Why don't you use ETFs?

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MichaelCorleone
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Why don't you use ETFs?

Post by MichaelCorleone »

With all of the ETF threads lately and the proliferation of low-cost ETFs being readily available for free, or very close to it, I'm curious as to why some investors still prefer the traditional open-ended mutual fund to an ETF.

For those of you that prefer an open-ended mutual fund when the equivalent fund is available in ETF form, why do you prefer the mutual fund?
livesoft
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Post by livesoft »

My 401(k) does not allow me to buy ETFs.

Our one single Vanguard stock mutual fund is admiral share class and has had no transactions since I bought it. I see no benefit to convert it to an ETF. Do you?

Other than that, I have a lot of stock ETFs.
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Post by SP-diceman »

I would imagine all this "free ETF" stuff is just too new.


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Post by rustymutt »

I'm to lazy to switch right now.
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Post by livesoft »

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Post by gkaplan »

Don't want to open a brokerage account.

(You might have wanted to include a poll.)
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Post by Tyrobi »

Our signed Investment Policy Statement does not allow us to flip into ETFs even though it's very popular at the moment. Our IPS clearly specifies to use only low cost index funds, not ETFs. So far it has helped us to stay the course.

In the future, if I decide to use ETFs then I will have to revisit and update our IPS and have my family to sit down and to sign it again before jumping into the world of ETFs.
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celia
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Post by celia »

You're over 70 1/2 and need to take Required Minimum Distributions (a calculated dollar amount each year) and you want to spread the withdrawal over all your tax-deferred assets. It is more complicated to sell a little bit of each ETF than each mutual fund.
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Post by KyleAAA »

I already own mutual funds and have direct investment and all that set up. Switching off the autopilot isn't appealing.
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grabiner
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Re: Why don't you use ETFs?

Post by grabiner »

MichaelCorleone wrote:With all of the ETF threads lately and the proliferation of low-cost ETFs being readily available for free, or very close to it, I'm curious as to why some investors still prefer the traditional open-ended mutual fund to an ETF.

For those of you that prefer an open-ended mutual fund when the equivalent fund is available in ETF form, why do you prefer the mutual fund?
Costs and convenience.

I am an Admiral in Total Stock Market, so it costs me less to own the mutual fund (no trading costs, and the same expense ratio). I will be Admiral in Emerging Markets Index soon, and the small cost difference given the size of my transactions isn't worth the loss of convenience. I do use ETF shares of FTSE All-World Ex US Small-Cap, because the cost savings is substantial and I don't expect this fund to ever close the cost gap with Admiral shares. And I also hold EWX (SPDR emerging markets small cap), because there is no fund.

And I don't have a brokerage account in my IRA; maintaining such an account would add its own costs and wouldn't save me enough in expenses to be worthwhile.
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nisiprius
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Post by nisiprius »

The advantages of the ETF are only compelling if you use the ETF to do things you can't do with a mutual fund.

The things you can do with an ETF that you can't do with a mutual fund are things I don't do.

There are things I sometimes do with our mutual funds that I can't do with an ETF. I like the ability to buy or sell exact dollar amounts to the penny, and the ability to set up automatic purchases, withdrawals, and exchanges ("Exchange $1,000 of fund X for fund Y on the first of every month") ("Sell off exactly 100% of fund Z gradually over a period of exactly ten years via "declining balance"). These are not very important, but they matter enough to keep me with mutual funds. I think they will become increasingly important as we enter the decumulation phase.

Just as the ability to buy or sell at some exact minute of the day is not very important, but matters to ETF buyers.

Finally, I am trying hard to move always in the direction of simplification, with the idea that someday our portfolio will have to be managed by a more elderly me or by my wife, and I think a portfolio of mutual funds is easier to manage than a portfolio of ETFs. (And I would far prefer to have my wife manage it herself than have someone else manage it. As my wife herself says, "The people you read about in the paper who have lost everything always seem to be people with financial advisors.")

After all, it's really mostly ego that's stopping me from just dumping everything into Target Retirement Income. But there isn't any Target Retirement Income ETF, any Wellesley ETF, or even any Balanced Index ETF. Not that I'd be likely to use it, but there isn't any Managed Payout ETF either.
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celia
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Post by celia »

nisiprius wrote:Finally, I am trying hard to move always in the direction of simplification, with the idea that someday our portfolio will have to be managed by a more elderly me or by my wife, and I think a portfolio of mutual funds is easier to manage than a portfolio of ETFs. (And I would far prefer to have my wife manage it herself than have someone else manage it. As my wife herself says, "The people you read about in the paper who have lost everything always seem to be people with financial advisors.")
This is a very good observation that I completely forgot about.
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Post by joe8d »

I don't own them for all the reasons the above posters cited.In fact,they scare me in that hedge funds can dramatically move the whole market in an instant using them.
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Post by stratton »

nisiprius wrote:The advantages of the ETF are only compelling if you use the ETF to do things you can't do with a mutual fund.
Buying Vanguard funds at other brokerages is one thing if it avoids those extra fund fees such as the $75 at Fidelity to buy ($0 to sell).

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Post by englishgirl »

All the reasons already mentioned - I already had mutual funds, and I use automatic investment. Plus, I just don't really understand them, and I remember Larry Swedroe saying that you shouldn't invest in things you don't understand. Now, I guess I could probably take the time to read up, but the whole intraday pricing thing also scares me (I know I'd be the one to buy/sell at the worst possible price for the day). Plus, don't you need to open a brokerage account to use them? Seems a lot of effort. So, I stick with laziness and ignorance.

Is laziness worth the price difference? I don't know, but I just haven't been compelled yet to make the switch. Maybe when the time comes to roll my 401k into an IRA that then won't be touched much, the price difference might be more of an issue.
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Re: Why don't you use ETFs?

Post by sommerfeld »

MichaelCorleone wrote:For those of you that prefer an open-ended mutual fund when the equivalent fund is available in ETF form, why do you prefer the mutual fund?
Most of my investments are made by scheduled purchases scheduled to happen once per pay period.

Market orders of ETF's occasionally execute at prices well away from the NAV. It would be imprudent for me to replace an automated exchange into an open-ended mutual fund with a scheduled market order, and too much work for me to choose an appropriate limit price for every scheduled purchase.
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Post by jeffyscott »

ETFs are a fad, like cell phones. :wink:

Immediate reasons are mostly just inertia (also unavailability for employer sponsored accounts).

Long term this is probably the most significant factor:
nisiprius wrote:Finally, I am trying hard to move always in the direction of simplification, with the idea that someday our portfolio will have to be managed by a more elderly me or by my wife, and I think a portfolio of mutual funds is easier to manage than a portfolio of ETFs.
One other thing is that I don't trust that just because they are being offered with no commission and brokerage accounts are also free that this will always be the case.
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Post by jpsfranks »

As others have mentioned, mostly the convenience of being able place an order whenever without worrying about pricing anomalies. I found this particularly valuable when TLHing.

Up until 2008 most of my taxable stock portfolio was in ETFs. Then came the carnage and I found myself needing to TLH my whole taxable portfolio every couple of months. TLHing between ETFs to me felt like jumping between two moving trains while carrying bags of money with holes in them. Trying to orchestrate that during the work day when I had other things to be concentrating on was frustrating.

Contrast that to an order to exchange funds which can be placed at any time and takes place pretty much seamlessly at NAV.
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Post by allsop »

As a non-US based investor there are many inexpensive ETF's listed in USA that would give me access to markets that are expensive for me to buy in my home country.

However, the US estate taxes are very high with a low limit for exemption ($60 000), and thus too costly.
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Post by gotherelate »

The way I see it, and I could be wrong about this, ETFs have an extra layer of market risk. An open end mutual fund is subject to the market risk of the individual equities it owns, period. An ETF is subject to that market risk, but also to the market risk of the ETF itself. I'm not in a hurry to take on that extra market risk.

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Post by dharrythomas »

I don't currently invest in Closed End Mutual Funds and that's all an ETF is. I don't understand the excitement, they've been around for decades.

ETFs just allow you to churn your account and market time without impacting the rest of the fund holders. That's a good thing but since I try to do neither, I don't need ETFs. I agree with Jack Bogle that EFTs tempt you to do things that you probably shouldn't be doing and that's dangerous (I'm sure he didn't use those exact words). I need less temptation in my life, not more.

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Post by tc33 »

bid/ask spreads on thin- to moderately-traded ETFs
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Post by sommerfeld »

dharrythomas wrote:I don't currently invest in Closed End Mutual Funds and that's all an ETF is. I don't understand the excitement, they've been around for decades.
There's a key difference between CEF's and ETF's:

ETF shares can be created or redeemed by market makers in exchange for a "creation basket" of the underlying shares.

In theory this means that ETF's will track the NAV more closely than a CEF.

In practice, this depends on market makers not going out for lunch when the market starts melting down.
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Re: Why don't you use ETFs?

Post by grabiner »

sommerfeld wrote:
MichaelCorleone wrote:For those of you that prefer an open-ended mutual fund when the equivalent fund is available in ETF form, why do you prefer the mutual fund?
Most of my investments are made by scheduled purchases scheduled to happen once per pay period.

Market orders of ETF's occasionally execute at prices well away from the NAV. It would be imprudent for me to replace an automated exchange into an open-ended mutual fund with a scheduled market order, and too much work for me to choose an appropriate limit price for every scheduled purchase.
There is a similar issue for East Coast investors who work during market hours. If I want to buy $5000 worth of an ETF, I don't want to place a market order (or a limit order which may be well above the opening market price) early in the morning; to avoid this, I have to buy on a day that I happen to be home when the market is open. I can buy $5000 of a mutual fund at NAV with an order placed the night before.
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Post by atomiclightbulb »

I prefer the mutual funds. Purchasing and re-balancing is more straightforward. I realize that many brokerages allow free ETF trades right now, but that may change in the future. I tend to buy funds only a couple hundred dollars at a time, so if brokerages start charging for ETF trades again, the transaction costs would wipe out the ER savings.

Mutual funds have worked for me, have very low cost at Vanguard, and are simple/straightforward. No reason to change something that works well.
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Re: Why don't you use ETFs?

Post by livesoft »

grabiner wrote:I have to buy on a day that I happen to be home when the market is open.
Not really, you just use your cell phone / PDA to make trades at any time of the day when you are not in meetings.
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Post by JimHalpert »

Saving a penny or two on an expense ratio is not worth the underlying risks of etf's. What I suspected could happen in the event of a market markdown was proven on May 6.
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Post by exigent »

I like buying round dollar amounts instead of a set # of shares. Also, mutual funds meet my needs so I gain nothing by switching (esp when Admiral shares are in the mix).
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Post by nisiprius »

I really think people, even in this thread, maybe even me, are constantly exaggerating the importance of the differences. Once you're asked why you do or don't use ETFs, you start looking for the tiniest differences and exaggerating them to justify your preferences.

ETFs may exist for the purpose of supporting bad investor behavior, but any Boglehead can use ETFs responsibly. It's not as if ETFs are intoxicating or addictive. 5/6/10 was just weird, but I think you'd be hard pressed to name the name of anyone you know who was hurt by it; it doesn't prove ETFs are particularly risky, it just proves that weird things happen.

It's not really cell phone versus land line. I think a better analogy, for men anyway, would be boxers versus briefs.

Boxers are more fashionable. But briefs typically have lower costs. But briefs incur fertility risk. But briefs give you tighter control of your... investments. But boxers offer a far wider range of styles and colors. Etc. etc. etc.

But what it comes down to is that I'm staying with the underwear I feel more comfortable in.
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Post by stratton »

nisiprius wrote:I really think people, even in this thread, maybe even me, are constantly exaggerating the importance of the differences. Once you're asked why you do or don't use ETFs, you start looking for the tiniest differences and exaggerating them to justify your preferences.
I totally agree with you. I don't get the big deal on ETFs. Since it trades like a stock you have to watch out for the same hazards.

The ones people need to worry about are the leveraged ETFs and ETNs with their credit issuer risk.

Paul
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