Tell me again why nav and spread isn’t a big deal for etfs

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eleventhstreet
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Tell me again why nav and spread isn’t a big deal for etfs

Post by eleventhstreet » Tue Sep 10, 2019 10:22 pm

So I used to be a traditional mutual fund owner then gravitated towards Etfs
I had otherwise qualified to admiral mutual funds
I always thought the buy sell on mutual funds and nav difference was just a few fractions of a cent. Everyone here treats it like it's peanuts

Now let’s take bndx a very basic part of a four fund portfolio

0.2% nav premium AND a 0.8% buy sell spread which let’s be honest, as a retail investor you probably end up getting the worst deal execution.
So let’s say it’s 0.5% loss on the transaction
That’s a 0.5% load essentially
10,000 that’s $50
And the proposed benefit over a vanguard mutual fund is you can sell six hours sooner
Can someone explain to me what I’m missing here

My takeaway from this is that there's no free lunch. If you're getting all the expense ratios benefits of an admiral fund with non of the minimums AND you're getting instant liquidity you're probably losing something and that's a 0.5% load.

And that example is just with a highly highly liquid ETF imagine something smaller like a state specific tax free Muni bond fund ETF

HawkeyePierce
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by HawkeyePierce » Tue Sep 10, 2019 10:34 pm

Where are you getting your numbers? I see an average spread of 0.02%, an order of magnitude smaller.

https://www.etf.com/BNDX#tradability

AlohaJoe
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by AlohaJoe » Tue Sep 10, 2019 10:40 pm

HawkeyePierce wrote:
Tue Sep 10, 2019 10:34 pm
Where are you getting your numbers? I see an average spread of 0.02%, an order of magnitude smaller.

https://www.etf.com/BNDX#tradability
The OP is looking at bid ask spreads right now (i.e. 11:40pm when the market is closed).

ohai
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by ohai » Tue Sep 10, 2019 11:04 pm

The bid/ask spread on a liquid ETF will almost always be one cent. Price of BNDX is $58.47, meaning the spread would probably be 0.017%, and you'd pay half of that, or 0.0085%.

NAV discount or premium can be meaningful in bond funds, yes. However, you will not necessarily pay that as a cost when you buy a fund with an NAV premium, since that premium could very well persist until you sell the fund. In fact, it could even increase.

Many bond funds trade at a discount to NAV as well. I have a few that I bought at 9% ish NAV discount, and are now at 4% discount (according to the fund company, anyway).

typical.investor
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by typical.investor » Tue Sep 10, 2019 11:07 pm

eleventhstreet wrote:
Tue Sep 10, 2019 10:22 pm
Can someone explain to me what I’m missing here
First could you explain how the mutual fund trades at NAV.

When the US market closes and the mutual fund price is set, are the foreign bond markets open? I mean typically foreign securities don't trade at NAV anyway if their markets aren't open and the current price reflects changes in sentiment since they closed.

I don't see a a 0.5% load estimate on ETFs as anywhere close to realistic.

So please do explain.

pdavi21
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by pdavi21 » Wed Sep 11, 2019 2:46 am

NAV is somewhat of a fake number in some cases. You either take an uncompensated risk to leave NAV calculation to fund managers (who are sometimes horrible at it), or you take uncompensated risks that you will lose/win on the spread and that investors will misprice the true NAV it by bidding an ETF up or down.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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eleventhstreet
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by eleventhstreet » Wed Sep 11, 2019 11:16 am

Okay I get the point, it may be nav that is wrong not the market price.
But in that case if there was ever a premium over nav I’d just buy the mutual fund. Unless you guys are saying even if I buy a vanguard mutual fund from vanguard I still pay premium over nav

Bid ask I did look when markets were closed and checking now it’s smaller than I stated but on more niche etfs it’s still nothing to completely dismiss but yes maybe more like 0.05% on niche etfs

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eleventhstreet
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by eleventhstreet » Wed Sep 11, 2019 11:16 am

Okay I get the point, it may be nav that is wrong not the market price.
But in that case if there was ever a premium over nav I’d just buy the mutual fund. Unless you guys are saying even if I buy a vanguard mutual fund from vanguard I still pay premium over nav

Bid ask I did look when markets were closed and checking now it’s smaller than I stated but on more niche etfs it’s still nothing to completely dismiss but yes maybe more like 0.05% on niche etfs

pdavi21
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by pdavi21 » Wed Sep 11, 2019 12:05 pm

If the NAV premium is larger than usual, buying the fund could be advantageous. If it is lower than usual, converting the mutual fund to an ETF could be advantageous.

One fund that comes to mind is VFSVX/VSS. There is a guy on here who would arbitrage the NAV premium (which had been relatively predictable in the past).

Another fund that comes to mind is EDV. The NAV premium is always large. Either the demand for ETF investment in long term treasuries is too high for efficiency (such that directly buying the treasuries would be cheaper), or Vanguard has never quite figured out how to do NAV.

The returns are not going to be huge unless you can do it on a large portion of your portfolio, and NAV premium can go higher before you sell. There is no rule that it has to average zero, although it probably should.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Jack FFR1846
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by Jack FFR1846 » Wed Sep 11, 2019 12:26 pm

So is the question: "What's so much greater about MF than ETFs?".

My answer would be: "nothing".

I own both. I prefer ETFs.
Bogle: Smart Beta is stupid

megabad
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by megabad » Wed Sep 11, 2019 1:14 pm

as above posters have noted, for a liquid ETF (like a giant Vanguard Index etf), it isn't a big deal because it isn't...big. On a highly liquid fund, we are talking 0.01% - 0.1%. I despise the fact that Vanguard lowered the ERs for ETFs [and not on mutual funds] but now that they have, it seems like it pretty much erased most of the bid ask spread penalty on a lot of the largest index ETFs they have. They are pretty much similar to me. I own both.

Over the very long term, NAV "discount/premium" should not matter in theory so I have ignored that portion of the discussion. If you are daytrading, I suppose it could matter a lot (as could the bid ask spread). Of course, if you are daytrading, you wouldn't use mutual funds anyway.

See link here for Vanguards bid ask spread numbers:
https://advisors.vanguard.com/VGApp/iip ... daskspread
Last edited by megabad on Wed Sep 11, 2019 2:05 pm, edited 1 time in total.

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whodidntante
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by whodidntante » Wed Sep 11, 2019 1:37 pm

megabad wrote:
Wed Sep 11, 2019 1:14 pm
I despise the fact that Vanguard lowered the ERs for ETFs
I offer a service for Vanguard investors who are upset over the reduced fees they pay. Basically you send me money and I waste it like a 1980's New York floor trader. If you want me to use one of those giant brick mobile phones to yell at people, that service is available but extra.

megabad
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by megabad » Wed Sep 11, 2019 1:55 pm

whodidntante wrote:
Wed Sep 11, 2019 1:37 pm
megabad wrote:
Wed Sep 11, 2019 1:14 pm
I despise the fact that Vanguard lowered the ERs for ETFs
I offer a service for Vanguard investors who are upset over the reduced fees they pay. Basically you send me money and I waste it like a 1980's New York floor trader. If you want me to use one of those giant brick mobile phones to yell at people, that service is available but extra.
No need, I will just pay more expenses on my traditional mutual funds to cover the reduced expenses on the ETFs in my portfolio and everyone elses. In other words, I am basically already being forced to do exactly as you suggest. I will say no more. I have ranted about this in the past many times.

anon_investor
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by anon_investor » Wed Sep 11, 2019 2:01 pm

megabad wrote:
Wed Sep 11, 2019 1:55 pm
whodidntante wrote:
Wed Sep 11, 2019 1:37 pm
megabad wrote:
Wed Sep 11, 2019 1:14 pm
I despise the fact that Vanguard lowered the ERs for ETFs
I offer a service for Vanguard investors who are upset over the reduced fees they pay. Basically you send me money and I waste it like a 1980's New York floor trader. If you want me to use one of those giant brick mobile phones to yell at people, that service is available but extra.
No need, I will just pay more expenses on my traditional mutual funds to cover the reduced expenses on the ETFs in my portfolio and everyone elses. In other words, I am basically already being forced to do exactly as you suggest. I will say no more. I have ranted about this in the past many times.
It's not really that bad is it? For example just 1 basis point in expense ratio between VTI/VTSAX. Just this week, there was a day where VTI ended the day with a loss and VTSAX ended up with a gain because of the NAV premium. Now I could see the complaint if the different in expense ratio was a lot more.

Jack FFR1846
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by Jack FFR1846 » Wed Sep 11, 2019 2:03 pm

whodidntante wrote:
Wed Sep 11, 2019 1:37 pm
megabad wrote:
Wed Sep 11, 2019 1:14 pm
I despise the fact that Vanguard lowered the ERs for ETFs
I offer a service for Vanguard investors who are upset over the reduced fees they pay. Basically you send me money and I waste it like a 1980's New York floor trader. If you want me to use one of those giant brick mobile phones to yell at people, that service is available but extra.
Do you offer a service where you will shake your fist at clouds, then turn to onlookers on the sidewalk and yell "get off my lawn!".
Bogle: Smart Beta is stupid

Topic Author
eleventhstreet
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by eleventhstreet » Wed Sep 11, 2019 2:06 pm

Okay I know I said I have been settled on the issue of NAV but another poster brought up a good point
If I can convert admiral shares to ETFs why would any ever buy the ETF if its trading at a premium? You pay more money for literally the same exact product.

anon_investor
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by anon_investor » Wed Sep 11, 2019 2:10 pm

eleventhstreet wrote:
Wed Sep 11, 2019 2:06 pm
Okay I know I said I have been settled on the issue of NAV but another poster brought up a good point
If I can convert admiral shares to ETFs why would any ever buy the ETF if its trading at a premium? You pay more money for literally the same exact product.
Not everyone has enough for the minimum for certain mutual funds. I believe some of Vanguard's mutual funds have $100k minimums, where as the ETF's are probably only around $100-$200 a share.

deltaneutral83
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by deltaneutral83 » Wed Sep 11, 2019 2:14 pm

eleventhstreet wrote:
Wed Sep 11, 2019 2:06 pm
Okay I know I said I have been settled on the issue of NAV but another poster brought up a good point
If I can convert admiral shares to ETFs why would any ever buy the ETF if its trading at a premium? You pay more money for literally the same exact product.
Most BH don't bother with ETF's with wide spreads. I'm talking US TSM/Tot Intl/Total Bond and whatever other various tilts :D BH's have are the norm. I have fired off limit orders on VTI at the bid and been filled the 7 or 8 times within 30 seconds I've done it and the others I just enter at the ask and of course have been filled there nearly instantly. You cannot purchase mutual funds intra day either, that is a factor for some people. The idea of entering an order at lunchtime and having no idea what you pay for it is unsettling for many, it's probably overkill on a 30 year time horizon, but I can certainly relate.

megabad
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Re: Tell me again why nav and spread isn’t a big deal for etfs

Post by megabad » Wed Sep 11, 2019 2:17 pm

eleventhstreet wrote:
Wed Sep 11, 2019 2:06 pm
Okay I know I said I have been settled on the issue of NAV but another poster brought up a good point
If I can convert admiral shares to ETFs why would any ever buy the ETF if its trading at a premium? You pay more money for literally the same exact product.
In theory slight intraday volatility between reconstitutions should not be a large factor over the very very very long term with gradual transactions for a large and solidly constructed ETF. In theory, the price/nav cannot drift too much for too long unless there are major structural issues. As I said before, this would only be a major factor for folks that are flash trading huge swaths of money (in which case this discussion is moot because you have to use ETFs/exhange traded products for this).

Ironically, some of these structural elements are why I still like some traditional mutual funds, but I don't believe they offer me a net monetary advantage in most cases.

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