it directly, not through having a brokerage account.

Some ETFs give a false sense of liquidity, with more volume trading in the ETF than in the underlying securities in the fund. This could spell trouble for people relying on special participants to be redeeming ETFs and keep them trading near NAV - if/when times get tough, the spreads on an ETF of some smaller and more esoteric holdings could get pretty wide.
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Northern Flicker
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

If you invest in a mutual fund, you are exposed to the behavior of other investors in the fund. You pay your share of the transaction cost for the entire fund. The fund also may need to sell shares to process withdrawals. Even if you don't withdraw, you pay your share of this cost. Buy-and-hold investors subsidize active traders. Moreover, if there are investors actively trying to time the market using a fund, it can bleed cash away from other investors in the fund if the market timer gets lucky.

Mutual funds have frequent trading restrictions, and a very large fund will absorb transaction costs adequately as a sufficiently tiny percentage of the fund. But these are real issues.

ETFs shield the investor because ETF shares are bought and sold from other investors. There are no withdrawals to process for trading. Frequent traders can trade shares as often as they want without harming but-and-hold investors, at least up to a point. ETFs do allow investors to move large sums in and out of a market without a lot of friction, which can increase market volatility, but it still does not specifically effect other investors in the fund directly or your decision of ehich to hold-- it is a market effect.

ETFs have enabled a big increase in variety of fund products. The fund company focuses on managing the fund. They do not have to be the record-keeper for a large group of retail investors, track investor accounts, issue 1099's etc.
Last edited by Northern Flicker on Sat Nov 20, 2021 4:10 pm, edited 2 times in total.
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22twain
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Re: I Just Don’t Understand ETFs

Post by 22twain »

ETFs are more portable than mutual funds.

My investment account is at T. Rowe Price. I can buy and hold Vanguard mutual funds there, but if I did, I'd have to pay a $75 transaction fee. Maybe TRP has changed this in recent years, but I doubt it.

However, I can hold Vanguard ETFs in a brokerage account there, nowadays with zero trading fees (commissions). TRP dropped their brokerage trading commissions shortly after the other major brokerages did (Fidelity, Schwab, Vanguard). Even when they still had brokerage trading fees, $10 was a lot cheaper than $75.
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Re: I Just Don’t Understand ETFs

Post by whodidntante »

ETFs are more structurally efficient than mutual funds. They don't need to carry much cash to meet redemptions, and they don't normally need to trade at all to accept investments or meet redemptions. Trading costs are normally incurred by those doing the trading. They can also shed appreciated shares via heartbeat trades or through the redemption process, allowed for improved tax deferral. Also, they are portable, and can be purchased and held at multiple brokers. They are generally marginable upon settlement. It's more difficult to imagine why mutual funds would be preferred in light of these advantages for ETFs.
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Re: I Just Don’t Understand ETFs

Post by AlohaJoe »

Regal 56 wrote: Sat Nov 20, 2021 12:06 amOr rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange
Mutual funds can collapse in the face of redemptions. ETFs can't. This isn't just a theoretical point. It happened in the UK in 2019 to one of the most famous mutual funds in the country. Over 500,000 people were affected with some having lost half their money.

https://riskpremium.com/?p=3309
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Re: I Just Don’t Understand ETFs

Post by nalor511 »

To the nav vs spread point, many accountants have pointed out that there is a lot of guessing/hedging/heuristic magic happening with daily nav estimation, and that it's not truly any more accurate than an ETF market price
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Re: I Just Don’t Understand ETFs

Post by 000 »

The biggest factor for me is portability. Trying to use mutual funds on other brokerage platforms is expensive and annoying, yet my desired funds are not available from any one sponsor.

Actually, I've been thinking about getting out of Vanguard funds altogether due to the concern that redemptions from the MF share classes might have spillover effects into the ETF class. Though unlikely, is it possible we see a bad enough situation that even Vanguard total market investors are panic selling? I think so. Then again, I don't really want to be stuck with Blackrock either.
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Re: I Just Don’t Understand ETFs

Post by gtrplayer »

Regal 56 wrote: Sat Nov 20, 2021 12:06 am Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange, the same as a regular stock. But that’s a distinction without a difference. Is it crucially significant that an ETF can be bought or sold between 9:30-4:00, and a mutual fund can’t? Perhaps that’s crucial to those who want to wheel and deal on an hourly basis. But to a “buy and hold” investor, who cares?

ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.) ETFs supposedly have low turnover. But so can mutual funds. ETFs are purported as tax efficient. But so can mutual funds. Really, other than being exchange tradable, what’s the big diff?

• Mutual funds are a basket of investments. So are ETFs.
• Mutual funds mitigate risk by spreading it over many investments. So do ETFs.
• Mutual funds have expense ratios. So do ETFs.
• Mutual funds are constructed by fund managers. So are ETFs.

Perhaps I’m daft. But I’m not trolling. I truly don’t understand how an ETF is much different from a mutual fund. In fact, I don’t understand why ETFs exist at all. As far as I can tell, it’s a mutual fund for people who can’t tolerate waiting until 4:00. Other than that, an ETF is just a particular type of mutual fund.

What am I missing?
I’ve never understood why ETFs are often cheaper than similar mutual funds. Describing an ETF, it sounds more difficult to manage but it must be somewhat simpler for some reason. Why are ETFs often cheaper? All of my investments outside of 401k are in ETFs, largely for this reason even though I don’t understand it.
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Re: I Just Don’t Understand ETFs

Post by exodusNH »

Regal 56 wrote: Sat Nov 20, 2021 12:06 am Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange, the same as a regular stock. But that’s a distinction without a difference. Is it crucially significant that an ETF can be bought or sold between 9:30-4:00, and a mutual fund can’t? Perhaps that’s crucial to those who want to wheel and deal on an hourly basis. But to a “buy and hold” investor, who cares?

ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.) ETFs supposedly have low turnover. But so can mutual funds. ETFs are purported as tax efficient. But so can mutual funds. Really, other than being exchange tradable, what’s the big diff?

• Mutual funds are a basket of investments. So are ETFs.
• Mutual funds mitigate risk by spreading it over many investments. So do ETFs.
• Mutual funds have expense ratios. So do ETFs.
• Mutual funds are constructed by fund managers. So are ETFs.

Perhaps I’m daft. But I’m not trolling. I truly don’t understand how an ETF is much different from a mutual fund. In fact, I don’t understand why ETFs exist at all. As far as I can tell, it’s a mutual fund for people who can’t tolerate waiting until 4:00. Other than that, an ETF is just a particular type of mutual fund.

What am I missing?
If you are a buy and hold investor and you like your brokerage, they are effectively the same thing.

ETFs are basically mutual funds that trade like stocks. Because of that, if you choose brokerage that offers commission-free trades on stocks, ETFs are also commission-free.

This is different from mutual funds, where depending on the fund and brokerage, might incur commissions.

Due to the mechanics of how ETFs work, they are generally more tax-efficient than mutual funds. Vanguard is the exception here. They have a patented process that makes their funds just as efficient. This only matters in a taxable account.

Some mutual funds have purchase minimums. ETFs can be bought 1 share at a time everywhere. Some brokerages even offer fractional share purchases, which allows you to buy specific dollar amounts instead of having to round up or down to a whole number.

Some mutual funds have limits on how frequently you can sell them. ETFs can be sold as often as you want, with some rules that apply to trading in general.

ETFs have to publish their underlying holdings much more frequently.

ETFs can be cheaper for a fund company due to the mechanics of how they're formed, cashed out, and traded.

ETFs can be priced above or below the actual value of the holdings. This usually isn't a big deal with the widely-traded ones.

ETFs might not support automatic purchases.

This isn't a comprehensive list.
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Re: I Just Don’t Understand ETFs

Post by exodusNH »

gtrplayer wrote: Sat Nov 20, 2021 2:09 am
Regal 56 wrote: Sat Nov 20, 2021 12:06 am Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange, the same as a regular stock. But that’s a distinction without a difference. Is it crucially significant that an ETF can be bought or sold between 9:30-4:00, and a mutual fund can’t? Perhaps that’s crucial to those who want to wheel and deal on an hourly basis. But to a “buy and hold” investor, who cares?

ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.) ETFs supposedly have low turnover. But so can mutual funds. ETFs are purported as tax efficient. But so can mutual funds. Really, other than being exchange tradable, what’s the big diff?

• Mutual funds are a basket of investments. So are ETFs.
• Mutual funds mitigate risk by spreading it over many investments. So do ETFs.
• Mutual funds have expense ratios. So do ETFs.
• Mutual funds are constructed by fund managers. So are ETFs.

Perhaps I’m daft. But I’m not trolling. I truly don’t understand how an ETF is much different from a mutual fund. In fact, I don’t understand why ETFs exist at all. As far as I can tell, it’s a mutual fund for people who can’t tolerate waiting until 4:00. Other than that, an ETF is just a particular type of mutual fund.

What am I missing?
I’ve never understood why ETFs are often cheaper than similar mutual funds. Describing an ETF, it sounds more difficult to manage but it must be somewhat simpler for some reason. Why are ETFs often cheaper? All of my investments outside of 401k are in ETFs, largely for this reason even though I don’t understand it.
They are cheaper to run by the mutual fund company because they aren't involved with managing the buying and selling of shares.

There are companies called "market makers" that are monitoring the purchase and sale activity on a fund. When they see that demand exceeds supply, they go to Vanguard with a bundle of stocks. Vanguard takes the stocks and hands the market maker X ETF shares. The market maker then sells the shares. The reverse happens when supply exceeds demand.

The market maker earns a tiny profit when they engage in this activity. When demand is high, the ETF price will be above the intrinsic value of the underlying stocks. They're handing over a set of stocks that they payed $x.00 for and selling them as an ETF that sells for $x.02.

While this winds up being cheaper for Vanguard, which is why t the ER is lower, you can wind up paying just a little bit more for the shares than they're worth. You also have to deal with the bid/ask spread, which also adds/takes a little from you on each trade.

For buy and hold investors, those little differences aren't a big deal.
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Re: I Just Don’t Understand ETFs

Post by Booogle »

Regal 56 wrote: Sat Nov 20, 2021 12:06 am ETFs are purported as tax efficient. But so can mutual funds.

This is where you get things wrong.

The only tax efficient mutual funds are S&P 500 index funds and certain Vanguard funds, because they have a special patent for tax efficiency.
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Re: I Just Don’t Understand ETFs

Post by anon_investor »

Booogle wrote: Sat Nov 20, 2021 6:18 am
Regal 56 wrote: Sat Nov 20, 2021 12:06 am ETFs are purported as tax efficient. But so can mutual funds.

This is where you get things wrong.

The only tax efficient mutual funds are S&P 500 index funds and certain Vanguard funds, because they have a special patent for tax efficiency.
Even S&P500 index funds (except for Vanguard's) is less tax efficient than a S&P500 ETF such as IVV or VOO.
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Re: I Just Don’t Understand ETFs

Post by sycamore »

The Boglehead wiki article ETFs vs mutual funds compares the two.
Regal 56 wrote: Sat Nov 20, 2021 12:06 am What am I missing?
OP: after reading the responses in this thread and the wiki article, do you have an answer to your question?
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Re: I Just Don’t Understand ETFs

Post by livesoft »

Regal 56 wrote: Sat Nov 20, 2021 12:06 am Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. ....

[...]
What am I missing?
There aren't any significant differences between passively-managed index mutual funds and passively-managed index ETFs. So you are not missing anything there. Many mutual funds are actively-managed though.
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Re: I Just Don’t Understand ETFs

Post by Chip »

Booogle wrote: Sat Nov 20, 2021 6:18 am This is where you get things wrong.

The only tax efficient mutual funds are S&P 500 index funds and certain Vanguard funds, because they have a special patent for tax efficiency.
Absolute statements are always wrong. :P

In 2019 FSKAX (Fidelity's US total market fund) was more tax efficient than VTI or VTSAX for all taxpayers except those with state income tax rates higher than 8%. That doesn't mean it was in the past or will be in the future, but it was for that particular year.

Tax efficiency of broad-based equity index funds should probably be low on the list of investing issues to worry about.
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Re: I Just Don’t Understand ETFs

Post by pahkcah »

Regal 56 wrote: Sat Nov 20, 2021 12:06 am ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.)
When comparing apples to apples, yes, they can be cheaper. VTSAX ER = 0.04%, VTI ER = 0.03% (not much difference, but a difference)

A few years ago, an investor could purchase the Vanguard Total Stock Market Fund in three flavors: (1) a non-admiral shares mutual fund; (2) an admiral shares mutual fund; or (3) an ETF. Both the admiral shares mutual fund and the ETF had an ER that was lower by 0.05% at that time. The company I was working for had a 401k that offered only the non-admiral shares mutual fund and the ETF, so I invested in the ETF to obtain the lower ER. I did not select the ETF with any intention of day trading it, just wanted to pay less in management fees.
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Re: I Just Don’t Understand ETFs

Post by nisiprius »

In my arrogant opinion:

The difference is exactly what the names say.

They are both examples of "investment companies," specialized corporations that make money by making investments. An exchange-traded fund is traded on an exchange just like a stock and can be bought or sold minute by minute at the prices prevailing at that moment. A mutual fund is only priced once a day, and you don't buy or sell it on an exchange, you buy or sell directly from the mutual fund company.

There's no meaningful difference for investors who follow the the Bogleheads investment philosophy.

It's like the difference between Coke in bottles and Coke in cans.

If you have ever traded individual stocks, you will probably prefer ETFs. If you haven't, you will probably prefer mutual funds.

The choice is usually dictated by other things than intrinsic goodness. If you are in a 401(k) and it has mutual funds and not ETFs, you will use a mutual fund. If you want to invest in a Vanguard product at a non-Vanguard brokerage that charges $75 for a Vanguard mutual fund and $0 for a Vanguard ETF you will prefer the ETF. If you want some very narrow focussed splinter of the market, like "companies facilitating working form home," and there's an ETF for it but no mutual fund, you'll use the ETF. If you are an institutional investor and you want to take short positions, or trade options on a group of stocks, you can do that with an ETF and not with a mutual fund, so you will "prefer" the ETF.

Rhetoric suggesting one is hugely better than the other or that you would be making a terrible mistake either way is overwrought.

In any comparisons, be sure that they involve the actual kinds of funds and ETFs you personally want to invest in. Don't trust unspecific, blanket, number-free claims of the form "ETFs are" or "Mutual funds are."

As of the last Investment Company Institute yearbook, investors currently have four times as much money invested in mutual funds as they do in ETFs. The amount invested in ETFs is growing faster. Just drawing a straight line by eye suggests that by the 2030s there may be as much invested in ETFs as there is in mutual funds.

Image

Mutual funds as we know them had been around for about fifty years when the first ETF was launched. ETFs have been around for not quite thirty. Perhaps in a couple of decades there will be something new to challenge both mutual funds and ETFs.

alex_686 says that ETFs are a superior structure for the provider than mutual funds and I believe it. Because I think that ETFs transfer a (microscopic) amount of risk from the provider to the investor.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

Booogle wrote: Sat Nov 20, 2021 6:18 am
Regal 56 wrote: Sat Nov 20, 2021 12:06 am ETFs are purported as tax efficient. But so can mutual funds.

This is where you get things wrong.

The only tax efficient mutual funds are S&P 500 index funds and certain Vanguard funds, because they have a special patent for tax efficiency.
Tax-managed mutual funds can be very tax-efficient without using of Vanguard's dual share class patent. VTCLX and VTMSX are examples. Total market index mutual funds without ETF share classes are somewhat better at managing capital gains than S&P 500 index mutual funds without ETF share classes because index changes are not a significant driver of realizing capital gains for US total market index funds.

S&P500 funds are slightly better at avoiding unqualified dividends than US total market index funds because a majority of REIT market cap lives outside the S&P 500. The largest US REIT, American Tower (that owns cell phone and other communications towers), and Simon Property Group are examples of REITs that are in the S&P500, so there are some that are in that index.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

nisiprius wrote: alex_686 says that ETFs are a superior structure for the provider than mutual funds and I believe it. Because I think that ETFs transfer a (microscopic) amount of risk from the provider to the investor.
ETFs tend to increase volatility slightly because of variance of market value from NAV. But ETFs reduce the risk of an individual paying more transaction cost because other participants in the fund do more trading. If an ETF share is a share class of a fund with mutual fund shares, it seems that the transaction costs would still have to be shared though, or it would be a source of deviation of market price and NAV that active participants would harvest through arbitrage.
Last edited by Northern Flicker on Sun Nov 21, 2021 1:55 pm, edited 4 times in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

gtrplayer wrote: I’ve never understood why ETFs are often cheaper than similar mutual funds.
Keeping track of all of the cash flows, keeping track of how many shares each investor owns, managing the flow of dividends to the correct accounts, generating 1099's are examples of things that are offloaded to brokers with ETFs.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: I Just Don’t Understand ETFs

Post by iceport »

exodusNH wrote: Sat Nov 20, 2021 2:36 am
gtrplayer wrote: Sat Nov 20, 2021 2:09 am
Regal 56 wrote: Sat Nov 20, 2021 12:06 am Try as I might, I don’t understand what an ETF is. Or rather, I don’t see how it’s different from a mutual fund. The only real difference is that it can be bought or sold on a stock exchange, the same as a regular stock. But that’s a distinction without a difference. Is it crucially significant that an ETF can be bought or sold between 9:30-4:00, and a mutual fund can’t? Perhaps that’s crucial to those who want to wheel and deal on an hourly basis. But to a “buy and hold” investor, who cares?

ETFs are touted as cheaper. Well, some are and some aren’t. (I just scanned through a list of ETFs with expense ratios well north of 1.00%.) ETFs supposedly have low turnover. But so can mutual funds. ETFs are purported as tax efficient. But so can mutual funds. Really, other than being exchange tradable, what’s the big diff?

• Mutual funds are a basket of investments. So are ETFs.
• Mutual funds mitigate risk by spreading it over many investments. So do ETFs.
• Mutual funds have expense ratios. So do ETFs.
• Mutual funds are constructed by fund managers. So are ETFs.

Perhaps I’m daft. But I’m not trolling. I truly don’t understand how an ETF is much different from a mutual fund. In fact, I don’t understand why ETFs exist at all. As far as I can tell, it’s a mutual fund for people who can’t tolerate waiting until 4:00. Other than that, an ETF is just a particular type of mutual fund.

What am I missing?
I’ve never understood why ETFs are often cheaper than similar mutual funds. Describing an ETF, it sounds more difficult to manage but it must be somewhat simpler for some reason. Why are ETFs often cheaper? All of my investments outside of 401k are in ETFs, largely for this reason even though I don’t understand it.
They are cheaper to run by the mutual fund company because they aren't involved with managing the buying and selling of shares.

There are companies called "market makers" that are monitoring the purchase and sale activity on a fund. When they see that demand exceeds supply, they go to Vanguard with a bundle of stocks. Vanguard takes the stocks and hands the market maker X ETF shares. The market maker then sells the shares. The reverse happens when supply exceeds demand.

The market maker earns a tiny profit when they engage in this activity. When demand is high, the ETF price will be above the intrinsic value of the underlying stocks. They're handing over a set of stocks that they payed $x.00 for and selling them as an ETF that sells for $x.02.
This is a major point of difference between the two different types of funds. It doesn't typically matter much to individual investors (because the cost differences are typically very small), but the ramifications for fund managers are huge.

There's a lengthy transcript available for the Bogleheads on Investing — Episode 037 podcast, with Gerry O’Reilly, manager of the Vanguard Total Stock Market Index Fund and ETF, and Rich Powers, Head of ETF and Index Product Management at Vanguard. The entire discussion is a fascinating and relatively detailed look into the logistics of managing index funds and ETFs. For anyone really curious, this transcript is a great introduction into the differences between how traditional funds and ETFs are managed.


For me, knowing how much more effort it takes to run a traditional index mutual fund compared to an equivalent ETF makes me all the more glad to pay any negligible cost premium to hold traditional funds. I find them far easier and more convenient to trade than ETFs.

But, hey, all those ETF buyers are serving their purpose with Vanguard funds, so I shouldn't be discouraging anyone from going that route if they don't mind the hassles of ETF trading.
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

gtrplayer wrote: Sat Nov 20, 2021 2:09 am I’ve never understood why ETFs are often cheaper than similar mutual funds. Describing an ETF, it sounds more difficult to manage but it must be somewhat simpler for some reason. Why are ETFs often cheaper? All of my investments outside of 401k are in ETFs, largely for this reason even though I don’t understand it.
Having worked in operations it is hard to list all the ways thar ETFs are cheaper to run. ETFs work exactly like stocks. One size fits all. Every mutual fund has to be networked separately, each with it own set of quirks. Breakpoints of fees. Who calculates taxes. Who the record keeper is. The rules on purchase size and timing. Etc. None of the issues is particularly large, but put together it is a mound.

Plus mutual fund shareholders have to pay trading costs. APs pay ETF’s trading costs.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

With Vanguard dual share class funds, we can see the actual effect on return, volatility, and max drawdown while holding most differences other than ETF vs mutual fund constant. (Some differences with ETFs may not be differences for Vanguard ETFs due to the dual share class structure).

A trend for equity index funds is that the more liquid the underlying securities, the more benefit flowed to the ETF holder, but there are exceptions to that below.

Total (US) Stock Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Total International Stock Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Developed Markets Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Emerging Markets Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Vanguard (CRSP) Small Cap Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

(CRSP) Large-Cap Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

(CRSP) Small-Cap Value Index Fund:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Regal 56
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Re: I Just Don’t Understand ETFs

Post by Regal 56 »

First, my thanks to all who've posted replies.

Second, my apologies for not being more active in this thread. Saturday is a work day for me, and I also had to tinker with new equipment for my job. So I’m just now checking back in.

Please bear with me as I try to digest all this. The stock market is an enigma to me. I have a modest Roth IRA portfolio of mutual funds into which I dump money each year. Buy and hold all the way. I’ve never bought an individual stock. I wouldn’t know a bid/ask spread from a bedspread. And that, perhaps, is why ETFs are puzzling to me. To a reformed day trader, ETFs are probably a comforting reminder of wild market playing. To me, ETFs are an alien breed. Their purported advantages mean nothing to me, since they have nothing to do with how I invest.

Indeed, since I teach for a living, I know how hard it is for people to come up with intelligible questions in a subject about which they know nothing. As a teacher, I often must translate tongue-tied fumbling as students struggle to articulate their confusion. They’re not stupid. They simply don’t know what they don’t know. And that’s the boat I’m in now.

So please indulge me my next question. Generally speaking, are ETFs simply put together at their inception and then released into the world, with no further ongoing action by fund managers? Or are they managed over time, in a way similar to mutual funds? Based on the posts I’ve read here, I understand that mutual funds and ETFs are different animals in terms of record keeping and compliance issues. But are they at least similar in that their underlying securities are managed over time?

If this question seems odd, it reflects a significant part of my confusion regarding ETFs. I understand mutual funds. I understand that traditional fund managers add winners and trim losers. (Or try to.) I also understand that index fund managers keep the fund on track with its index. So I understand that a mutual fund is ongoing organism. It has a team of managers and researchers who keep it profitable for shareholders. (Or try to.)

ETFs, it appears to me, don’t. Although I can rattle off names of mutual fund managers, I can’t name a single ETF manager. Is that because managing an ETF doesn’t extend past its making? Trying to wrap my head around this, it’s my sense that each ETF share is a one-off thing. If you bought, say, a share of VTI in 2016, it might not be exactly the same as a share of VTI purchased today. Even though both are VTI shares, the 2016 share has all its original securities. (Minus any that failed between 2016 and today.) This is different from a mutual fund, in that shares you bought in 2016 were continuously managed. So the mutual fund share bought in 2016 was fluid between then and today, whereas the 2016 ETF is today what it was then.

Do I have it right, or am I way off?
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Re: I Just Don’t Understand ETFs

Post by LTCM »

The boglehead podcast on the VTI mutual fund/ETF gets into this. From their perspective not much different but it also gets into why they’re cheaper.

https://rickferri.com/podcast/episode-3 ... ick-ferri/
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Re: I Just Don’t Understand ETFs

Post by Ocean77 »

Regal 56 wrote: Sat Nov 20, 2021 9:37 pm So please indulge me my next question. Generally speaking, are ETFs simply put together at their inception and then released into the world, with no further ongoing action by fund managers? Or are they managed over time, in a way similar to mutual funds? Based on the posts I’ve read here, I understand that mutual funds and ETFs are different animals in terms of record keeping and compliance issues. But are they at least similar in that their underlying securities are managed over time?

If this question seems odd, it reflects a significant part of my confusion regarding ETFs. I understand mutual funds. I understand that traditional fund managers add winners and trim losers. (Or try to.) I also understand that index fund managers keep the fund on track with its index. So I understand that a mutual fund is ongoing organism. It has a team of managers and researchers who keep it profitable for shareholders. (Or try to.)

ETFs, it appears to me, don’t. Although I can rattle off names of mutual fund managers, I can’t name a single ETF manager. Is that because managing an ETF doesn’t extend past its making? Trying to wrap my head around this, it’s my sense that each ETF share is a one-off thing. If you bought, say, a share of VTI in 2016, it might not be exactly the same as a share of VTI purchased today. Even though both are VTI shares, the 2016 share has all its original securities. (Minus any that failed between 2016 and today.) This is different from a mutual fund, in that shares you bought in 2016 were continuously managed. So the mutual fund share bought in 2016 was fluid between then and today, whereas the 2016 ETF is today what it was then.

Do I have it right, or am I way off?
I'm afraid you don't have it right, yet. The best way to understand it is to start from a mutual fund, as you're familiar with that. To buy or sell shares, customers have to issue an order to the mutual fund company (either directly or through their broker). The mutual fund company sets the daily price at which to transact shares, based on the market price of the securities it holds. So far so good.

An ETF is the same thing, except the shares can be traded on the open market between investors. Imagine you buy some shares in a regular mutual fund, and then go to your neighbor and sell some of those to him. That's basically what it is. As you know there are passive and actively managed mutual funds, and it is the same with ETFs. It just so happens that the majority of ETF are passively managed, but there are active ones as well. In both cases (active or passive), ongoing management is needed. That applies to both mutual funds and ETFs. Just the type of management is different. With passive funds and ETFs, management simply means to keep the securities aligned with the index it tracks.

There is one critical aspect of ETFs that is required to make it work: the pricing of the shares. Remember the example of you trading shares of mutual funds with your neighbor. The problem here would be, at what price should you sell or buy those shares. As the mutual fund company is not involved in this trade, it does not dictate the price. When ETF were invented, somebody came up with a clever scheme how to solve this: First of all, ETF shares trade like stocks, meaning the price of it is set by the market maker at the stock exchange, based on supply and demand. Just like it happens with stock prices. Now the ETF share price could deviate from what it "should be" based on the securities it holds. To get the ETF price aligned back with its underlying holdings, ETFs allow investment firms to perform an arbitrage: If the ETF price is higher than the securities it holds, a firm can purchase the underlying securities on the open market, package them into a basket, and sell these as ETF shares. They make a small profit along the way, but this action brings the ETF price back in line with the holdings value. The opposite occurs when the ETF price falls below the value of the securities it holds: And investment firm can then buy such ETF shares, trade them for the stock holdings inside the ETF, sell those holdings on the open market, and again make a small profit (and bringing the ETF price back up to reflect the securities it holds).

If this last aspect is too complicated to understand, you can simply ignore it. The take away is simply that instead of the mutual fund company, the market sets the ETF share price at any given moment to be very close to "correct".

Hope this helps!
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

Regal 56 wrote: Sat Nov 20, 2021 9:37 pm So please indulge me my next question. Generally speaking, are ETFs simply put together at their inception and then released into the world, with no further ongoing action by fund managers? Or are they managed over time, in a way similar to mutual funds? Based on the posts I’ve read here, I understand that mutual funds and ETFs are different animals in terms of record keeping and compliance issues. But are they at least similar in that their underlying securities are managed over time?
Mutual funds and ETFs are almost exactly identical in how they operate. Boggleheads like to make mountains out of mole hills. When I was in mutual fund accounting deep in the weeds the molehills were important. Mostly they are not important to retail investors.

This is particularly true on the portfolio side. They are both covered by Act 40 and Act 44 - the major bits of laws that covers investment funds in 1940 and 1944.

You mention VTI. That is just one shareholder class in a joint portfolio which has 2 mutual fund classes. Just one large portfolio.

Things are a little different on the client facing side. How they are bought and how are they held. You really have to go into the weeds before you even need to worry about tge bid/ask spread.

For a teacher analogy, it line trying to scare middle schoolers with the complexities of non-linear algebra - something that few will need to untangle in their lives.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

Regal 56 wrote: Please bear with me as I try to digest all this. The stock market is an enigma to me. I have a modest Roth IRA portfolio of mutual funds into which I dump money each year. Buy and hold all the way. I’ve never bought an individual stock. I wouldn’t know a bid/ask spread from a bedspread. And that, perhaps, is why ETFs are puzzling to me. To a reformed day trader, ETFs are probably a comforting reminder of wild market playing. To me, ETFs are an alien breed. Their purported advantages mean nothing to me, since they have nothing to do with how I invest.
In an IRA it really does not matter whether you use a mutual fund or ETF. Operational tax efficiency is irrelevant. And it is portable: you can move it to a different provider by liquidating to cash, doing a rollover, and reinvesting at the new provider.

Whether you use mutual funds or ETFs (all else equal) is probably the least consequential portfolio decision you will make for assets in an IRA.

The design of your asset allocation, choosing low cost funds that are effective in harvesting the return of each asset class in your asset allocation, and the decision to contribute to a traditional or Roth IRA are the important, impactful decisions.

On the subject of traditional vs Roth, one concern is that your portfolio seems to be 100% in Roth. This is rarely optimal. Currently, the standard tax deduction is $25,100 for a married couple filing jointly, and half of that for a single person. If you just have a Roth retirement account, it is likely that a significant portion of your withdrawals will be in the zero bracket, so it would have been unnecessary to have paid the tax on the incone being contributed.

Without knowing more about your tax and financial, it is not possible to be specific, but many retirement savers will not need more than about 1/3 of their portfolio in a Roth account, with 2/3 or so in a traditional retirement account.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: I Just Don’t Understand ETFs

Post by alpine_boglehead »

Here in Europe, ETFs are what brought index investing to retail investors.

There are hardly any index mutual funds, but lots and lots of actively managed ones, still peddled by banks and brokers, most still with ridiculous fees and, believe it or not, front loads. Conversely, lots of index ETFs, but hardly any actively managed ones (just the usual sector/country ETFs that are mostly irrelevant for long term investing).
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Re: I Just Don’t Understand ETFs

Post by rascott »

Mutual funds are an antiquated financial product. I see little reason for them to exist for index investors
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

rascott wrote: Sun Nov 21, 2021 2:18 am Mutual funds are an antiquated financial product. I see little reason for them to exist for index investors
401K's?
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Re: I Just Don’t Understand ETFs

Post by UpperNwGuy »

Regal 56 wrote: Sat Nov 20, 2021 9:37 pm it’s my sense that each ETF share is a one-off thing. If you bought, say, a share of VTI in 2016, it might not be exactly the same as a share of VTI purchased today. Even though both are VTI shares, the 2016 share has all its original securities. (Minus any that failed between 2016 and today.) This is different from a mutual fund, in that shares you bought in 2016 were continuously managed. So the mutual fund share bought in 2016 was fluid between then and today, whereas the 2016 ETF is today what it was then.

Do I have it right, or am I way off?
You are way off. All shares of an ETF hold the same underlying securities whether they were purchased this week or last year. An ETF, like a mutual fund, has a manager who manages it.
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Re: I Just Don’t Understand ETFs

Post by reln »

Northern Flicker wrote: Sun Nov 21, 2021 2:55 am
rascott wrote: Sun Nov 21, 2021 2:18 am Mutual funds are an antiquated financial product. I see little reason for them to exist for index investors
401K's?
401ks could have (lower cost) ETFs instead of mutual funds.
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Re: I Just Don’t Understand ETFs

Post by edge »

401ks are unlikely to broadly use highly tradeable instruments. CITs are the more likely destination, not ETFs.
reln wrote: Sun Nov 21, 2021 6:35 am
Northern Flicker wrote: Sun Nov 21, 2021 2:55 am
rascott wrote: Sun Nov 21, 2021 2:18 am Mutual funds are an antiquated financial product. I see little reason for them to exist for index investors
401K's?
401ks could have (lower cost) ETFs instead of mutual funds.
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Re: I Just Don’t Understand ETFs

Post by sycamore »

One example of active ETFs where a manager makes ongoing portfolio adjustments is Vanguard's own factor funds. https://investor.vanguard.com/etf/factor-funds "Advisor uses a rules-based quantitative model to evaluate U.S. common stocks." is one sentence Vanguard places on each fund's Overview page, like https://investor.vanguard.com/etf/profile/overview/vfva. The prospectus of those funds specifically calls out "manager risk."

There are plenty of other active ETFs, many of them focusing on factors like small, value, momentum, etc.

So some ETFs certainly can be an ongoing organism.
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Re: I Just Don’t Understand ETFs

Post by HanSolo »

nisiprius wrote: Sat Nov 20, 2021 10:06 am It's like the difference between Coke in bottles and Coke in cans.
This basically sums it up for me.
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Re: I Just Don’t Understand ETFs

Post by 40 Years' Gatherin's »

Northern Flicker wrote: Sat Nov 20, 2021 12:24 am If you invest in a mutual fund, you are exposed to the behavior of other investors in the fund. You pay your share of the transaction cost for the entire fund. The fund also may need to sell shares to process withdrawals. Even if you don't withdraw, you pay your share of this cost. Buy-and-hold investors subsidize active traders. Moreover, if there are investors actively trying to time the market using a fund, it can bleed cash away from other investors in the fund if the market timer gets lucky.

Mutual funds have frequent trading restrictions, and a very large fund will absorb transaction costs adequately as a sufficiently tiny percentage of the fund. But these are real issues.

ETFs shield the investor because ETF shares are bought and sold from other investors. There are no withdrawals to process for trading. Frequent traders can trade shares as often as they want without harming but-and-hold investors, at least up to a point. ETFs do allow investors to move large sums in and out of a market without a lot of friction, which can increase market volatility, but it still does not specifically effect other investors in the fund directly or your decision of ehich to hold-- it is a market effect.

ETFs have enabled a big increase in variety of fund products. The fund company focuses on managing the fund. They do not have to be the record-keeper for a large group of retail investors, track investor accounts, issue 1099's etc.
Over the last 20 years there is ZERO difference in returns & standard deviation between VTSAX and VTI.

VTSAX & Chill, folks.
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Re: I Just Don’t Understand ETFs

Post by Ed 2 »

I invest in both Index ETF’s and Index funds but I like regular Index funds more because they allow me to invest passively by auto invest, ETF’s don’t. This is the biggest difference I can show. Ability of trading during the day is not an issue for truly long term passive index investor in my opinion. By buying via auto invest Index funds you don’t invest emotionally and reduce the risk of making emotional mistake by selling or buying based on market news.
P.s. This is my post # 2000 !!!!
Last edited by Ed 2 on Sun Nov 21, 2021 9:30 am, edited 1 time in total.
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Re: I Just Don’t Understand ETFs

Post by Da5id »

000 wrote: Sat Nov 20, 2021 12:53 am The biggest factor for me is portability. Trying to use mutual funds on other brokerage platforms is expensive and annoying, yet my desired funds are not available from any one sponsor.
Same for me. I converted mostly for the portability factor. Should I choose to leave Vanguard as a brokerage, it will be pretty painless to transfer all my ETFs to any other brokerage and not have to deal with fees to buy/sell mutual funds at that new brokerage. That is particularly important in taxable accounts. In other accounts, converting non-portable mutual funds to other non-portable mutual funds is not a real factor

The small fee savings is a bonus, but a very very small one.
Last edited by Da5id on Sun Nov 21, 2021 9:46 am, edited 2 times in total.
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

40 Years' Gatherin's wrote: Sun Nov 21, 2021 9:23 am Over the last 20 years there is ZERO difference in returns & standard deviation between VTSAX and VTI.
Because they are just different share classes of the sane fund. They are conjoined twins bearing with a single heart.

Any benefit or disadvantage caused by one share class must be carried by all shareholders.
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Re: I Just Don’t Understand ETFs

Post by 40 Years' Gatherin's »

alex_686 wrote: Sun Nov 21, 2021 9:44 am
40 Years' Gatherin's wrote: Sun Nov 21, 2021 9:23 am Over the last 20 years there is ZERO difference in returns & standard deviation between VTSAX and VTI.
Because they are just different share classes of the sane fund. They are conjoined twins bearing with a single heart.

Any benefit or disadvantage caused by one share class must be carried by all shareholders.
I see. With all that said, I'm invested in VTSAX in my taxable account and plan to stay that way for a long time.
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Re: I Just Don’t Understand ETFs

Post by Regal 56 »

Before going on, I’d like to use use two posts here to make a point:
LTCM wrote:The boglehead podcast on the VTI mutual fund/ETF gets into this. From their perspective not much different but it also gets into why they’re cheaper.

https://rickferri.com/podcast/episode-3 ... ick-ferri/
The portion of this interview relevant to our discussion begins at the 21:05 mark. I didn’t understand most of it. For me, the interview might as well be in Greek.

To be clear, I don’t fault the interview. It’s experts talking to experts, and doubtless they understand each other. But it must be asked: who is this interview aimed at? If it’s aimed at novices, then it entirely misses the mark. It’s filled with jargon. It seldom addresses anything relevant to what a novice investor does. Rather, it talks to investing aficionados—those who already know a lot about investing. Again, that’s not a flaw. The interview is what it is. But as an explanation to novices, it’s of no value.

Whenever I search for explanations of something unfamiliar to me, it’s striking how opaque most explanations are. Experts seldom seldom put themselves in the shoes of non-experts. The result is that they’re good at explaining something to those who already understand it.

In contrast, consider this post:
Ocean77 wrote:The best way to understand it is to start from a mutual fund, as you're familiar with that. To buy or sell shares, customers have to issue an order to the mutual fund company (either directly or through their broker). The mutual fund company sets the daily price at which to transact shares, based on the market price of the securities it holds. So far so good.

An ETF is the same thing, except the shares can be traded on the open market between investors. Imagine you buy some shares in a regular mutual fund, and then go to your neighbor and sell some of those to him. That's basically what it is. As you know there are passive and actively managed mutual funds, and it is the same with ETFs. It just so happens that the majority of ETF are passively managed, but there are active ones as well. In both cases (active or passive), ongoing management is needed. That applies to both mutual funds and ETFs. Just the type of management is different. With passive funds and ETFs, management simply means to keep the securities aligned with the index it tracks.
This is useful to me, and I’ll bet it’s useful to other novices. It uses plain language and familiar analogies.

Please understand, I’m a novice trying to understand something. And I doubt I’m alone in this. In fact, the catalyst for my interest is a friend who uses a robo-advisor that has her invested in (among other things) ETFs. Like me, she doesn’t know exactly what an ETF is. Our confusion likely is more common than not.

That said, I’d like to step back and digest what’s been said here. I’m still confused. But it’s hard to explain exactly what I’m confused about. The result is that I’m wasting everyone’s time by being unclear. I don’t like doing that. So please be patient while I try to pin down what eludes me. Maybe then I’ll be able to ask useful questions.
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Re: I Just Don’t Understand ETFs

Post by etfan »

Does the amount of money I have invested in a certain ETF directly correspond to an equivalent portion of the underlying funds?

For example, if I own $10,000 of VTI, does that mean I own (indirectly) a percentage of APPL, TSLA, GOOG, etc, precisely equivalent to those companies' "weight" in the overall market times $10,000?

Could some sort of event take place, other than the regular market ups and downs, that would diminish my investment? For example, what if, for some reason, investors collectively abandon the VTI ETF? Would that cause its value to crash even though the underlying stocks are unaffected by the exodus?
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Re: I Just Don’t Understand ETFs

Post by Oicuryy »

The difference between open end funds (aka "mutual funds") and exchange traded funds is the way they distribute shares.

Open end funds (OEFs) issue and redeem shares directly to shareholders for cash.

Exchange traded funds (ETFs) issue and redeem large blocks of shares to dealers in kind for a basket of the securities the fund holds. The dealers then sell or buy the ETF shares to/from shareholders on a stock exchange.

See What Is The Creation/Redemption Mechanism?

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Re: I Just Don’t Understand ETFs

Post by alex_686 »

etfan wrote: Sun Nov 21, 2021 11:18 am Does the amount of money I have invested in a certain ETF directly correspond to an equivalent portion of the underlying funds?

For example, if I own $10,000 of VTI, does that mean I own (indirectly) a percentage of APPL, TSLA, GOOG, etc, precisely equivalent to those companies' "weight" in the overall market times $10,000?

Could some sort of event take place, other than the regular market ups and downs, that would diminish my investment? For example, what if, for some reason, investors collectively abandon the VTI ETF? Would that cause its value to crash even though the underlying stocks are unaffected by the exodus?
Basically yes. In exactly the same way a mutual fund works.

There are edge cases where the fund's price can get disconnected from economic reality. This is gets nuanced fast, however ETFs tend to be more robust. ETFs had better pricing than mutual funds when the bond market liquidity froze in 2008 and 2020.

For context I used to work in mutual fund accounting and have struck a fund's NAV.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: I Just Don’t Understand ETFs

Post by BitTooAggressive »

whodidntante wrote: Sat Nov 20, 2021 12:33 am ETFs are more structurally efficient than mutual funds. They don't need to carry much cash to meet redemptions, and they don't normally need to trade at all to accept investments or meet redemptions. Trading costs are normally incurred by those doing the trading. They can also shed appreciated shares via heartbeat trades or through the redemption process, allowed for improved tax deferral. Also, they are portable, and can be purchased and held at multiple brokers. They are generally marginable upon settlement. It's more difficult to imagine why mutual funds would be preferred in light of these advantages for ETFs.
Because you are guaranteed to get NAV for a mutual fund. The spread during a volatile market with a less liquid ETF could be bad. Can’t imagine a problem with something like Vanguard total stock market but a smaller ETF could be trouble.
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Re: I Just Don’t Understand ETFs

Post by fwellimort »

For all 'practical' purposes, ETFs and equivalent mutual funds are the one and the same.

ETFs are less costly to manage than mutual funds. Hence, ETFs are very portable.
You can move your Vanguard ETFs tomorrow to basically any brokerage without having to worry about fees (or future fees if you plan on purchasing the product on another brokerage).
This isn't necessarily the case with mutual funds and this issue might be even more pronounced over time.

Portability can be a huge benefit to some people. I for one was able to open brokerage account without any issues and transfer ETFs easily to get signing bonuses.
Mutual funds are sometimes really difficult to move. Try moving Schwab Total Market Index Fund (SWTSX) in certain brokerages like M1, Robinhood, etc. Pretty much impossible. And what if one day you want to use M1 Finance brokerage because it offers some features you want to take advantage of.
Well, you are 'locked out' unless you realize the gains and pay taxes on a taxable account with the mutual fund. With an ETF equivalent, you never have to worry about that scenario.

Also, the trend seems to be institutions replacing mutual funds for ETFs and trying to charge fees to manage mutual funds from other firms.
At the institutional side, ETFs and mutual funds do the same thing for the investor but mutual funds are just more expensive to run.
Why take the risk?

ETFs are more 'future proof' and makes things less of a hassle when you need to switch brokerages.
For instance, if you have $100k+ in equity at BoA (through Merrill Edge), you can get a 5.25% category cashback credit card.
With ETFs, you can just switch without worrying tomorrow. But with mutual funds, the switching can become quite a pain (have to worry about potential fees, fee structure of mutual funds in the future, etc.).

M1 Finance Plus for instance lets you borrow your portfolio at 2% rate. Unlike Robinhood or IBKR Pro, you can actually borrow your portfolio for purchases outside stocks/bonds/etc. And its credit card does really big cashbacks (10% at Netflix/Tesla/Spotify, etc. and 5% at Chipotle/Starbucks/etc.).
All that could be much easier in the near future if you plan to switch brokerages with ETFs. And it's also easier to switch back with ETFs if you dislike the new brokerage.

Plus, look at the state of major brokerages today.
Schwab and Fidelity consistently has better customer service over Vanguard and even Schwab/Fidelity customer service is quite lackluster.
Easier to switch around with ETFs than with mutual funds. Vanguard customer service for me is 1~2 hour wait time while Fidelity is 5~15 minute wait time. And sometimes it's nice to have the customer service especially if you have checking/credit cards/etc. with the firm.
One day maybe Fidelity will have really lackluster customer service in chase for 'lower fees'; maybe a new brokerage shows up in which I can borrow my assets at 0% and have a 15% cashback credit card and a free tax loss harvesting or whatever. ETFs make this 'future' more convenient to take advantage of over mutual funds.

For personal use:
1. Fidelity as my main brokerage purchasing ITOT (US) and IXUS (International)
2. Remaining pennies after fractional share purchases at Fidelity goes to FZROX
3. $100k+ at Merrill Edge with SCHB (result of tax loss harvesting from ITOT/VTI last year) to get four 5.25% cashback category credit cards
I use Fidelity CMA for checking account, Turbo Tax Premier for free from Fidelity for filing taxes, 5.25% BoA cashback category cards for purchases, Fidelity retirement calculator to keep check, Fidelity/BoA/Wealthfront to keep check of my total assets throughout all brokerages, etc.
And Fidelity for all customer service related stuffs. I dropped Vanguard quite quickly after realizing on some days, I might need to wait over 2 hours to do a 10 minute call. No thanks.
All that made possible because moving ETFs around brokerages are so easy (application takes like 2 minutes and you just have to wait a week afterwards).
Last edited by fwellimort on Sun Nov 21, 2021 1:09 pm, edited 3 times in total.
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Re: I Just Don’t Understand ETFs

Post by livesoft »

BitTooAggressive wrote: Sun Nov 21, 2021 12:43 pmBecause you are guaranteed to get NAV for a mutual fund. The spread during a volatile market with a less liquid ETF could be bad. Can’t imagine a problem with something like Vanguard total stock market but a smaller ETF could be trouble.
The spread during a volatile market with a less liquid ETF could be great! There are always 2 parties to such a transaction: a buyer and a seller. If it is bad for the seller, then it has to be good for the buyer and vice versa.
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alex_686
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

BitTooAggressive wrote: Sun Nov 21, 2021 12:43 pm Because you are guaranteed to get NAV for a mutual fund. The spread during a volatile market with a less liquid ETF could be bad. Can’t imagine a problem with something like Vanguard total stock market but a smaller ETF could be trouble.
Why is it a good thing that you are guaranteed to get the NAV?

The NAV is just a accountant's estimate of the fund's value. What if the estimates are off, like they were for Vanguard's bond funds (and all of the other bond funds as well) during 2008 and 2020?

Look, things get nuanced fast. Pricing for mutual funds and ETFs are both high quality but are different. The both can fail during certain situations - like a low liquidity ETF holding illiquid assets, or other times when a mutual fund holds illiquid assets.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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