WSJ: When to Pick Mutual Fund over ETF?

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wstrdg
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WSJ: When to Pick Mutual Fund over ETF?

Post by wstrdg » Thu Aug 09, 2018 12:49 pm

https://www.wsj.com/articles/when-to-pi ... 1533521340
All else being equal, there are two primary factors that can differentiate mutual funds and ETFs tracking the same index—the tax efficiency of ETFs over the long run, and the implied cost of a bid-ask spread that ETFs face but mutual funds don’t.

Jack FFR1846
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by Jack FFR1846 » Thu Aug 09, 2018 12:55 pm

Mutual fund is beer in a bottle. ETF is beer in a can. Same beer inside.

If you're buying an ETF during trading hours and it's a widely traded ETF, you're paying the spread of what? 2 cents a share? (I just looked at SCHB and it's exactly 2 cents a share). Big deal. If it bothers you, put in a limit order for 2 cents lower than the current bid, so you pick it up even cheaper than anyone within the spread this second.

I have both. Makes zero difference to me. Fractional shares? I don't care.
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iceport
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by iceport » Thu Aug 09, 2018 12:59 pm

wstrdg wrote:
Thu Aug 09, 2018 12:49 pm
https://www.wsj.com/articles/when-to-pi ... 1533521340
All else being equal, there are two primary factors that can differentiate mutual funds and ETFs tracking the same index—the tax efficiency of ETFs over the long run, and the implied cost of a bid-ask spread that ETFs face but mutual funds don’t.
Derek Horstmeyer wrote:The one exception to this is Vanguard, which implements a proprietary pooling system of assets to deliver posttax benefits to both ETFs and mutual funds.
I guess the implication is that, according to the analysis described in the article, Vanguard mutual funds always come out ahead of identically priced Vanguard ETFs, no matter the holding period?
"Discipline matters more than allocation.” ─William Bernstein

MotoTrojan
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by MotoTrojan » Thu Aug 09, 2018 1:23 pm

Jack FFR1846 wrote:
Thu Aug 09, 2018 12:55 pm
Mutual fund is beer in a bottle. ETF is beer in a can. Same beer inside.

If you're buying an ETF during trading hours and it's a widely traded ETF, you're paying the spread of what? 2 cents a share? (I just looked at SCHB and it's exactly 2 cents a share). Big deal. If it bothers you, put in a limit order for 2 cents lower than the current bid, so you pick it up even cheaper than anyone within the spread this second.

I have both. Makes zero difference to me. Fractional shares? I don't care.
While this is true at Vanguard, there are implications elsewhere in taxable accounts.

livesoft
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by livesoft » Thu Aug 09, 2018 1:26 pm

The article says they used Morningstar after-tax returns which we know are bogus, so toss this article into the trash can.
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GAAP
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GAAP » Fri Aug 10, 2018 12:05 pm

Jack FFR1846 wrote:
Thu Aug 09, 2018 12:55 pm
Mutual fund is beer in a bottle. ETF is beer in a can. Same beer inside.

If you're buying an ETF during trading hours and it's a widely traded ETF, you're paying the spread of what? 2 cents a share? (I just looked at SCHB and it's exactly 2 cents a share). Big deal. If it bothers you, put in a limit order for 2 cents lower than the current bid, so you pick it up even cheaper than anyone within the spread this second.

I have both. Makes zero difference to me. Fractional shares? I don't care.
Yes, but does the beer taste the same? :wink:

Bid/ask on the Vanguard ETFs that I hold is usually under 2 cents. I prefer ETFs in particular because I can make a decision to buy/sell based upon the market state now, rather than whatever might happen at the end of the day. That is particularly helpful for TLH. I have additional reasons that probably don't apply to most here -- potential of an ex-pat retirement.

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triceratop
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by triceratop » Fri Aug 10, 2018 12:15 pm

Is it hubris that I never find anything of value in and often completely disagree with WSJ financial reporting? As livesoft said, nothing new to see here.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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GerryL
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GerryL » Fri Aug 10, 2018 12:39 pm

As Jack Bogle says: There's nothing wrong with exchange-traded funds … as long as you don't trade them.

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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GAAP » Fri Aug 10, 2018 12:47 pm

GerryL wrote:
Fri Aug 10, 2018 12:39 pm
As Jack Bogle says: There's nothing wrong with exchange-traded funds … as long as you don't trade them.
That's equally true for mutual funds...

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GerryL
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GerryL » Fri Aug 10, 2018 1:05 pm

GAAP wrote:
Fri Aug 10, 2018 12:47 pm
GerryL wrote:
Fri Aug 10, 2018 12:39 pm
As Jack Bogle says: There's nothing wrong with exchange-traded funds … as long as you don't trade them.
That's equally true for mutual funds...
Yes. I believe that was his point. He is not a fan of a product that seems to promote trading.

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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GAAP » Fri Aug 10, 2018 1:16 pm

GerryL wrote:
Fri Aug 10, 2018 1:05 pm
GAAP wrote:
Fri Aug 10, 2018 12:47 pm
GerryL wrote:
Fri Aug 10, 2018 12:39 pm
As Jack Bogle says: There's nothing wrong with exchange-traded funds … as long as you don't trade them.
That's equally true for mutual funds...
Yes. I believe that was his point. He is not a fan of a product that seems to promote trading.
I get that, but I wonder if it's really a chicken-and-egg thing. Are people who buy ETFs more likely to trade anyway?

I care about that relative ease when actually executing a transaction -- but nearly all of my transactions are purchases with new funds. Perhaps the real answer is "know thyself" (and don't be an idiot).

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triceratop
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by triceratop » Fri Aug 10, 2018 1:19 pm

GAAP wrote:
Fri Aug 10, 2018 1:16 pm
I get that, but I wonder if it's really a chicken-and-egg thing. Are people who buy ETFs more likely to trade anyway?

I care about that relative ease when actually executing a transaction -- but nearly all of my transactions are purchases with new funds. Perhaps the real answer is "know thyself" (and don't be an idiot).
Right, this has always been a narrow-minded strawman used to attack serious, sensible investing using ETFs, which of course is completely fine.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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wjo
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by wjo » Fri Aug 10, 2018 1:27 pm

Bill Bernstein suggests that using bond ETFs is not recommended as ETFs lack a mutual fund's requirement to redeem shares at NAV. In a liquidity crisis, the price of Bond ETF may drop way below the price of the underlying bonds and market makers may not able to use arbitrage effectively to keep the ETF price close to the underlying value. Bernstein suggests this is particularly a problem in corporate and municipal bond ETFs where bonds can be thinly traded, esp. in a crisis.

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triceratop
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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by triceratop » Fri Aug 10, 2018 1:30 pm

wjo wrote:
Fri Aug 10, 2018 1:27 pm
Bill Bernstein suggests that using bond ETFs is not recommended as ETFs lack a mutual fund's requirement to redeem shares at NAV. In a liquidity crisis, the price of Bond ETF may drop way below the price of the underlying bonds and market makers may not able to use arbitrage effectively to keep the ETF price close to the underlying value. Bernstein suggests this is particularly a problem in corporate and municipal bond ETFs where bonds can be thinly traded, esp. in a crisis.
As someone who doesn't expect to sell things when their prices are depressed I don't think I should care whether the price is depressed relative to NAV is in a crisis. Okay that isn't true -- I would consider mutual funds strictly worse in this situation because by continuing to hold I am possibly being hurt by other investors running for the exits.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by GAAP » Fri Aug 10, 2018 1:39 pm

triceratop wrote:
Fri Aug 10, 2018 1:30 pm
wjo wrote:
Fri Aug 10, 2018 1:27 pm
Bill Bernstein suggests that using bond ETFs is not recommended as ETFs lack a mutual fund's requirement to redeem shares at NAV. In a liquidity crisis, the price of Bond ETF may drop way below the price of the underlying bonds and market makers may not able to use arbitrage effectively to keep the ETF price close to the underlying value. Bernstein suggests this is particularly a problem in corporate and municipal bond ETFs where bonds can be thinly traded, esp. in a crisis.
As someone who doesn't expect to sell things when their prices are depressed I don't think I should care whether the price is depressed relative to NAV is in a crisis. Okay that isn't true -- I would consider mutual funds strictly worse in this situation because by continuing to hold I am possibly being hurt by other investors running for the exits.
In that situation, at least the ETF holders know what price they'll get. MF holders don't know until after it happens -- and may bail out thinking they'll get more than they actually end up with.

That after-close settlement of mutual funds has bothered me for decades, and was a primary impetus for me to choose ETFs.

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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by vineviz » Fri Aug 10, 2018 2:11 pm

GAAP wrote:
Fri Aug 10, 2018 1:39 pm
triceratop wrote:
Fri Aug 10, 2018 1:30 pm
wjo wrote:
Fri Aug 10, 2018 1:27 pm
Bill Bernstein suggests that using bond ETFs is not recommended as ETFs lack a mutual fund's requirement to redeem shares at NAV. In a liquidity crisis, the price of Bond ETF may drop way below the price of the underlying bonds and market makers may not able to use arbitrage effectively to keep the ETF price close to the underlying value. Bernstein suggests this is particularly a problem in corporate and municipal bond ETFs where bonds can be thinly traded, esp. in a crisis.
As someone who doesn't expect to sell things when their prices are depressed I don't think I should care whether the price is depressed relative to NAV is in a crisis. Okay that isn't true -- I would consider mutual funds strictly worse in this situation because by continuing to hold I am possibly being hurt by other investors running for the exits.
In that situation, at least the ETF holders know what price they'll get. MF holders don't know until after it happens -- and may bail out thinking they'll get more than they actually end up with.

That after-close settlement of mutual funds has bothered me for decades, and was a primary impetus for me to choose ETFs.
I agree, and I also think that in most types of crisis there is likely to be a flight to quality that would be more likely to favor bonds than to hurt them (especially Treasury bonds).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: WSJ: When to Pick Mutual Fund over ETF?

Post by rkhusky » Sat Aug 11, 2018 7:16 am

triceratop wrote:
Fri Aug 10, 2018 1:30 pm
wjo wrote:
Fri Aug 10, 2018 1:27 pm
Bill Bernstein suggests that using bond ETFs is not recommended as ETFs lack a mutual fund's requirement to redeem shares at NAV. In a liquidity crisis, the price of Bond ETF may drop way below the price of the underlying bonds and market makers may not able to use arbitrage effectively to keep the ETF price close to the underlying value. Bernstein suggests this is particularly a problem in corporate and municipal bond ETFs where bonds can be thinly traded, esp. in a crisis.
As someone who doesn't expect to sell things when their prices are depressed I don't think I should care whether the price is depressed relative to NAV is in a crisis. Okay that isn't true -- I would consider mutual funds strictly worse in this situation because by continuing to hold I am possibly being hurt by other investors running for the exits.
What happened in 2008? Were bond ETF holders disadvantaged when they wanted to sell bonds to buy stocks in order to rebalance?

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