jeffyscott wrote: ↑Wed Sep 20, 2023 10:44 am
Unless I misunderstood, your concern with mutual funds is that when you rebalance the results might be off your target allocations when you do your rebalancing, because you don't know the exact prices.
Back when I did rebalancing with mutual funds, I actually did very small increments. So, I might do something like move 1% of stocks to bonds, if I were targeting 50/50 and allocation was 55/45 and then I would repeat small moves like that. I think doing a lot of trades like that is easier with mutual funds, so I think my style of rebalancing was easier with mutual funds. In addition, my rebalancing often involved offetting moves in different accounts, we had two employer accounts and two IRA accounts, which is easier to do with mutual funds since all trades entered will execute at the same time.
When you say "my concern with mutual funds" that is not a correct characterization of my comments.
I invested in mutual funds for decades before I ever traded an ETF, and have no "concerns" with them.
But the op asked
"Why should the average Vanguard investor be so concerned with real-time prices and having more trading flexibility? Isn't Vanguard about long-term, buy and hold investing?"
I have been a long-term buy and hold investor for a couple of decades now, before I ever traded an ETF, and still consider myself a long term buy and hold investor even now that I use ETFs. Picking stocks, sectors, paying taxes on gains etc are have similar pros/cons using ETF or open end funds, no reason to be labeled from buy/hold to day trader just because one uses ETFs.
But there absolutely ARE benefits even if you are not a day trader.
1) How can one argue that rebalancing with stale data is better than rebalancing with current data ?
2) As Alex_686 pointed out, the actual valuation is slightly more representative of real world valuation compare to end of day open end valuations.
Not to say open end valuations are not as accurate as they can be, but think about it, every day fund companies gather closing prices after market hours and calculate the value at which you'll trade shares of the fund. For highly liquid US stocks, this is pretty accurate, using an exchange close.
For less liquid securities and especially international securities, there is much more estimation as to what the actual value of an open end mutual fund would be when computed after market hours. I like Alex_686, actually worked on systems to gather, compute such valuations and transmit them to mutual fund accountants like him, for such NAV daily computation. I won't go into all the details but depending on the type of fund, the value is more an estimation than a precise value. ETF prices you trade at are actually what the market will bear for your portion of the basket, nothing more accurate than what people are actually willing to pay you right now.
3) On especially volatile days I would check my account, and see if my asset allocation is way out of whack, and in my case, I will either not rebalance at all (if no threshold has been breached) or I will do the rebalance all in one shot, and I prefer to make such decisions with the most accurate data I can get. This does not make me a market timer nor day trader but I still benefit from price timeliness and accuracy. I am not trying to guess the price later but use the current price now for rebalancing. In fact with open end funds, I used to wait to rebalance after 3pm so that I have a good idea where the market is and can be a bit more accurate than having no idea where the market would close. Now I can do the trade anytime when the market is open and have even more accurate info and ease of rebalancing since I don't have to do any math to figure out the unreported change in values from prior open to today's almost closing valuations. All changes are reported and easily utilized.
4) As to "having more trading flexibility" I appreciate the idea that there are no trading restrictions, not so I can day trade, but also this eliminates any fund manager restrictions such as holding periods. Also eliminates restrictions from holding a fund at a particular broker, I can trade ETFs at any broker I want. Fidelity zero funds are cheap but I can't trade them anywhere but Fidelity. ETFs aren't zero ER but some are pretty close without any such restrictions as to WHERE I can trade them. Same goes for Vanguard Admiral funds where there is an equivalent Investor series. Many brokers will allow only the Investor shares not Admiral shares to be traded, so to get the low ER, one has to either stick with Vanguard brokerage OR convert to ETFs. In many cases there is no exact equivalent ETF, such as my NY Muni fund, where I hold Admiral at Vanguard, but could trade ishares NY muni fund and trade at any broker. In that case the ER is higher for the ETF, so one must decide whether were you trade is more important than having the lowest ER, but no doubt ETFs give you more flexibility as to where to trade. In most cases there is no trade-off, the ETFs are usually cheaper alternatives and have more trading flexibility, a win win situation often. The fact I now hold an admiral fund is due to my preference first to get the right exposure and tax ramifications (NY munis in open end fund vs VTEB ETF with different tax ramifications), lowest fees (so Admiral not ishares high fee NYF) and lastly I do prefer ETF (so if they ever create an ETF of the Vanguard NY tax exempt I would convert in a second). But given no good ETF out there, I am happy to own open end funds, and especially for bonds where the intraday price movements are lower. All my equities are now ETF, and some of my fixed income is in open end but most in ETF (as feasible to meet other goals of cost and strategy). So yeah, I gave up the ability to move from Vanguard, but given it's a bond fund, I could sell it and buy something else if I really want to move, gains aren't often huge on a bond fund. But if it was an ETF, no need to sell, so in such case an ETF can actually allow one to do LESS trading and report LESS capital gains.
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