ETFs (--> Wiki)

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ETFs (--> Wiki)

Post by gbs » Thu Mar 01, 2007 12:00 pm

An expanded version of this page is available at The Bogleheads Wiki.

Please help us understand how ETFs work!

Link to papers and articles that describe internal arbitrage mechanisms, bid-ask spreads, premium-discounts, tax efficiency, etc.

ETF vs. Index fund papers welcome.
ETF vs. Active Funds papers welcome.

Please do not post links to ETF products or product providers. You can post links to ETF search/sort pages.

Return to the Table of Contents
Last edited by gbs on Thu Mar 01, 2007 4:28 pm, edited 1 time in total.

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Bylo Selhi
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Post by Bylo Selhi » Thu Mar 01, 2007 1:06 pm

M* Investing Classroom ETF
link: here
In this course, we'll discuss how ETFs differ from regular mutual funds, what their advantages and disadvantages are, and how to determine whether they might be appropriate for you.

ETFs: Are Vanguard's VIPERs Flawed?
VIPER ETFs' tax efficiency called into question.
link: here

An Inside Look At ETF Construction
link: here

Yahoo's Exchange-Traded Funds (ETF) Center

A Guide to Exchange-Traded Funds
link: here

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Post by simba » Thu Mar 01, 2007 1:49 pm

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Barry Barnitz
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Commentaries from Gary Gastineau

Post by Barry Barnitz » Thu Mar 01, 2007 1:49 pm

Vanguard vs. ETFs

1. An Exchange-Traded Fund or Conventional Fund - You Can't Really Have it Both Ways by Gary Gastineau
Only superior performance expectations and dominance of a very actively traded ETF share class for some of the smaller (and new) Vanguard index funds might make the Vanguard structure as attractive to taxable ETF share class investors as the separate ETFs proposed by Fidelity and already offered by other issuers. Even more attractive to many investors would be a different (not strictly "conventional") share class inside an ETF, with all entry and exit through the ETF share class. Of course, fund structure is only one feature of a successful fund. Fidelity?s choice of the Nasdaq Composite as the index for its first ETF has been widely criticized. We agree with much of the criticism and feel that Fidelity could have made a much better choice. We also prefer the index change process used by MSCI to the index change process used by other index providers.
2. The Anatomy of Tax Efficiency by Gary Gatineau
From the perspective of performance, Vanguard has generally done a better job of managing index funds for retail investors than its ETF competitors. Vanguard also generally uses more efficient indexes than its competitors.The MSCI indexes that Vanguard uses for the VIPERs have a slightly larger cap bias than the offerings of some other index publishers, so comparing performance will not be easy in future years. One result of Vanguard's adoption of the MSCI indexes will be to reduce its relative portfolio management, trading and even printing costs, because most of its funds will hold fewer stock positions with larger average capitalizations than most funds that use Dow Jones or Russell indexes. Taxable investors will probably want to proceed with caution until the VIPERs share classes hold a substantial fraction of the Vanguard index funds' assets. For investors who cannot wait, the Total Stock Market VIPERs and, to a lesser extent, the Extended Market VIPERs offer the best prospects for asset growth, ETF share class dominance and corresponding tax efficiency.
Last edited by Barry Barnitz on Mon May 21, 2007 12:20 pm, edited 4 times in total.
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Post by simba » Thu Mar 01, 2007 1:52 pm

1. ETFs - A new Investment option for Taxable Investors by James Poterba, John Shoven
Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more "tax efficient" than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

2. ETFs not for Everyone by Wilfred Dellva
This paper describes the increasingly popular exchange-traded funds; ETFs, for short; as
alternatives to traditional mutual funds. ETF features are identified and compared with index
mutual funds in terms of trading, creation and redemptions, cost comparisons, and tax
efficiency. The results indicate that transaction costs limit ETF attractiveness for small
investors. The in-kind creation and redemption process of ETFs provide significant tax
efficiencies. Finally, the study finds little or no ETF advantage for the tax deferred, longterm
retirement investor.

3. How ETFs Manage a Tax-Efficiency Edge over Traditional Mutual Funds by Will McClatchy and Jim Wiandt
For all the talk that ETFs are more tax-efficient, there's rarely a detailed explanation of exactly why this is so. As a result, many investors do not truly understand the tax benefits and liabilities of ETFs. It's important to emphasize that ETFs are not a magic potion that will lay Uncle Sam to rest in a field of poppies. There are tax consequences to investing in ETFs, both for the fund and for the individual.

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Post by oneleaf » Thu Mar 01, 2007 5:00 pm

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Post by mikep » Mon May 10, 2010 11:40 am

I added ETF conversion process from my experience to the wiki page given the increase in forum conversations on this topic. ... t_Vanguard