I Just Don’t Understand ETFs

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lazynovice
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Re: I Just Don’t Understand ETFs

Post by lazynovice »

HanSolo wrote: Thu Nov 25, 2021 6:34 pm
lazynovice wrote: Thu Nov 25, 2021 5:50 pm
HanSolo wrote: Thu Nov 25, 2021 4:56 pm It seems there are no points of disagreement in the discussion.
You got it. Fail to delivers are taken care of by the market makers, neither party is “out of the market” and therefore not a reason to avoid ETFs.
Nobody said to avoid ETFs. On that point, there's no disagreement.

Apparently, the only point of disagreement is that some people use unsettled funds for trading and some people avoid doing that. My opinion is that neither behavior is "wrong". Your opinion is that the latter is "wrong".

If you want to think that, that's up to you. I like my opinion, and you like yours. That's OK.
No, actually that isn’t the point of the disagreement. The disagreement is about the claim that if one ETF trade fails to deliver, you will be out of the market. The other poster who is making that argument posted an article that states the opposite. I’m done debating it, because you have both said it isn’t a reason to avoid ETFs and the OP can read the linked article himself and make his own decision.
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Re: I Just Don’t Understand ETFs

Post by HanSolo »

lazynovice wrote: Thu Nov 25, 2021 6:48 pm
HanSolo wrote: Thu Nov 25, 2021 6:34 pm Nobody said to avoid ETFs. On that point, there's no disagreement.

Apparently, the only point of disagreement is that some people use unsettled funds for trading and some people avoid doing that. My opinion is that neither behavior is "wrong". Your opinion is that the latter is "wrong".

If you want to think that, that's up to you. I like my opinion, and you like yours. That's OK.
No, actually that isn’t the point of the disagreement. The disagreement is about the claim that if one ETF trade fails to deliver, you will be out of the market.
Nobody said that. So maybe there was no disagreement to begin with.

I also buy ETFs (mostly mutual funds, but also ETFs when there's no corresponding mutual fund). And I also don't use unsettled funds for trading. And I also don't care if others do what I do or not. If others do something different from what I do, that's OK with me.
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Re: I Just Don’t Understand ETFs

Post by lazynovice »

HanSolo wrote: Thu Nov 25, 2021 6:50 pm
lazynovice wrote: Thu Nov 25, 2021 6:48 pm
HanSolo wrote: Thu Nov 25, 2021 6:34 pm Nobody said to avoid ETFs. On that point, there's no disagreement.

Apparently, the only point of disagreement is that some people use unsettled funds for trading and some people avoid doing that. My opinion is that neither behavior is "wrong". Your opinion is that the latter is "wrong".

If you want to think that, that's up to you. I like my opinion, and you like yours. That's OK.
No, actually that isn’t the point of the disagreement. The disagreement is about the claim that if one ETF trade fails to deliver, you will be out of the market.
Nobody said that. So maybe there was no disagreement to begin with.

I also buy ETFs (mostly mutual funds, but also ETFs when there's no corresponding mutual fund). And I also don't use unsettled funds for trading. And I also don't care if others do what I do or not.
Northern Flicker wrote: Wed Nov 24, 2021 3:43 pm
lazynovice wrote: T+2 is the industry requirement. It isn’t a measure of the broker’s certainty. It used to be T+3.
My understanding is that the change to T+2 was to reduce the frequency of failed trades-- narrower time window for an adverse event. If shaving off a day makes a material reduction in risk of a failed trade, then the risk for T+2 is probably at least as much as the incremental risk of the 3rd day when it was T+3.

In a TLH, the buy could also fail leaving you out of the market.
Northern Flicker wrote: Thu Nov 25, 2021 4:10 pm From 2011, ie post-2008:

https://www.morningstar.com/articles/37 ... -for-alarm

Not sure why my postings should be interpreted as trying to scare people away from ETFs. I just was pointing out that doing a TLH by doing a buy 30 seconds or 5 minutes after a sell takes settlement risk if you need the cash from the sell to settle the buy. If a back office delay causes a 20 minute delay in the sell settlement, the buy trade will fail.
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Re: I Just Don’t Understand ETFs

Post by HanSolo »

lazynovice wrote: Thu Nov 25, 2021 7:07 pm
Northern Flicker wrote: Wed Nov 24, 2021 3:43 pm In a TLH, the buy could also fail leaving you out of the market.
Northern Flicker wrote: Thu Nov 25, 2021 4:10 pm If a back office delay causes a 20 minute delay in the sell settlement, the buy trade will fail.
I can't speak to all the possibilities of what can go wrong in a trade, and have no personal experience with back office operations, but I've read that there's such a thing as a systemic crisis, and you did acknowledge that there's a non-zero risk of that. While the article did say that the other broker or market maker will make you whole, it didn't say what will happen in the case of insolvency of the broker or market maker (and/or the counterparty, e.g., their collateral got wiped out) due to a sudden systemic crisis (and if you know of any articles that describe that scenario, that would be interesting). So I take the article to mean that they'll make you whole "if they can".

The article also said, "collateral posted by the parties in the transaction will be used to settle the transaction." If the circumstances turn out in such a way that this is your collateral, and you don't mind them doing that, then I guess there's no issue for you.

My preference is to side-step the whole issue by not using unsettled funds for a trade. And I have no problem with someone doing something different from what I do.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

UpperNwGuy wrote: Thu Nov 25, 2021 5:48 pm
HanSolo wrote: Thu Nov 25, 2021 3:59 pm
All these comments are being made for the sake of scaring people who don’t know better. I’m not sure what the motivation is for that.
Nobody said anything for the sake of scaring anyone. It's just information. Sure, some people don't care about tail risks, and that's fine. But it doesn't mean that those who want to be aware of that should not have the information.

I think you read something into the previous posts that wasn't there. Nobody said to be afraid. Just be aware, then do what you want.
Sorry, but I don't buy that explanation. I read those posts as an intentional attempt to cast doubt on ETFs. This is simply not a normal risk and doesn't need to be mentioned in this kind of discussion.
Sorry, but the postings about settlement were my postings, and they were very explicitly focused on the convenience of mutual funds for tax-loss harvesting. How others choose to interpret or amplify it is beyond my control. When you do a TLH with ETFs you either need to have cash for the buy transaction, or have 2 days out of the markets, or you have to depend on settlements happening on time if you have a narrow window between sell and buy transactions. That is the sum total of my point.
lazynovice wrote: The disagreement is about the claim that if one ETF trade fails to deliver, you will be out of the market.
If you sell A and then buy B 30 seconds later and the sell of A settles late, it certainly is possible that your buy of B could be cancelled. That is the claim, not that there is guaranteed behavior either way.

A mutual fund exchange also can fail. The source fund could have liquidity problems and delay the withdrawal.

I own both mutual funds and ETFs.
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Re: I Just Don’t Understand ETFs

Post by lazynovice »

Northern Flicker wrote: Thu Nov 25, 2021 8:04 pm
UpperNwGuy wrote: Thu Nov 25, 2021 5:48 pm
HanSolo wrote: Thu Nov 25, 2021 3:59 pm
All these comments are being made for the sake of scaring people who don’t know better. I’m not sure what the motivation is for that.
Nobody said anything for the sake of scaring anyone. It's just information. Sure, some people don't care about tail risks, and that's fine. But it doesn't mean that those who want to be aware of that should not have the information.

I think you read something into the previous posts that wasn't there. Nobody said to be afraid. Just be aware, then do what you want.
Sorry, but I don't buy that explanation. I read those posts as an intentional attempt to cast doubt on ETFs. This is simply not a normal risk and doesn't need to be mentioned in this kind of discussion.
Sorry, but the postings about settlement were my postings, and they were very explicitly focused on the convenience of mutual funds for tax-loss harvesting. How others choose to interpret or amplify it is beyond my control. When you do a TLH with ETFs you either need to have cash for the buy transaction, or have 2 days out of the markets, or you have to depend on settlements happening on time if you have a narrow window between sell and buy transactions. That is the sum total of my point.
lazynovice wrote: The disagreement is about the claim that if one ETF trade fails to deliver, you will be out of the market.
If you sell A and then buy B 30 seconds later and the sell of A settles late, it certainly is possible that your buy of B could be cancelled. That is the claim, not that there is guaranteed behavior either way.

A mutual fund exchange also can fail. The source fund could have liquidity problems and delay the withdrawal.

I own both mutual funds and ETFs.
The underlined statement is not true. Please read the article you linked or the part I highlighted for you. I have sold one ETF and bought another within 1 minute many times. With no margin enabled. Fidelity calls it cash available to trade with a warning it is unsettled. Others in this thread have done this as well. I do this at Fidelity.

Good night, all!
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

Buying with unsettled cash is allowed by the SEC as long as you do not turn around and try to sell what you bought with unsettled cash before the cash settled. I get that alot of people buy with unsettled cash regularly with consistent success. I also get that it may take someone having a failure someday before they believe that it is a possible outcome.
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Re: I Just Don’t Understand ETFs

Post by stan1 »

For those worried about systemic anomalies in the ETF market, today (Black Friday) may not be a good day to buy when many people are not at work (computer systems minimally staffed) and there are rumors of global cataclysm.

Of course it may also be a good day to buy some stonks on sale.
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Re: I Just Don’t Understand ETFs

Post by lazynovice »

Bud/Ask spread on what I would consider a volatile day:

VTI bid/ask spread is 3 cents. Usually 1 cent.
ITOT 2 cents, usually 1 cent.
VXUS and IXUS 1 cent, usually 1 cent
BND spread 1 cent usually 1 cent
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

You go away for a day...
HanSolo wrote: Thu Nov 25, 2021 1:19 pm I didn't see that in the sources I read. It sounds like you're assuming that the broker or market maker is still solvent. In any case, if you're right, then someone needs to rewrite the books on counterparty risk... and the people who were worried about Lehman and systemic risk should've just taken a chill pill, eh?
Or you could read a book written after 1970. Lets talk about how counterparty risk actually works for exchange trade stocks (including ETFs) and bonds.

You put in a "buy" trade on a exchange and it is completed.

The counterparty risk is not with the brokerage or person who is selling the stock (as it was before 1970) but rather with the Central Clearing House (CCP). All trades settle against the CCP. In the US this is Depository Trust Company (DTC). It holds a AAA credit rating and is backed by all of the prime brokers (i.e., very large banks) who are members. There has never been a issue with DTC.

Things did get dicey in 2008 with the Lehman Brothers colipase. After that the brokers had to post cash collateral to ensure settlement completion. The amount of collateral required is risk adjusted.

So lets think what would have to happen for a settlement failure to happen. Enough brokers would have to simultaneously fail to burn through the collateral posted, bankrupt DTC, and bankrupt most of the all of the prime brokers. i.e., the entire financial system would have to be burning to the ground. This is unlikely to happen but it could.

Lets step back for a second and consider this holistically. If the entire system was burning down to the ground how would mutual funds fair? Maybe the fund's settlement process of T+1 would not be affected. After all, that is run through Depository Trust & Clearing Corporation (DTCC) - technically a separate company from DTC. However I strongly suspect that mutual fund would be running into serious problems as well.
Northern Flicker wrote: Thu Nov 25, 2021 10:26 pm Buying with unsettled cash is allowed by the SEC as long as you do not turn around and try to sell what you bought with unsettled cash before the cash settled. I get that alot of people buy with unsettled cash regularly with consistent success. I also get that it may take someone having a failure someday before they believe that it is a possible outcome.
Because while there are many risks out there, this is a non-risk. Any melt down serious enough to interfere with the settlement of cash from a sale is also going to interfere with the settlement of the purchase.
Northern Flicker wrote: Thu Nov 25, 2021 4:10 pm Not sure why my postings should be interpreted as trying to scare people away from ETFs. I just was pointing out that doing a TLH by doing a buy 30 seconds or 5 minutes after a sell takes settlement risk if you need the cash from the sell to settle the buy. If a back office delay causes a 20 minute delay in the sell settlement, the buy trade will fail.
So, not this. If you sell the brokerage firm is going to assume that the trade is going to settle. This assumption is deeply baked into everything. The closest this ever came to pass in my career was during 9/11, and that was a question of "when", not "if".

What would be more likely is that the exchange would shut down (circuit breaker, suspension of trading due to fraud or bankruptcy, etc.) or the broker shut down (Robinhood with GameStop).

But these are not settlement issues.
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

Northern Flicker wrote: Wed Nov 24, 2021 7:16 pm
alex_686 wrote: Wed Nov 24, 2021 4:21 pm
Northern Flicker wrote: Wed Nov 24, 2021 3:36 pm It limits the "buyers" of disposed of securities to those able to do the heartbeat trade method, so I have to assume the transaction cost and/or execution is not optimal.
I am not sure what you are trying to say. I think you are literally trying to say is that ETFs would have to engage in their normal redemption process, where the costs are born by the APs.
A law passed in the 1960's enables mutual funds (defined broadly so that most ETFs are included) not to have to realize capital gains for withdrawals processed by distributing shares in-kind.
So, I would rework the first sentence to be about funds in general. ETFs were not even around back in the 60s.
Northern Flicker wrote: Wed Nov 24, 2021 7:16 pmIn a heartbeat trade, an institutional counterparty, presumably an AP, deposits cash into a fund and receives shares in-kind in return. I'm not sure if these are always even needed to manage the makeup of the fund, in which case the entire transaction cost is superfluous. If the transaction is needed, I do not assume it is at as favorable a cost (outside of tax gain considerations) as the best execution available for the shares.
Reread the 3rd part of the heartbeat trade link that I posted. You got some critical points wrong.

The AP almost never deposits cash the the ETF. That is the exception to the rule. This is how it works.

The AP and the fund exchange a basket of the ETF. One side hands over 100k shares of VTI and the other side hands over a basket of shares that represents the underlying holdings of 100k of VTI. Plus the AP hands over 1,000 fee to VTI. a.k.a. a in-kind transfer.

Note: There is not trading costs for the ETF. If the index says that the basket should have 514 shares of MSFT and 1,002 shares of APPL then exactly that many shares need to be turned over. This exactly mirrors the index. Costs are born by the AP.

Mutual funds don't have this luxury. When the fund has cash flows it has to go out into the market and buy the shares. They pay commission costs. They pay the bid/ask spread.

For ETFs the creation / redemption process happens constantly. If there is every a decent spread between the ETF and the underlying basket they make a arbitrate trade.

This means that they are constantly delivering out in-kind shares. If a ETF is even half competent they will be delivering out shares with a low cost basis.

Mutual funds find this very hard to do. ETF arbitrage trades last a fraction of a second if not simultaneously. Very low risk here. Mutual funds are trickier. You have to put in your order at 2 pm but you don't know what the price is going to be until the close of the exchange, at 3 pm. That is 1 hour for price swings. You are buying a pig-in-a-poke. Who is going to do that? Most often there are better ways to execute trades.

The only times I have seen this happen in modern times was in highly specialized situations. Maybe somebody else has a more common example.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

In a TLH with mutual funds, it is a direct exchange from fund A to fund B. They will be different assets, so not a wash sale, but similar enough that whatever happens in the market near close will affect both similarly.

When I've done a TLH, it has been with entire asset classes, not just trades at the margins. Having to do that with ETFs would be a white knuckle exercise because they have been at times of market stress such as 3/2020 or 3/2009.

On the other hand, the issues are just swept under the rug with a mutual fund. Vanguard uses fair value pricing for various funds, so any mispricing issues are obfuscated by the published NAV.
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Re: I Just Don’t Understand ETFs

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alex_686 wrote: Fri Nov 26, 2021 10:46 am You go away for a day...
HanSolo wrote: Thu Nov 25, 2021 1:19 pm I didn't see that in the sources I read. It sounds like you're assuming that the broker or market maker is still solvent. In any case, if you're right, then someone needs to rewrite the books on counterparty risk... and the people who were worried about Lehman and systemic risk should've just taken a chill pill, eh?
Or you could read a book written after 1970.
What I read was the Investopedia article I linked above (dated 2020), the Morningstar article someone else linked (dated 2011), and the Vanguard Brokerage Account Agreement (dated 2020).

The Morningstar article described how settlement of some trades can be delayed to T+4 or T+5.

What I did not read was that in the case of a delayed or failed trade, I am guaranteed to receive the cash or shares I'm due within a specified period.

What I also did not read was that if I place a trade with unsettled funds, and there is a delay (or failure) in settling the funds I used for my trade, then I am guaranteed to have neither my trade canceled nor having to cough up collateral.

If such guarantees exist, please cite where that is stated. What are the terms of the guarantee, and what guarantees the solvency of whomever is giving that guarantee?

You did say "unlikely" but it's quite ordinary that investors make a distinction between what's unlikely and what's guaranteed not to happen. For example, a guarantee may give someone legal recourse, while statistical probabilities do not. And that distinction also explains, for example, why there's a spread between AAA bonds and Treasuries. It's quite ordinary for such considerations to come into play in actual investment and trading decisions.
There has never been a issue with DTC.
That's the past. There are a lot of things that never happened until they did.
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Regal 56
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Re: I Just Don’t Understand ETFs

Post by Regal 56 »

I’m reading the book recommended by alex_686: “A Comprehensive Guide to Exchange-Traded Funds” by Joanne M. Hill, Dave Nadig, and Matt Hougan. Although much of it goes over my head, it explains the basics very well. What I’m beginning to understand is that my confusion about ETFs stems from my fundamental indifference toward what ETFs offer. Most of the benefits of ETFs mean nothing to me. I don’t care that they can be traded like stocks. I don’t care about their tax efficiency. (All my retirement savings are in a Roth IRA.) I don’t care that their makeup is transparently available on a daily basis. Right down the list of ETF advantages, my response is the same: I just don’t care.

Please understand, I’m not saying no one should care. Obviously there are serious investors who do. But I don’t.

For me, investing is a Rube Goldberg machine into which I shovel money. I want to understand enough to ensure I won’t be fleeced by shysters. In that, mutual funds tick the right boxes. Perhaps if I were smarter, ETFs would do the same. But I really don’t want to spend another minute trying to understand bid/ask spreads. Indeed, much of the discussion on this thread I’ve met with a stupefied stare.

Over the years, I’ve come to appreciate the old adage: “perfect is the enemy of good.” Good enough is good enough when it comes to investing. I’m happy to get into the weeds in my own area of expertise. (If anyone wants a lesson on primary chords, I’m your guy.) That’s not to say this discussion was useless to me. On the contrary, it’s left me more comfortable with ignoring ETFs. Where before I vaguely sensed I was missing out, now I know they’re simply not worth the trouble—for me.

My sincere thanks to all.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

Regal 56 wrote: Most of the benefits of ETFs mean nothing to me. I don’t care that they can be traded like stocks. I don’t care about their tax efficiency. (All my retirement savings are in a Roth IRA.) I don’t care that their makeup is transparently available on a daily basis.
The case for ETFs in a retirement account is much weaker as you note. In a retirement account, the decision of ETF vs mutual fund is not impactful. The largest benefit of ETFs in a retirement account is being able to mix and match products from different providers in a single account. This is handy, but unnecessary if your fund provider offers everything you need.

I do believe that your time would be better spent on understanding why having 100% of one's retirement funds in Roth account(s) usually is a mistake, often a costly mistake.
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

alex_686 wrote: Because while there are many risks out there, this is a non-risk. Any melt down serious enough to interfere with the settlement of cash from a sale is also going to interfere with the settlement of the purchase.
If the purchase fails, the TLH fails. My original point was just that a TLH at times of great market stress generally is much easier to implement as a mutual fund exchange, and not to descend into a discussion about unsettled trades. Whether or not one gets a better deal in the end on the exchange is complex to answer.
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Re: I Just Don’t Understand ETFs

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Northern Flicker wrote: Fri Nov 26, 2021 10:55 pm
alex_686 wrote: Because while there are many risks out there, this is a non-risk. Any melt down serious enough to interfere with the settlement of cash from a sale is also going to interfere with the settlement of the purchase.
If the purchase fails, the TLH fails. My original point was just that a TLH at times of great market stress generally is much easier to implement as a mutual fund exchange, and not to descend into a discussion about unsettled trades. Whether or not one gets a better deal in the end on the exchange is complex to answer.
TLH with ETFs during March 2020 worked just fine. How much more of a market stress event can one expect?
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Re: I Just Don’t Understand ETFs

Post by Northern Flicker »

Fair enough. I'm still not very confident about doing TLH's for core asset holdings involving a substantial fraction of portfolio value (30% or more) and being exposed to market movements while out of the market for that level of asset. Even 5 minutes could be significant for such a percentage of a portfolio during market turmoil.

I don't TLH small tax lots, but an entire asset class on the few occasions that I've done them.
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Re: I Just Don’t Understand ETFs

Post by alex_686 »

Northern Flicker wrote: Fri Nov 26, 2021 10:55 pm
alex_686 wrote: Because while there are many risks out there, this is a non-risk. Any melt down serious enough to interfere with the settlement of cash from a sale is also going to interfere with the settlement of the purchase.
If the purchase fails, the TLH fails. My original point was just that a TLH at times of great market stress generally is much easier to implement as a mutual fund exchange, and not to descend into a discussion about unsettled trades. Whether or not one gets a better deal in the end on the exchange is complex to answer.
I think you are asking the wrong question. Can a settlement fail? Sure. Can aliens land in my yard tomorrow? Sure. It is a remote possibility. However fretting about rare high impact events is not going to do you any good.

A better question would be under what scenarios it would fail and the overall impact would be. I say this from a professional viewpoint as my day job is to manager swaps which often have a settlement period of t + 10 years.

The scenario you are referencing would be one where:
  • [1] Your brokerage delivered your sold securities to DTC
    [2] DTC failed to deliver your purchased securities to DTC
    [3] Your brokerage is still open for business.
I can't conceive of a situation where 2 happens and 1 & 3. In any scenario that #2 happened I doubt that the failure of your TLH trade would be in your top 10 concerns.

This is informed by my experience working with physical certificates and 144a sales. We would routinely fail to deliver good securities at t+30, sometimes t+60, and once nearly at t+100. That my brokerage failed to delivery securities to DTC did not mean that DTC couldn't deliver the securities to the counterparties that had bought them.

Once again I urge you to step back and think about this holistically. I am not saying that there could be a failure to deliver securities. But we have to think about the scenarios and relative risk. If the system was so broken down that DTC could not deliver your securities where would mutual funds be?
Regal 56 wrote: Fri Nov 26, 2021 5:50 pm For me, investing is a Rube Goldberg machine into which I shovel money. I want to understand enough to ensure I won’t be fleeced by shysters. In that, mutual funds tick the right boxes. Perhaps if I were smarter, ETFs would do the same. ... Indeed, much of the discussion on this thread I’ve met with a stupefied stare.
So I draw the opposite lesson. Like I referenced before, the ETF book is for advance practitioners. And while ETFs may be complex they are relatively simpler than mutual funds. I can't point you to a comparable mutual fund book becuase one does not exist.

A quick side note:
Regal 56 wrote: Fri Nov 26, 2021 5:50 pm But I really don’t want to spend another minute trying to understand bid/ask spreads.
I would ignore the bid/ask spread at this point. Much has been made of this molehill. Market orders in the middle of the day work just fine.

Back to the main story:

Once again I take away a different lesson here:
Northern Flicker wrote: Fri Nov 26, 2021 2:09 pm When I've done a TLH, it has been with entire asset classes, not just trades at the margins. Having to do that with ETFs would be a white knuckle exercise because they have been at times of market stress such as 3/2020 or 3/2009.

On the other hand, the issues are just swept under the rug with a mutual fund. Vanguard uses fair value pricing for various funds, so any mispricing issues are obfuscated by the published NAV.
One of the reasons why ETFs seem complex - and thus dangerous - is that they are transparent. We can talk about the issues and risks.

Mutual funds seem safer because, as Northern Flicker said, vast swaths of the processes are "obfuscated", hidden from your view. Since you can't know the details it must be safer.

The difference between seeing your local butcher make the sausage is a very messy process verse buying the sausage all cleanly wrapped up in the supermarket.

But it isn't. The mutual fund side is more complex, more prone to error, and harder to fix "breaks" (non-delivery of expected securities) than ETFs. No fund family is networked the same way at any brokerage. No brokerage networks different fund families the same way. All DTC eligible securities work the same way at all brokerages. A single highly robust process.
Northern Flicker wrote: Fri Nov 26, 2021 7:24 pm
Regal 56 wrote: Most of the benefits of ETFs mean nothing to me. I don’t care that they can be traded like stocks. I don’t care about their tax efficiency. (All my retirement savings are in a Roth IRA.) I don’t care that their makeup is transparently available on a daily basis.
The case for ETFs in a retirement account is much weaker as you note. In a retirement account, the decision of ETF vs mutual fund is not impactful. The largest benefit of ETFs in a retirement account is being able to mix and match products from different providers in a single account. This is handy, but unnecessary if your fund provider offers everything you need.
Look, I am not interested in scare mongering. Both are high quality products.

I do think the ETF is the superior product because of its simplicity. Becuase of its simplicity they tend to have lower fees and other drags on their efficiency.
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 catnamedspot »

To me, an ETF just feels like owning single stock on the market (even though it promotes diversification). It's behavior is the same during turmoil. Mutual funds are more stable and not subject to day traders.
Da5id
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Re: I Just Don’t Understand ETFs

Post by Da5id »

catnamedspot wrote: Fri Jul 15, 2022 2:32 am To me, an ETF just feels like owning single stock on the market (even though it promotes diversification). It's behavior is the same during turmoil. Mutual funds are more stable and not subject to day traders.
Huh. Do you think the value of an ETF with a mutual fund analog will ever diverge much? Mutual fund "stability" comes from being priced only at the end of the day, the underlying assets are just as volatile.
Gaston
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Re: I Just Don’t Understand ETFs

Post by Gaston »

Northern Flicker wrote: Fri Nov 19, 2021 11:24 pm 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.
You hit the nail on the head. According to Gus Sauter, the former Chief Investment Officer at Vanguard, this is the main reason Vanguard first launched ETFs. You can hear him say this in episode 5 of the Bogleheads On Investing podcast, timestamp 00:23:40.

On a side note, Vanguard used to impose a back-end fee of about 0.5% on some of its mutual funds. Vanguard imposed the fee on investors who sold shares within 90 days of first having purchased shares. The purpose of the fee was to dissuade short-term traders from jumping into and out of the fund, which imposed trading costs on all shareholders in the fund. The fee itself, when charged, was distributed back into the fund for the benefit of other shareholders, not pocketed by Vanguard. I don't recall what Vanguard called this fee, but it was the only mutual fund fee I ever liked, as it dissuaded day-traders from tinkering with "my" fund. :happy
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beyou
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Re: I Just Don’t Understand ETFs

Post by beyou »

rascott wrote: Sun Nov 21, 2021 1:18 am Mutual funds are an antiquated financial product. I see little reason for them to exist for index investors
Actually both are pretty antiquated concepts.

https://en.wikipedia.org/wiki/Mutual_fund#Early_history

"Mutual funds were introduced to the United States in the 1890s. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value. The first open-end mutual fund with redeemable shares was established on March 21, 1924, as the Massachusetts Investors Trust, which still in existence today and managed by MFS Investment Management."

Closed end funds were and still are EXCHANGE TRADED FUNDS but we don't call them ETFs, but they are exchange traded and they are indeed funds.
It's just that they generally do not track an index (active) and they do not create new shares over time (shared created at IPO). But one must buy on an exchange via a broker like a modern day ETF, same trading mechanics to the retail investor EXACTLY.

There are man indices, and if one is only available via open end fund I see no issue with that.
Also note many index investors think mainly about equity investments, but many types of bonds are best traded still via open end funds.
Vanguard has many types of open end muni funds but one main ETF for munis. Could they open more ETFs, sure, but there must be a reason they have not. There is a cost to opening each new fund and many already exist, and the expected size probably didn't justify a new ETF. Also the need for greater transparency of holdings in ETFs could be a reason to NOT create an ETF.
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