Schwab "On Investing" article on ETFs

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Schwab "On Investing" article on ETFs

Post by nisiprius » Thu Jun 10, 2010 4:49 pm

This quarter's Schwab "On Investing," available online at http://oninvesting.texterity.com/oninve ... =texterity , features a cover story of one "Rich Lockwood" who is "building a legacy with ETFs." Since I am intrigued/baffled by why anyone would care much about the difference between mutual funds and ETFs I read the article to get some insight. It's presented as a Q&A with an investor, but I think we can assume that Schwab likes what this client is saying.
Q. Why do you prefer ETFs to mutual funds and individual securities?

A. I'm not interested in picking individual stocks.... I used to invest almost my portfolio in traditional index mutual funds. But mutual funds trade only once a day and I want to be able to sell when I want to....

One of the most important benefits for me is the liquidity. It allows me to adjust my strategy as I need to so we can meet our goals. I don't trade frequently, but I like having the ability to move quickly. And for me, there's an emotional component. Using ETFs gives me some peace of mind--I like knowing that at any given moment I can adjust my investing strategy without having to wait until the end of the day.

In addition, ETFs provide me with incredible diversification, which helps me manage risk.
Having to wait until the end of the day to sell makes the difference between meeting and not meeting one's goals?

I assume that's he's thinking about the possibility of seeing a 1987-style crash in progress and being able to protect his family by bailing out early, while the poor mutual fund holders have to watch the ticker drop, drop, drop hour after hour. Can anyone form any other interpretation of his comments?

I wonder whether this rationale is shared by many other ETF buyers, and how often they check the stock market every day to be ready to sell their ETFs?
Last edited by nisiprius on Thu Jun 10, 2010 5:02 pm, edited 2 times in total.
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Re: Schwab "On Investing" article on ETFs

Post by rustymutt » Thu Jun 10, 2010 4:56 pm

nisiprius wrote:This quarter's Schwab "On Investing," available online at http://oninvesting.texterity.com/oninve ... =texterity , features a cover story of one "Rich Lockwood" who is "building a legacy with ETFs." Since I am intrigued/baffled by why anyone would care much about the difference between mutual funds and ETFs I read the article to get some insight. It's presented as a Q&A with an investor, but I think we can assume that Schwab likes what this client is saying.
Q. Why do you prefer ETFs to mutual funds and individual securities?

A. I'm not interested in picking individual stocks.... I used to invest almost my portfolio in traditional index mutual funds. But mutual funds trade only once a day and I want to be able to sell when I want to....

One of the most important benefits for me is the liquidity. It allows me to adjust my strategy as I need to so we can meet our goals. I don't trade frequently, but I like having the ability to move quickly. And for me, there's an emotional component. Using ETFs gives me some peace of mind--I like knowing that at any given moment I can adjust my investing strategy without having to wait until the end of the day.

In addition, ETFs provide me with incredible diversification, which helps me manage risk.
Having to wait until the end of the day to sell makes the difference between meeting and not meeting one's goals?

Not to mention the lower cost of ETF's
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Re: Schwab "On Investing" article on ETFs

Post by nisiprius » Thu Jun 10, 2010 4:59 pm

rcasement wrote:Not to mention the lower cost of ETF's
Well, the article does not mention them.

Lower costs are a good, rational, Bogleheadish reason for preferring ETFs, but that is not what the investor profiled by Schwab cares about.
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Post by livesoft » Thu Jun 10, 2010 5:28 pm

You ask if folks check their ETFs every day. On my laptop, I have function key F4 programmed to pop-up current prices and percent-day-change for 17 different ETFs (this is a Mac OSX Dashboard widget). It takes less than 1 second to do this.

What's the purpose of this instant one-button set of quotes? Most of the time, there is no purpose, but every once in a while (remember May 6th?), I act on what I see. If I am doing some tax-loss harvesting or some buying on the dips, then this is also useful to me.

It is also useful when I am deciding whether to take my colleagues to lunch. When the market is up like today, we go out to lunch and I pay for everyone. When the market is down, I eat the leftovers I brought to work.

I don't know about Rich Lockwood and his peace of mind. I am not interested in selling in a panic, but I am interested in buying when others panic. For that I think you need to use ETFs.

So if your goal is taking your colleagues to lunch, you need to use ETFs and watch them like a hawk ... at least before lunchtime.

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Post by GammaPoint » Thu Jun 10, 2010 6:14 pm

livesoft wrote: So if your goal is taking your colleagues to lunch, you need to use ETFs and watch them like a hawk ... at least before lunchtime.
Lol, I like this :D

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Re: Schwab "On Investing" article on ETFs

Post by rfburns » Thu Jun 10, 2010 7:19 pm

nisiprius wrote:Having to wait until the end of the day to sell makes the difference between meeting and not meeting one's goals?
Put another way, if i need to sell, why should I have to wait until the end of the day and take closing price? For 3 of the last 5 trading days the market has seen steep sell-offs in the last hour or two of trading vs. higher intra-day levels. So yes it makes a difference for me, even if only psychological.

I don't see it as a goal, more like an added convenience. I can relate to the author's comments in that I don't trade often, but appreciate having the ability to place trades any time of day the market is open.

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Post by gotherelate » Thu Jun 10, 2010 7:19 pm

livesoft wrote:You ask if folks check their ETFs every day. On my laptop, I have function key F4 programmed to pop-up current prices and percent-day-change for 17 different ETFs (this is a Mac OSX Dashboard widget). It takes less than 1 second to do this.

What's the purpose of this instant one-button set of quotes? Most of the time, there is no purpose, but every once in a while (remember May 6th?), I act on what I see. If I am doing some tax-loss harvesting or some buying on the dips, then this is also useful to me.

It is also useful when I am deciding whether to take my colleagues to lunch. When the market is up like today, we go out to lunch and I pay for everyone. When the market is down, I eat the leftovers I brought to work.

I don't know about Rich Lockwood and his peace of mind. I am not interested in selling in a panic, but I am interested in buying when others panic. For that I think you need to use ETFs.

So if your goal is taking your colleagues to lunch, you need to use ETFs and watch them like a hawk ... at least before lunchtime.

Did you take a bath yesterday when the Dow was up at lunch time, but finished the day much lower?

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Re: Schwab "On Investing" article on ETFs

Post by tfb » Thu Jun 10, 2010 9:28 pm

rfburns wrote:I don't see it as a goal, more like an added convenience. I can relate to the author's comments in that I don't trade often, but appreciate having the ability to place trades any time of day the market is open.
I agree. If the rarely exercised ability gives an investor peace of mind, I don't see anything wrong with it. If forum posts only get posted once a day at 4:00, does anyone think we will still have this many threads and posts?

Speaking of Schwab "On Investing", the gem is actually in the letters from readers section about probability and confidence level. The author screwed up once, got caught by the readers, then proceeded to screw up again in the reply to the reader. Very amusing.
Last edited by tfb on Thu Jun 10, 2010 10:48 pm, edited 3 times in total.
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Post by livesoft » Thu Jun 10, 2010 9:31 pm

gotherelate wrote:Did you take a bath yesterday when the Dow was up at lunch time, but finished the day much lower?

-Granpda
:) I didn't take my colleagues to lunch this week ... they are all out of town.

But I did buy some shares near the end of the day with a limit order. I made a few dollars since the position closed up for the day and up even higher today. It could drop tomorrow or next week. Who knows? Who cares?

I have no car this week, so I've been riding my bike to work. I'll take folks to lunch next week.

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Post by Rick Ferri » Thu Jun 10, 2010 10:14 pm

Pardon my ignorance. Who is "Rich Lockwood"?

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Post by fishndoc » Thu Jun 10, 2010 10:44 pm

Rick Ferri wrote:Pardon my ignorance. Who is "Rich Lockwood"?
Ever notice how "investors" who are interviewed for something like this are not named "Billy Poore" or "Bobby Sapp", etc, or something that sounds less blueblood than "Rich Lookwood"?
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Post by Peter Foley » Thu Jun 10, 2010 11:00 pm

Rick - in response to your question . . . I read the article and from that article I concluded that Rich Lockwood is a customer of Schwab who has decided to invest in index ETF's rather than index mutual funds.

Reading between the lines what I believe to be the premise of the article is that if you invest in ETFs you have a little more control over the buy and sell prices as you can execute a trade at any time. I personally favor this approach because I dislike the fact that when I buy or sell a mutual fund I do not know what the exact price at which I am buying or selling. Mr. Lockwood addresses that emotional component of buying/selling.

Why would Schwab care? Schwab's proprietary mutual funds are relatively low cost, no load , no transaction fee. If they can sell you an ETF equivalent they get a small commission on the trade and perhaps this approach will appeal to those who trade more often than Mr. Lockwood., These individuals would incur higher fees per account resulting in more profit for Schwab. (I admit this is speculation, but what other motive might they have for running such an article?)

I have a number of accounts with Schwab and hold a mix of Schwab index funds and ETFs. (It is much cheaper to buy a Vanguard ETF through Schwab than the Vanguard mutual fund.) At Schwab I have held the Vanguard mid cap/small cap ETF (VXF) at times to balance the Index 500 mutual fund available in my deferred accounts.

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Post by SP-diceman » Thu Jun 10, 2010 11:18 pm

Rick Ferri wrote:Pardon my ignorance. Who is "Rich Lockwood"?
I saw "Rich" and figured he knew what he was doing.
(heh, heh)


Thanks
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Post by anthau » Fri Jun 11, 2010 8:14 am

Peter Foley wrote:Why would Schwab care? Schwab's proprietary mutual funds are relatively low cost, no load , no transaction fee. If they can sell you an ETF equivalent they get a small commission on the trade and perhaps this approach will appeal to those who trade more often than Mr. Lockwood., These individuals would incur higher fees per account resulting in more profit for Schwab. (I admit this is speculation, but what other motive might they have for running such an article?)
While I agree that Schwab makes money off the trades, it's not just from commissions (Schwab offers its own ETFs commission-free), but on the bid-ask spreads.
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Post by Rick Ferri » Fri Jun 11, 2010 8:17 am

Peter Foley wrote:Reading between the lines what I believe to be the premise of the article is that if you invest in ETFs you have a little more control over the buy and sell prices as you can execute a trade at any time.
I'm a long-term investor who owns both ETFs and mutual funds. I've found no definitive return benefit to trading ETFs during the day over waiting until the end of the day and trading mutual funds at NAV. In the final analysis, it doesn't matter whether your buying or selling open-end mutual funds or ETFs, the market controls the price.

Rick Ferri

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Post by hudson » Fri Jun 11, 2010 3:11 pm

livesoft wrote: On my laptop, I have function key F4 programmed to pop-up current prices and percent-day-change for 17 different ETFs .
Livesoft, if possible and appropriate, share your list of 17 ETFs. THANKS!

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Post by livesoft » Fri Jun 11, 2010 3:24 pm

VTI, VBR, IJS, VEA, VEU, VWO, TIP, BND, VNQ, GWX, EEM, VSS, IWM, SCZ, EFV, VXF, DGS

There is nothing special about these. They are comprised of various asset classes with duplication (e.g. to a first approximation VBR=IJS=IWM=VXF). I have some shares of 8 of them, but no shares of the other 9.

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Post by jshaffer740 » Fri Jun 11, 2010 6:43 pm

livesoft wrote:VTI, VBR, IJS, VEA, VEU, VWO, TIP, BND, VNQ, GWX, EEM, VSS, IWM, SCZ, EFV, VXF, DGS

There is nothing special about these. They are comprised of various asset classes with duplication (e.g. to a first approximation VBR=IJS=IWM=VXF). I have some shares of 8 of them, but no shares of the other 9.
Hi livesoft:

What widget is it that you use to track these?

Thanks,
Jason

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Post by livesoft » Fri Jun 11, 2010 6:46 pm

"Stocks"

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Post by Peter Foley » Fri Jun 11, 2010 7:06 pm

Rick Ferri wrote
I'm a long-term investor who owns both ETFs and mutual funds. I've found no definitive return benefit to trading ETFs during the day over waiting until the end of the day and trading mutual funds at NAV. In the final analysis, it doesn't matter whether your buying or selling open-end mutual funds or ETFs, the market controls the price.
I agree with both your statements. I think it would be very difficult to prove the advantage of during the day trading over end of the day trading. I think it is primarily an emotional, psychological issue. I know exactly what I am going to receive when I do an ETF trade, I only know approximately what I am going to receive in shares or dollars when I put in an order to buy or sell a mutual fund.

As to your original question of "who is Rich Lockwood" - I perhaps answered too literally. Perhaps the question could be rephrased "why do we care what this Schwab customer is doing." My answer went on to try to answer the question in that light, i.e., I do not think Schwab is a disinterested party in talking about the supposed benefits of ETF trading versus mutual fund trading.

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Post by jshaffer740 » Fri Jun 11, 2010 8:53 pm

livesoft wrote:"Stocks"
Ok, thanks. I wasn't sure if you were using Apple's stock "Stocks" or not :).

Jason

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Post by hudson » Sat Jun 12, 2010 6:25 am

livesoft wrote:VTI, VBR, IJS, VEA, VEU, VWO, TIP, BND, VNQ, GWX, EEM, VSS, IWM, SCZ, EFV, VXF, DGS
Thanks for sharing! I don't know if I got them in the right piles?

VTI Vanguard Total Stock Market
TIP iShares Barclays TIPS Bond
BND Vanguard Total Bond Market
VNQ Vanguard REIT ETF

VBR Vanguard Small-Cap Value
IJS iShares S&P SmallCap 600 Value Idx

IWM iShares Russell 2000 Index
VXF Vanguard Extended Market (US less S&P)

GWX SPDR S&P International Small Cap
SCZ iShares Trust iShares MSCI EAFE Small Cap
VSS Vanguard FTSE All Wld Ex USSml

VEA Vanguard Europe Pacific
VEU Vanguard FTSE All-World ex-US

EFV iShares MSCI EAFE Value Index

VWO Vanguard Emerging Markets
EEM iShares MSCI Emerging Markets
DGS WisdomTree Emerging Mkts Small Cp
Last edited by hudson on Sat Jun 12, 2010 7:31 am, edited 1 time in total.

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Liquidity benefit?

Post by Taylor Larimore » Sat Jun 12, 2010 7:20 am

I like knowing that at any given moment I can adjust my investing strategy without having to wait until the end of the day.
This is the weakest reason for using ETFs. In fact, it's time-consuming and dangerous In my opinion, Mr. Lockwood would be much better-off using traditional mutual funds where the temptation to trade is much less.
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Post by Cash » Sat Jun 12, 2010 7:45 am

livesoft wrote: I don't know about Rich Lockwood and his peace of mind. I am not interested in selling in a panic, but I am interested in buying when others panic. For that I think you need to use ETFs.
+1. I love a good panic.

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Re: Liquidity benefit?

Post by pkcrafter » Sat Jun 12, 2010 8:07 am

Taylor Larimore wrote:
I like knowing that at any given moment I can adjust my investing strategy without having to wait until the end of the day.
This is the weakest reason for using ETFs. In fact, it's time-consuming and dangerous In my opinion, Mr. Lockwood would be much better-off using traditional mutual funds where the temptation to trade is much less.
I agree. One of the biggest drawbacks to using ETFs for most investors is actually the ability to trade on daily noise. If you are watching the market on a daily basis, you aren't practicing Boglehead investing.

From the article:
And for me, there's an emotional component. Using ETFs gives me some peace of mind--I like knowing that at any given moment I can adjust my investing strategy without having to wait until the end of the day
.
That is bad investing practice. The emotional component is a problem, not a help.

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"The stock market is a giant distraction to the business of investing."



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Re: Liquidity benefit?

Post by livesoft » Sat Jun 12, 2010 8:23 am

pkcrafter wrote:One of the biggest drawbacks to using ETFs for most investors is actually the ability to trade on daily noise.
OK, that statement or something like it gets tossed out often. I agree about "the ability to trade on daily noise". That goes for ALL owners of ETFs, not just most. But it also insinuates that most investors actually do trade on the daily noise. Can you back that up with data?

I'll admit that some computer programs are responsible for the high volume of SPY, IWM, EEM, VWO, and VNQ. But that's quite a bit different from "most investors".

I probably have more ETF transactions than most of the Bogleheads this year. When I look, I made 3 separate contributions this year to my Roth that resulted in 4 ETF transactions. I made some money in the May 6th flash crash by buying then selling a few days later which was 2 ETF transactions. I rebalanced from bonds to equities in my IRA, for another ETF purchase. And I did some tax-loss harvesting, for 3 pairs of ETF transactions in my taxable account.

That's a total of 13 ETF transactions in 2010. Many folks have made more transactions in their 401(k) plans just from paycheck contributions than that.

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Post by Petrocelli » Sat Jun 12, 2010 8:37 am

Rick Ferri wrote:Pardon my ignorance. Who is "Rich Lockwood"?
A guy with a really cool name.
Petrocelli (not the real Rico, but just a fan)

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Re: Liquidity benefit?

Post by pkcrafter » Sun Jun 13, 2010 10:04 am

livesoft wrote:
pkcrafter wrote:One of the biggest drawbacks to using ETFs for most investors is actually the ability to trade on daily noise.
OK, that statement or something like it gets tossed out often. I agree about "the ability to trade on daily noise". That goes for ALL owners of ETFs, not just most. But it also insinuates that most investors actually do trade on the daily noise. Can you back that up with data?

I'll admit that some computer programs are responsible for the high volume of SPY, IWM, EEM, VWO, and VNQ. But that's quite a bit different from "most investors".

I probably have more ETF transactions than most of the Bogleheads this year. When I look, I made 3 separate contributions this year to my Roth that resulted in 4 ETF transactions. I made some money in the May 6th flash crash by buying then selling a few days later which was 2 ETF transactions. I rebalanced from bonds to equities in my IRA, for another ETF purchase. And I did some tax-loss harvesting, for 3 pairs of ETF transactions in my taxable account.

That's a total of 13 ETF transactions in 2010. Many folks have made more transactions in their 401(k) plans just from paycheck contributions than that.
Additions of new money and rebalancing aren't the issue. It's misusing EFTs by frequent moving in and out of the market triggered by short term market/economic conditions. Yes, it applies to all ETF holders. I'm just saying that most of those investors now getting into ETFs are going to make behavioral mistakes that decrease returns. The whole basis (and the real secret) of the Boglehead philosophy is actually to provide an investing strategy that limits potential investor mistakes. ETFs increase opportunities for behavioral mistakes for average investors. You seem to be saying average investors won't make ETF mistakes. I contend they will when given the opportunity.


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Re: Liquidity benefit?

Post by livesoft » Sun Jun 13, 2010 10:27 am

pkcrafter wrote:... I'm just saying that most of those investors now getting into ETFs are going to make behavioral mistakes that decrease returns. The whole basis (and the real secret) of the Boglehead philosophy is actually to provide an investing strategy that limits potential investor mistakes. ETFs increase opportunities for behavioral mistakes for average investors. You seem to be saying average investors won't make ETF mistakes. I contend they will when given the opportunity.


Paul
You are right, that's what I'm saying. The average investors that I know fall into 2 categories:

(1) They are simply investing in their 401(k) plans. They put money in via payroll deduction and never look at it again. They have no idea what their asset allocation is and no idea what their 401(k) balance is. They have not even heard of Roth IRAs.

(2) Others that are reading this forum. The folks who read this forum do not trade in and out of mutual funds and when given a new toy like ETFs, they will not trade in and out of ETFs either. Maybe in a year we can investigate via a poll to see if that held true.

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Post by pkcrafter » Sun Jun 13, 2010 11:45 am

livesoft wrote:
(2) Others that are reading this forum. The folks who read this forum do not trade in and out of mutual funds and when given a new toy like ETFs, they will not trade in and out of ETFs either. Maybe in a year we can investigate via a poll to see if that held true.
I'd agree that most Bogleheads won't misuse ETFs, but I'd guess that more than 50% of the posters on this forum are not following Boglehead practices, and we even see posts challenging Boglehead investing. Simply calling one's self a Boglehead does not make you one. The Boglehead method is there for those investors who want to use it, but most individual investors think they are smart enough to do better with other methods, or they follow Boglehead strategies except for.....

As for ETFs, there is simply too much interest in them now, which I take as as something other than a good sign.


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Post by nisiprius » Sun Jun 13, 2010 6:42 pm

livesoft, just to be clear--I understand you to say that perhaps a handful of times per year, you literally do place an intraday ETF trade, timed in the belief that have spotted a some spiky irrational price movement that you can take advantage of?
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Post by livesoft » Sun Jun 13, 2010 6:51 pm

^Yes, absolutely. I try to buy on relatively large one-day downward spikes. I have announced a few of those days when folks questioned how one could see one-day downward spikes. I think I've gotten the disbelievers to quiet down.

A mutual fund owner could make most of the same trades since they are mostly end-of-day.

In this thread, I already listed all my ETF trades for 2010.

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Post by livesoft » Tue Jun 15, 2010 3:45 pm

With a few things up 10% since last week's lows, I'm taking my whole group to lunch tomorrow.

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