Vanguard Total Stock Market Index: ETFs Exceed Admiral for the First Time?

[beyou]

Of course, if you also account for the mutual fund share classes that are not Admiral (Investor and the various Institutional classes), the mutual fund classes still are far larger than the ETF share class. (Institutional share classes have assets in excess of $600 billion at June 30).

There are no more Investor shares, that was folded into Admiral shares.

Not so. It still exists and it has $18 billion in assets. I was going to mention that earlier but since it is so small relative to the Admiral and institutional share classes it seemed a little silly. But, yes, VTI is slightly smaller than the two retail classes, VTSMX and VTSAX combined.

Vanguard tries to hide VTSMX. The fund is of course closed to new purchases. I assume that they are trying to "promote" Investor shares to Admiral wherever they can. But $18 billion ain't hay.

Source

Besides the fact that it is a static legacy remnant of past decisions, and not growing, there is also reason for the few remaining shareholders of share class to be furious. Vanguard basically took direct investors in the Investor class, moved them to Admiral immediately giving them a discount on the same product/service. For the remaining owners, why are they not benefiting from this cost reduction ? It is because of holding funds like LifeStrategy (and in case of Total International, Investor class is still held in Target funds). Why don’t these 1 fund investors get the same cost reduction as all other Vanguard investors ? I know in the past when we had large min investments in Admiral, they had some marketing and legal reasons for why they could not or would not use Admiral in Target/Lifestrategy. But today they have even cheaper “Institutional” shares of Total Stock in Target Funds, so whatever the reason past use of Investor shares seems resolved and can be changed. I would be outraged as a Lifestrategy holder if I couldn’t get the same change made for my fund and lower my ER. I think this is just Vanguard being Vanguard, slowly plodding along trying to make a large change, similar to the attempts to eliminate the “old platform” they are likely going to eliminate the Total Stock Investor shares unless there is some insurmountable legal issue (and usually that just means time and money spent on legal fees which is likely part of the reason for the slow progress).

[Parkinglotracer]

Vanguard does not do auto RMDs or auto investments with ETFs so in those accounts where I want auto distros / investments I use mutual funds.

Yes, We can put a person on the moon but we can’t ….

[gutterman]

Cool stat. We are 100% mutual funds. Happy to stay here.

Why MFs over ETFs?

ETFs are a hair cheaper to run than mutual funds. For context I used to work in brokerage operations and mutual fund accounting.

They are portable so you are not tied to a single brokerage. You have access to options which is a advantage to some.

There are other minor differences and they all are slightly in favor of ETFs rather than mutual funds.

I would also love to hear from the “old guard” why you are staying with mutual funds (apart from the obvious unrealized gains and possible tax consequences of switching). I know Bogle didn’t like them at first because he thought it would encourage active trading instead of buy-and-hold but you can definitely still buy-and-hold with ETFs.

When something has worked so well for you, why change it?

[nisiprius]

...Fidelity and many other active managers are coming out with Active ETFs as we speak. A former employer of mine who was 100% an active manager (offers NO index fund products) is creating ETFs today as we speak...Active ETFs are growing somewhat even as active open end funds are shrinking rapidly in asset size.

Industry excitement does not necessarily mean all that much in dollars. According to ETFdb,

With 1255 ETFs traded on the U.S. markets, Active Management ETFs have total assets under management of $463.57B. The average expense ratio is 0.69%.

According to the ICI, all ETFs together have assets of $6.5 trillion. The ETF landscape is overwhelmingly index ETFs, and there is over thirteen times as much money in index ETFs as in active ETFs.

[beyou]

As noted above, despite having an equal or greater expense ratio, over its lifetime.

Not so sure this is valid.

M* charts let you compare nav growth with dividend and over the MAX timeframe they have VTI slightly outperforms.

Now of course one cannot trade an ETF at NAV, you’ll say.
But equally valid is the fact that one cannot trade VTSAX at any price BUT NAV, and in ETF investors can enter and exit at ANY price using limit orders and such intraday. Very difficult to know if in the real world of investor returns, the avg holder is doing better or worse. Maybe market timing habits will help or hurt, but the ER absolutely increases your chance of outperformance, on avg. Yes, we can’t easily get the data and charts you will only rely upon, but that data is out there if one wants to make the effort. Every single trade is recorded in every stock and it us possible to gather such data if it matters to you.

Does not matter to me, as the advantage of lower fees does not seem to be disputable. Seems like the old arguments against the new fangled index funds…yeah they cost less but the active manager will outperform. Sometimes they do, sometimes they don’t, but their higher ER no doubt makes the task of outperformance more challenging. In this discussion, the analogy is that the retail ETF investor is the active trader except they have the cost advantage now. So while they may make bad timing decisions, they do have the wind in their backs.

And even if sometimes VTSAX does slightly better due to discounts on VTI, outpeformance was never my primary reason for converting to VTI. There are many pros and cons, good that Vanguard offers both so we can choose based on how we value those pros and cons. One of the differentiators absolutely is cost, one of many to consider.

[nisiprius]

I would also love to hear from the “old guard” why you are staying with mutual funds (apart from the obvious unrealized gains and possible tax consequences of switching).

When something has worked so well for you, why change it?

To put it another way, other than being one of the kewl kids, I see no advantage at all to changing.

Here's the kind of thing I mean: this poster wants to know

Does Placing Order Before Market Open Matter for High Volume ETFs Like VTI?

I ask to see whether I should continue my practice of placing orders around 5AM before market open using market orders...

I know the general rule with ETFs is to not trade at market open or 30 min before close, but does that really apply to high volume ETFs?

I don't know the answer. With mutual funds, I don't need to know.

[beyou]

...Fidelity and many other active managers are coming out with Active ETFs as we speak. A former employer of mine who was 100% an active manager (offers NO index fund products) is creating ETFs today as we speak...Active ETFs are growing somewhat even as active open end funds are shrinking rapidly in asset size.

Industry excitement does not necessarily mean all that much in dollars. According to ETFdb,

With 1255 ETFs traded on the U.S. markets, Active Management ETFs have total assets under management of $463.57B. The average expense ratio is 0.69%.

According to the ICI, all ETFs together have assets of $6.5 trillion. The ETF landscape is overwhelmingly index ETFs, and there is over thirteen times as much money in index ETFs as in active ETFs.

Yes, you are repeating the very points I made already, and made in the ‘M* article.

1) Active open end funds are shrinking
2) If active open end funds are shrinking, how much $ demand could there be for ETF versions ?
3) But managers feel that for those investors who want active, they will offer ETF now.

Any new product starts off slow with little assets, and only a handful of funds ever grow very large. There were only so many Fidelity Magellan funds, and many more open end funds that languish with a small asset size, and many that close as inefficiently small. Active ETF is new so of course small, but is the only growth in terms of creating new active funds.

Your comments reflect more on the stage of the progress and relative popularity of active products now.

Personally I think these asset managers are wasting $ creating active ETFs. I worked in the industry for decades and saw how the execs think. They all want to jump on trends, even if the trends do not seem likely to benefit themselves. Hard to be the dinosaur in management who says “these ETF things are a fad”.

[beyou]

I would also love to hear from the “old guard” why you are staying with mutual funds (apart from the obvious unrealized gains and possible tax consequences of switching).

When something has worked so well for you, why change it?

To put it another way, other than being one of the kewl kids, I see no advantage at all to changing.

Here's the kind of thing I mean: this poster wants to know

Does Placing Order Before Market Open Matter for High Volume ETFs Like VTI?

I ask to see whether I should continue my practice of placing orders around 5AM before market open using market orders...

I know the general rule with ETFs is to not trade at market open or 30 min before close, but does that really apply to high volume ETFs?

I don't know the answer. With mutual funds, I don't need to know.
[/quote]

So how is your model T Ford running these days ?

Personally I think both have advantages, no right or wrong.

Pros to ETF

portability (some Vanguard Admiral funds
cannot be transferred by acat). Admiral muni funds are a good example, but their muni etf index fund can be ported anywhere.

lower cost

ability to get in or out WHENEVER YOU WANT, at a price you know, vs a TBD price you find out later

rebalancing is more accurate with consistent timely info

ease of exchanges across fund families

Pros to open end

Ease of making a deposit or withdrawal as if it was a bank acct

Ease of exchanges among same fund family.

Ease of automating certain tasks like RMD. When you have limited choices of when and at what price to execute a trade, easier to automate. Choices make automation challenging but give you flexibility to choose instead.

Next day funds availability, though ETFs will have this as well in May 2024 (T+2 becomes T+1 for all US equity trades including ETFs).

I could sleep fine at night with using open end funds, and had reasons I resisted and delayed moving from the old Vanguard fund-only platform. My reasons were employment related, ETF/equity trading were tightly monitored for those who work in the industry, not at all for open end funds. But upon retiring from the industry, I immediately transitioned to brokerage and started converting my open end funds. For the first time in years I now own non-Vanguard funds, competition is a great thing, and ease of owning any ETF at any broker has made it convenient to take advantage of competition.

[Do_Nothing]

Here's the kind of thing I mean: this poster wants to know

Does Placing Order Before Market Open Matter for High Volume ETFs Like VTI?

I ask to see whether I should continue my practice of placing orders around 5AM before market open using market orders...

I know the general rule with ETFs is to not trade at market open or 30 min before close, but does that really apply to high volume ETFs?

I don't know the answer. With mutual funds, I don't need to know.

OP of that thread chiming in. I agree with you. Years ago I held VTSAX at Vanguard and didn’t have any concerns or questions about anything related to execution prices, bid/spread, time of day volatility, etc.

I switched over to ETFs for portability and changed brokerages. I like the portability factor, but I miss the simplicity of VTSAX and a truly set it and forget it approach.

Debating now between either using the new Fidelity auto investment into ETF function, or opening a Vanguard account and returning to VTSAX.

[beyou]

Vanguard does not do auto RMDs or auto investments with ETFs so in those accounts where I want auto distros / investments I use mutual funds.

Yes, We can put a person on the moon but we can’t ….

With a target date fund in an IRA or 401k, sure why not have this automated ? If i have more than one fund, why would I want Vanguard to choose where I get then RMD (or why would I want to give fixed standing instructions to each year take from same fund) ?

For those who want simplicity, yeah Target Date Funds and auto rmd is great. But flexibility reduced simplicity. Pick your poison. I do not use Target Date 1 fund solutions for me but recommend for those who are hands off so they avoid high fee asset managers. I do not mind rebalancing and also prefer to pick where to get withdrawals, whether mandated RMD or other withdrawals I choose to make in any account or at any time.

The only thing I ever used was the RMD calculator, to know the amount needed to withdraw, other than that, don’t need anything else automated for RMD. Just another withdrawal like any other, except for the mandated amount.

[Parkinglotracer]

Vanguard does not do auto RMDs or auto investments with ETFs so in those accounts where I want auto distros / investments I use mutual funds.

Yes, We can put a person on the moon but we can’t ….

With a target date fund in an IRA or 401k, sure why not have this automated ? If i have more than one fund, why would I want Vanguard to choose where I get then RMD (or why would I want to give fixed standing instructions to each year take from same fund) ?

For those who want simplicity, yeah Target Date Funds and auto rmd is great. But flexibility reduced simplicity. Pick your poison. I do not use Target Date 1 fund solutions for me but recommend for those who are hands off so they avoid high fee asset managers. I do not mind rebalancing and also prefer to pick where to get withdrawals, whether mandated RMD or other withdrawals I choose to make in any account or at any time.

The only thing I ever used was the RMD calculator, to know the amount needed to withdraw, other than that, don’t need anything else automated for RMD. Just another withdrawal like any other, except for the mandated amount.

We have two small inherited IRAs and take the auto withdrawals from vtsax / vtiax; one year when I was busy as my sister’ executor the vanguard accounts switched to brokerage accounts and auto rmds were stopped - I forgot to check on it. Forgetting is a painful paperwork process.

[beyou]

Vanguard does not do auto RMDs or auto investments with ETFs so in those accounts where I want auto distros / investments I use mutual funds.

Yes, We can put a person on the moon but we can’t ….

With a target date fund in an IRA or 401k, sure why not have this automated ? If i have more than one fund, why would I want Vanguard to choose where I get then RMD (or why would I want to give fixed standing instructions to each year take from same fund) ?

For those who want simplicity, yeah Target Date Funds and auto rmd is great. But flexibility reduced simplicity. Pick your poison. I do not use Target Date 1 fund solutions for me but recommend for those who are hands off so they avoid high fee asset managers. I do not mind rebalancing and also prefer to pick where to get withdrawals, whether mandated RMD or other withdrawals I choose to make in any account or at any time.

The only thing I ever used was the RMD calculator, to know the amount needed to withdraw, other than that, don’t need anything else automated for RMD. Just another withdrawal like any other, except for the mandated amount.

We have two small inherited IRAs and take the auto withdrawals from vtsax / vtiax; one year when I was busy as my sister’ executor the vanguard accounts switched to brokerage accounts and auto rmds were stopped - I forgot to check on it. Forgetting is a painful paperwork process.

Apple reminder app works wonders for me.
I calendar everything I need to do.
I do automate what makes sense to me, like monthly fixed amt withdrawals from a mmkt fund to pay a known amount of bills each month, but I still login to verify and then release the bill payment.

[nisiprius]

As noted above, despite having an equal or greater expense ratio, over its lifetime.

Not so sure this is valid...

Here's what I understand you to be saying.

1) You agree that (at least for this particular fund and ETF) the fund investor would have $68 more in their pocket.

2) You argue that this is not valid, because overall the actual costs borne by the provider are lower, and therefore the ETF investor may have $68 less in their pocket, but somebody else in the system--probably the authorized participants--have (let's say) $72 more in their pocket, so overall the world is $4 better with the ETFs.

3) Therefore, out of a spirit of altruism, I ought to convert to ETFs.

Or possibly? you are arguing that

1) ETFs are better for the investment industry, and only microscopically worse for me.

2) Therefore, they are the wave of the future and sooner or later they are going to figure to force me to convert, by adding costs or inconvenience or bad customer service.

3) Therefore, I should convert now, to avoid hypothetical future annoyances that haven't actually occurred yet.

My answer to that is that this argument does make sense, and it's the reason why I migrated to the new Vanguard platform a few years ago, but I don't sense that it is anywhere close to being true for mutual funds and ETFs... yet. I will know that it's time when Vanguard tells me that they are instituting a $250/year fee for mutual funds and urges me to click one button to migrate all my mutual funds to ETFs.

[alex_686]

As noted above, despite having an equal or greater expense ratio, over its lifetime VTSAX has outperformed VTI. VTSAX investors made $68 more than VTI investors. Without bad behavior by a few VTSAX short-term traders, would it have been $70? Without the drag of having to keep 0.5% in a redemption fund and only being 99.5% invested, would it have been $72?

This is a bit off. After all, VTI and VTSAX price measures the same thing, the Vanguard Total Stock Market Index Fund. You may want to ask why two different ways of measuring value is giving you two different results.

And while VTI currently has a lower expense ratio this is newish thing.

This is often said and it sounds plausible, and "costs to the fund" are commonly cited as the reason for active trading policies. But where's the real-world example of a closely-matched mutual fund/ETF pair where you can show convincingly that would-be buy-and-hold mutual fund investors were hurt by active traders?

This is at best a strawman argument because there are no closely matched mutual fund/ETF pairs. For those confused about the pair VTI/VTSAX it is because they are not a pair. They are the same fund, trading costs are at the fund level and they are both the same fund.

So that is not a option. So let us go over what we do know.

Trading costs are not part of the expense. So we are going to need to find some way to measure the costs of running the trading desk (which Vanguatrd is too shy to state in its annual reports), commissions (not stated for the obvious reasons), and drag from market impact of trading (bid/ask spread, VWAP).

We know what these costs are for a S&P 500 index ETF. $0. If a index says that a standard trading basket should have 10,000 shares of Apple then when a AP creates or redeems a basket they provided exactly that share amount. No drag from entering the market. Plus the AP pays Vanguard for this privilege.

Note, I am assuming that the trading basket fully replicas the index. There may be slippage where the trading basket is partially negotiated. For example, in funds that follow less popular indexes (such as the CRSP indexes, where Vanguard is the only user), have a high number of securities (like VTI/VTSAX), or have illiquid securities (the small cap section of VTI/VTSAX).

Figuring this out for a mutual fund is much harder. We know trading has direct costs - we can measure that. However most of the impact are implicated. As such they can't be directly measured.  

The problem for you Nisiprius is that you can't throw a long performance analysis and see the difference. The market dynamics are ever shifting.

To be specific, you might think I would haul out the coup de grâce that if ETFs have a zero trading costs and mutual funds have a trading costs than obviously ETFs are cheaper to run.

Expect maybe Vanguard is using a passive trading strategy against information traders, letting the market come to them. A example of this would be selling order flow. As such maybe Vanguard's trading costs are negative. Expect that using limit orders exchanges a possible better price for certainty of execution, which leads to the delay of filling your orders, which leads to slippage, which leads to a larger tracking error.

Sometimes a passive trading stratgy is better, sometimes not.

We live in a world of uncertainty. Sometimes you just have to play the odds.

[nisiprius]

I concede, and always have conceded, that ETFs are more efficient for the providers. As BillAster notes, what is missing is any compelling evidence that there is a meaningful advantage for the ETFs' investors. Either it doesn't trickle down, or it is truly just a trickle.

The argument seems to be that ETFs are better for the industry, and about the same for the investor, ergo investors ought to migrate to ETFs.

I don't say that my example proves that VTSAX is better than VTI. I just say that any alleged benefits of ETFs to investors don't have enough signal-to-noise ratio to be detectable. The fact that VTSAX did put more money in investors' pockets over the obvious time frame--whether or not it theoretically "should" have--shows this. Let's suppose it's entirely due to some market vagaries on the first and last days of the time period and could have gone the other way: my point is still valid.

You can demonstrate by physics that if I have no cargo in the trunk of my car I will get better fuel efficiency by filling the trunk with helium balloons, but that isn't in itself a reason to do it.

[beyou]

As noted above, despite having an equal or greater expense ratio, over its lifetime.

Not so sure this is valid...

Here's what I understand you to be saying.

1) You agree that (at least for this particular fund and ETF) the fund investor would have $68 more in their pocket.

2) You argue that this is not valid, because overall the actual costs borne by the provider are lower, and therefore the ETF investor may have $68 less in their pocket, but somebody else in the system--probably the authorized participants--have (let's say) $72 more in their pocket, so overall the world is $4 better with the ETFs.

3) Therefore, out of a spirit of altruism, I ought to convert to ETFs.

Or possibly? you are arguing that

1) ETFs are better for the investment industry, and only microscopically worse for me.

2) Therefore, they are the wave of the future and sooner or later they are going to figure to force me to convert, by adding costs or inconvenience or bad customer service.

3) Therefore, I should convert now, to avoid hypothetical future annoyances that haven't actually occurred yet.

My answer to that is that this argument does make sense, and it's the reason why I migrated to the new Vanguard platform a few years ago, but I don't sense that it is anywhere close to being true for mutual funds and ETFs... yet. I will know that it's time when Vanguard tells me that they are instituting a $250/year fee for mutual funds and urges me to click one button to migrate all my mutual funds to ETFs.

Neither of above is what I was implying at all.

No an investor does NOT have $68 more in their pocket, not at all.
You have NO $ in your pocket until you sell.
The price at which you sell could and does vary between ETF and open end fund.
The price at which you buy could and does very between the two, affecting YOUR gain or loss that you personally experience.
Any returns you see published on open end funds, that is exactly the return their investors received if they happened to trade those dates.
But returns you see for ETFs are not the return that ANY investor receives at all, as one cannot truly buy and sell at the close with the exact closing price published. Everyone gets a slightly different price. The results you are quoting are simply incorrect. The only way to compare two things is to eliminate variables and if you compare the NAV with dividend returns for the ETF and open end equivalent, the cumulative returns for the period both existed are higher for the ETF, period. That is a fact as of the latest data I saw in M* this morning. No reason that should vary much since both funds have same holdings with lower fees charges to the NAV of the ETF than to the NAV of the open end fund.

In bullish times the premium may cause ETF shareholders buy higher but sell higher.
In bearish times the discount may cause ETF shareholders to buy lower but then sell lower.
People who buy in bearish times and sell in bullish times (rebalancing) will do well in that scenario.
The time of day, which broker executes, on what trading venue at what order size all drive the actual $ you will pocket.
You may not like that complexity, but that does not change the fact that your assertion that the open end fund performed better is just wrong.
The comparison is not valid.

I would also say that ETFs are better for ME, I don't care as much if they are better for Vanguard or the industry.
I explained why in another post on this thread.

Note historically for Closed End funds, which have many overlapping mechanics like ETF, if the discount became too large for too long,
a closed end fund could be liquidated AT NAV and return the NAV to all shareholders. In theory the value of a exchange traded fund is the NAV,
since this is always a possibility. It is also possible for you to sell at MORE than NAV having an even higher return. But the NAV is published and reported so people can consider this when evaluating their trading strategy. Not exactly same but for some aspects of closed end funds as related to performance comparisons, this is a valid analogy to ETFs. If anything the discounts and premiums are smaller on ETF than Closed end funds due to the creation/destruction process that effectively allows the marketplace do what shareholder activists must do for closed end funds (petition to liquidate when there is a large discount). This is a primary reason for the migration from closed to open to ETF over the years. ETF is the best of both worlds IMO.

[Northern Flicker]

...One significant advantage of ETFs is that the investor is shielded from the effects of active traders of the fund. With a mutual fund, active traders and market timers can bleed cash out of the fund, at the expense of buy and hold investors. That is why fund companies have active trading policies for mutual funds. These help significantly, but do not eliminate the problem fully...

This is often said and it sounds plausible, and "costs to the fund" are commonly cited as the reason for active trading policies. But where's the real-world example of a closely-matched mutual fund/ETF pair where you can show convincingly that would-be buy-and-hold mutual fund investors were hurt by active traders?

We don't find those because ETFs exist for the active traders, keeping them out of the mutual funds. Twenty to twenty-five years ago, there was enough evidence of active trading harming mutual funds for the SEC to create requirements for frequent trading policies.

The existence of ETFs is a win for mutual fund investors.

I prefer mutual funds in many situations. I am fine with ETFs. What does not work well is the combination. Rebalance from a stock ETF to a bond mutual fund and the T+2 settlement means being out of the market for 2 days. In the other direction, funds from the bond mutual fund have to be moved to a settlement/sweep MMF before purchasing the ETF, resulting mutf exchange to sweep on day 1, and ETF share purchase on day 2.

I think ETFs that include corporate bonds or mortgages are problematic (including a total bond ETF). These are large universes of heterogeneous bonds, and creation baskets are a small subset. This offers too much latitude for my taste for the APs to play games with the creation baskets.

[Parkinglotracer]

Vanguard does not do auto RMDs or auto investments with ETFs so in those accounts where I want auto distros / investments I use mutual funds.

Yes, We can put a person on the moon but we can’t ….

With a target date fund in an IRA or 401k, sure why not have this automated ? If i have more than one fund, why would I want Vanguard to choose where I get then RMD (or why would I want to give fixed standing instructions to each year take from same fund) ?

For those who want simplicity, yeah Target Date Funds and auto rmd is great. But flexibility reduced simplicity. Pick your poison. I do not use Target Date 1 fund solutions for me but recommend for those who are hands off so they avoid high fee asset managers. I do not mind rebalancing and also prefer to pick where to get withdrawals, whether mandated RMD or other withdrawals I choose to make in any account or at any time.

The only thing I ever used was the RMD calculator, to know the amount needed to withdraw, other than that, don’t need anything else automated for RMD. Just another withdrawal like any other, except for the mandated amount.

We have two small inherited IRAs and take the auto withdrawals from vtsax / vtiax; one year when I was busy as my sister’ executor the vanguard accounts switched to brokerage accounts and auto rmds were stopped - I forgot to check on it. Forgetting is a painful paperwork process.

Apple reminder app works wonders for me.
I calendar everything I need to do.
I do automate what makes sense to me, like monthly fixed amt withdrawals from a mmkt fund to pay a known amount of bills each month, but I still login to verify and then release the bill payment.

I would use it if I needed to I guess.

[WhitePuma]

Here’s another reason that those with mutual funds might not change legacy holdings over:

If one has both covered and non-covered shares of a mutual fund (at Vanguard), and uses SpecID, the share class conversion is “all or nothing” (i.e., you can’t specify which shares to convert, nor just convert some shares) AND it will switch everything to average cost basis. Its so stupid. This has prevented me from switching VTSAX to VTI.

[billaster]

The results you are quoting are simply incorrect. The only way to compare two things is to eliminate variables and if you compare the NAV with dividend returns for the ETF and open end equivalent, the cumulative returns for the period both existed are higher for the ETF, period. That is a fact as of the latest data I saw in M* this morning. No reason that should vary much since both funds have same holdings with lower fees charges to the NAV of the ETF than to the NAV of the open end fund.

That may be a "fact" according to Morningstar, but I prefer to go by the official Vanguard reported returns which are mandated accurate by law. 1-year, 3-year and 10-year returns are higher for VTSAX than for VTI. VTI has a slight edge only on the 5-year return.

In other words, virtually no evidence that ETFs provide higher returns. In fact, there is more evidence for the opposite.

And your argument about daily trading prices makes no sense for a 10-year holding with no trading. If there were a performance advantage to the ETF, it would show up as a significant cumulative difference over 10 years that would overwhelm any hypothetical daily trading differences between open-end funds and ETFs. Vanguard's own performance reports indicate that is not the case.

[anagram]

Not according to Dr Bernstein.

Would you please give specifics.

In his 2nd Edition of Four Pillars he has a whole section on why he favors MFs. People should read his book.

[nisiprius]

My current best effort at understanding beyou's point is that the published figures are only accurate for an investor who trades literally at the exact same split-second as whatever time the published figures are based on. And that there actually literally is no valid way, in general, to compare the real-world dollar results of an ETF investor and a mutual fund investor, because the real-world ETF investor's results will never match any published results due to market fluctuations around the instant of purchase and sale. Therefore, one should base one's actions on the belief that ETFs incur lower costs to the provider, and that whether you can see or not, those lower costs are being passed on to the investor.

[alex_686]

Not according to Dr Bernstein.

Would you please give specifics.

In his 2nd Edition of Four Pillars he has a whole section on why he favors MFs. People should read his book.

Well, that doesn't help much. My shelves are laden with technical books on this stuff but not that one. And my local library's copy is checked out.

So could you please summerize?

[nisiprius]

...Backtesting reflects that VTI outperformed VTSAX by $270 (or 0.02% CAGR) since inception, no? Perhaps I'm missing something here...

Source:
https://www.portfoliovisualizer.com/bac ... RT9RuucOYN

What you're missing is that for some reason "backtest portfolio" defaults to whole years, while "fund performance" defaults to "all available months." Change your backtest to "month-to-month" and over all available months VTSAX would have outperformed VTI.

They're virtually identical, the differences are random noise that can go either way, and do not consistently favor ETFs despite claims of lower internal expenses for ETFs. Either the signal is too low to be detected above the noise, or the ETF cost benefits are not being passed on to investors.

[billaster]

My current best effort at understanding beyou's point is that the published figures are only accurate for an investor who trades literally at the exact same split-second as whatever time the published figures are based on. And that there actually literally is no valid way, in general, to compare the real-world dollar results of an ETF investor and a mutual fund investor, because the real-world ETF investor's results will never match any published results due to market fluctuations around the instant of purchase and sale. Therefore, one should base one's actions on the belief that ETFs incur lower costs to the provider, and that whether you can see or not, those lower costs are being passed on to the investor.

While that argument may apply to daily trading it makes no sense when comparing 10-year returns. If there were a significant difference in performance then the cumulative difference over 10-years would overwhelm any daily trading price effects. There is no evidence of a significant performance difference over long periods.

[alex_686]

My current best effort at understanding beyou's point is that the published figures are only accurate for an investor who trades literally at the exact same split-second as whatever time the published figures are based on. And that there actually literally is no valid way, in general, to compare the real-world dollar results of an ETF investor and a mutual fund investor, because the real-world ETF investor's results will never match any published results due to market fluctuations around the instant of purchase and sale. Therefore, one should base one's actions on the belief that ETFs incur lower costs to the provider, and that whether you can see or not, those lower costs are being passed on to the investor.

Or instead of relentless going over the baren lands that can not answer the question you are asking you could look at someplace that does. You are using 2 different measuring sticks to measure the same thing. The problem is with the measuring sticks. As such, stop using them. There isn't a solution here.

I would suggest starting at the fund's annual report. For example, look at the increased efficiency form lower trading costs. How does that show up in the annual report. How does the reduction of these costs benefit the fund sponsor? (Hint, they don't). As such, where does the money go.

Then I would suggest looking at the trend in tracking error. These are not static so use short time spans. On this, one should really use the CRPS Total Return Index as your measuring stick. That is the best objective measuring stick you want to use.

Lastly, as a advance topic, measure the errors and friction caused by the index themselves. While high quality they are not perfect. You kind of need to be this deep in the woods if you want to understand the small differences between mutual funds and ETFs.

To wit: The race is not always to the swift, nor the battle to the strong; but that is the way to bet.

I bet on ETFs because they have the edge going forward.

[anagram]

I would also love to hear from the “old guard” why you are staying with mutual funds (apart from the obvious unrealized gains and possible tax consequences of switching).

When something has worked so well for you, why change it?

To put it another way, other than being one of the kewl kids, I see no advantage at all to changing.

Here's the kind of thing I mean: this poster wants to know

Does Placing Order Before Market Open Matter for High Volume ETFs Like VTI?

I ask to see whether I should continue my practice of placing orders around 5AM before market open using market orders...

I know the general rule with ETFs is to not trade at market open or 30 min before close, but does that really apply to high volume ETFs?

I don't know the answer. With mutual funds, I don't need to know.

So how is your model T Ford running these days ?

Personally I think both have advantages, no right or wrong.

Pros to ETF

portability (some Vanguard Admiral funds
cannot be transferred by acat). Admiral muni funds are a good example, but their muni etf index fund can be ported anywhere.

lower cost

ability to get in or out WHENEVER YOU WANT, at a price you know, vs a TBD price you find out later

rebalancing is more accurate with consistent timely info

ease of exchanges across fund families

Pros to open end

Ease of making a deposit or withdrawal as if it was a bank acct

Ease of exchanges among same fund family.

Ease of automating certain tasks like RMD. When you have limited choices of when and at what price to execute a trade, easier to automate. Choices make automation challenging but give you flexibility to choose instead.

Next day funds availability, though ETFs will have this as well in May 2024 (T+2 becomes T+1 for all US equity trades including ETFs).

I could sleep fine at night with using open end funds, and had reasons I resisted and delayed moving from the old Vanguard fund-only platform. My reasons were employment related, ETF/equity trading were tightly monitored for those who work in the industry, not at all for open end funds. But upon retiring from the industry, I immediately transitioned to brokerage and started converting my open end funds. For the first time in years I now own non-Vanguard funds, competition is a great thing, and ease of owning any ETF at any broker has made it convenient to take advantage of competition.
[/quote]

My Model T is running very well. Gets great gas mileage and I can repair it myself. It does not cost $120,000 like the kewl kids spend on an electric car that can go 250 miles as long as it is not too cold. I love my Model T, thank you. Now substitute Model T for Vanguard mutual funds.

[anagram]

Here's the kind of thing I mean: this poster wants to know

Does Placing Order Before Market Open Matter for High Volume ETFs Like VTI?

I ask to see whether I should continue my practice of placing orders around 5AM before market open using market orders...

I know the general rule with ETFs is to not trade at market open or 30 min before close, but does that really apply to high volume ETFs?

I don't know the answer. With mutual funds, I don't need to know.

OP of that thread chiming in. I agree with you. Years ago I held VTSAX at Vanguard and didn’t have any concerns or questions about anything related to execution prices, bid/spread, time of day volatility, etc.

I switched over to ETFs for portability and changed brokerages. I like the portability factor, but I miss the simplicity of VTSAX and a truly set it and forget it approach.

Debating now between either using the new Fidelity auto investment into ETF function, or opening a Vanguard account and returning to VTSAX.

Problem is you can't convert Vanguard ETFs to MFs.

[anagram]

Here’s another reason that those with mutual funds might not change legacy holdings over:

If one has both covered and non-covered shares of a mutual fund (at Vanguard), and uses SpecID, the share class conversion is “all or nothing” (i.e., you can’t specify which shares to convert, nor just convert some shares) AND it will switch everything to average cost basis. Its so stupid. This has prevented me from switching VTSAX to VTI.

Wow! You mean you lose all your SpecID information if you convert to the ETF? That should be #1 reason against ETFs in this discussion and yet none of the proponents have mentioned this. Thank you!

[billaster]

Folks who believe that lower expense ratios for ETFs result in higher returns for investors are the same people who believe that the Tooth Fairy provides free money. Just because you can't see the expense doesn't mean it is really free.

All that ETFs have done is taken a cost of trader wages that is reported on the books as an expense for the open-ended fund and outsourced those trader wages so they are off the books.

Anyone who thinks that those outside traders work for free must also believe in the Tooth Fairy.

But, they argue, the outside traders make their money off the spreads from other less sophisticated retail traders. That's partly true, but some of those spreads also come out of the hides of fund investors.

Below is a forensic analysis of an actual heartbeat trade for an ETF. They show that the broker/dealers (Authorized Participants) and marketmakers both profit from these trades.

But the bottom line shows that there is some slippage in the transactions that comes out of fund investors' pockets. It turns out the free lunch isn't free. Fund investors are paying for those off the books traders.

And that explains why the hypothetical expense advantage of ETFs is illusory. The ETF has just moved a trading cost that is on the books and visible for the open-ended fund and replaced it with an invisible cost that is off the books for ETFs. The lower cost of ETFs is great for the mutual fund company that doesn't want to pay for their own traders. Not so good for investors.

https://insight.factset.com/the-heartbe ... -forensics

[WhitePuma]

Here’s another reason that those with mutual funds might not change legacy holdings over:

If one has both covered and non-covered shares of a mutual fund (at Vanguard), and uses SpecID, the share class conversion is “all or nothing” (i.e., you can’t specify which shares to convert, nor just convert some shares) AND it will switch everything to average cost basis. Its so stupid. This has prevented me from switching VTSAX to VTI.

Wow! You mean you lose all your SpecID information if you convert to the ETF? That should be #1 reason against ETFs in this discussion and yet none of the proponents have mentioned this. Thank you!

Yes, you lose SpecID if you have non-covered shares. Vanguard will not let you specify which shares to convert, and will revert everything to average cost basis.

[alex_686]

Problem is you can't convert Vanguard ETFs to MFs.

No, this is a feature.

Vanguard's dual class funds are in the same spot as the mutual fund only platform verse the brokerage platform was 20 years ago.

The fund's mutual fund share class is a drag on the ETF class. To actually quantify this drag you would need to analyze the actual trade ledger of the fund. We don't have access to those, but the SEC does and they have been grumbling.

So Vanguard has a problem.

Index funds are commodities. In the long run the low cost provider is going to win.

Retail investors like mutual funds over ETFs. They have massive assets with Vanguard. This gives Vanguard scale, scale leads to lower costs. Retail investors don't care much about a lower tracking error of 0.01% to 0.03%. Heck, they can't even calculate it. No reasons to make the vast majority of your client angry by forcing them into ETFs.

On the flip side, most of the assets in these funds are run by institutional investors. That extra 0.02% of extra return is worth millions when you have invested billions. If they feel that a fund has slipped into second place in terms of efficiency than those intuitional investors will yank their billions of dollars from Vanguard, destroying their scale, causing them to fall further behind.

The industry is structed as a winner-takes all, people in 2nd place gets a set of stack knives, and those in 3rd get fired. As such, in a commodities business the low cost provider is the winner. ETFs have a lower cost structure than mutual funds. So if Vanguard is going to stick around they need to get people off mutual funds and onto ETFs.

They don't have to do it this year but the writing is on the wall.

[anagram]

Here’s another reason that those with mutual funds might not change legacy holdings over:

If one has both covered and non-covered shares of a mutual fund (at Vanguard), and uses SpecID, the share class conversion is “all or nothing” (i.e., you can’t specify which shares to convert, nor just convert some shares) AND it will switch everything to average cost basis. Its so stupid. This has prevented me from switching VTSAX to VTI.

Wow! You mean you lose all your SpecID information if you convert to the ETF? That should be #1 reason against ETFs in this discussion and yet none of the proponents have mentioned this. Thank you!

Yes, you lose SpecID if you have non-covered shares. Vanguard will not let you specify which shares to convert, and will revert everything to average cost basis.

Wonderful. Why would anyone with non-covered shares want to convert to an ETF?

[anagram]

Problem is you can't convert Vanguard ETFs to MFs.

No, this is a feature.

Vanguard's dual class funds are in the same spot as the mutual fund only platform verse the brokerage platform was 20 years ago.

The fund's mutual fund share class is a drag on the ETF class. To actually quantify this drag you would need to analyze the actual trade ledger of the fund. We don't have access to those, but the SEC does and they have been grumbling.

So Vanguard has a problem.

Index funds are commodities. In the long run the low cost provider is going to win.

Retail investors like mutual funds over ETFs. They have massive assets with Vanguard. This gives Vanguard scale, scale leads to lower costs. Retail investors don't care much about a lower tracking error of 0.01% to 0.03%. Heck, they can't even calculate it. No reasons to make the vast majority of your client angry by forcing them into ETFs.

On the flip side, most of the assets in these funds are run by institutional investors. That extra 0.02% of extra return is worth millions when you have invested billions. If they feel that a fund has slipped into second place in terms of efficiency than those intuitional investors will yank their billions of dollars from Vanguard, destroying their scale, causing them to fall further behind.

The industry is structed as a winner-takes all, people in 2nd place gets a set of stack knives, and those in 3rd get fired. As such, in a commodities business the low cost provider is the winner. ETFs have a lower cost structure than mutual funds. So if Vanguard is going to stick around they need to get people off mutual funds and onto ETFs.

They don't have to do it this year but the writing is on the wall.

Wonderful. So you are saying the next thing Vanguard is going to do is force all MF holders to convert to ETFs? However we all have to remember we are the "owners" of Vanguard.

If it were not for capital gains I would sell and buy at another provider.

[Northern Flicker]

Folks who believe that lower expense ratios for ETFs result in higher returns for investors are the same people who believe that the Tooth Fairy provides free money. Just because you can't see the expense doesn't mean it is really free.

All that ETFs have done is taken a cost of trader wages that is reported on the books as an expense for the open-ended fund and outsourced those trader wages so they are off the books.

Anyone who thinks that those outside traders work for free must also believe in the Tooth Fairy.

But, they argue, the outside traders make their money off the spreads from other less sophisticated retail traders. That's partly true, but some of those spreads also come out of the hides of fund investors.

Below is a forensic analysis of an actual heartbeat trade for an ETF. They show that the broker/dealers (Authorized Participants) and marketmakers both profit from these trades.

But the bottom line shows that there is some slippage in the transactions that comes out of fund investors' pockets. It turns out the free lunch isn't free. Fund investors are paying for those off the books traders.

And that explains why the hypothetical expense advantage of ETFs is illusory. The ETF has just moved a trading cost that is on the books and visible for the open-ended fund and replaced it with an invisible cost that is off the books for ETFs. The lower cost of ETFs is great for the mutual fund company that doesn't want to pay for their own traders. Not so good for investors.

https://insight.factset.com/the-heartbe ... -forensics

Heartbeat trades are used to manage capital gains. You can achieve that with a mutual fund using tax loss harvesting, which also has trading cost. The ETFs don't have to do heartbeat trades, but do so to manage taxes. Index mutual funds without ETF share classes would tend to be superior in tax-qualified accounts where capital gains are irrelevant (if cost otherwise is competitive).

[alex_686]

Wonderful. So you are saying the next thing Vanguard is going to do is force all MF holders to convert to ETFs? However we all have to remember we are the "owners" of Vanguard.

If it were not for capital gains I would sell and buy at another provider.

Yes, and as a owner I agree. One needs to keep up with the times to remain competitive, else Vanguard will wither on the vine. I will point out that Ford no longer makes a Model T. The innovator's dilemma. Change or die.

On that, 30 years ago I could make a solid argument that manual transmissions were superior to automatic transmissions. I really can't make that argument anymore. Technology has advanced. Now you really can't find manual transmissions anywhere expect as a weird status symbol on the higher sport trims.

I still drive a manual but I can see the writing is on the wall.

[billaster]

Retail investors like mutual funds over ETFs. They have massive assets with Vanguard. This gives Vanguard scale, scale leads to lower costs. Retail investors don't care much about a lower tracking error of 0.01% to 0.03%. Heck, they can't even calculate it. No reasons to make the vast majority of your client angry by forcing them into ETFs.

On the flip side, most of the assets in these funds are run by institutional investors. That extra 0.02% of extra return is worth millions when you have invested billions. If they feel that a fund has slipped into second place in terms of efficiency than those intuitional investors will yank their billions of dollars from Vanguard, destroying their scale, causing them to fall further behind.

You are just making up numbers out of whole cloth. They have no basis in empirical fact. ETFs don't have lower net costs that accrue to investors. If anyone is being mislead, it isn't the open-end funds that disclose their expenses but the ETF investors who believe that the lower expense ratio provides increased returns and have their trader expenses hidden.

[Northern Flicker]

Fidelity and many other active managers are coming out with Active ETFs as we speak. A former employer of mine who was 100% an active manager (offers NO index fund products) is creating ETFs today as we speak.

And the fund industry has never come out with a product that was more favorable for the fund provider than for investors in the product?

[alex_686]

But, they argue, the outside traders make their money off the spreads from other less sophisticated retail traders. That's partly true, but some of those spreads also come out of the hides of fund investors.

This is true.

There are trading costs to ETFs when you buy, sell, or reinvest dividedness. The APs pay for the daily trading.

Mutual funds are the inverse. You don't pay when you buy, sell, or reinvest dividends. However, you the shareholder have to pay for the daily trading.

We can debate where the breakpoint is. I broadly estimate it is between the 9 month to 1 year mark. After that ETFs will pull ahead.

Below is a forensic analysis of an actual heartbeat trade for an ETF. They show that the broker/dealers (Authorized Participants) and marketmakers both profit from these trades.

First, if you ever get a chance to hear Elisabeth Kashner, the author, speak, do so. I can't count how many worthless presentations I have had to sleep through. Kashner was not one of them. Excellent speaker.

Second, you may be taking the wrong thing away from the article.

Let us say that the heartbeat trade is the very horrible thing you suggest it is. Can you estimate the cost of that trade for a conventional mutual fund? I mean, what costs would a standard typical mutual fund trading desk have incurred - both explicit and implicit costs of the example that Kashner gave - MOAT at 25%.

To extend, Kashner in the same article points out that VTI turns over 1.2% of its portfolio monthly. How much would that cost the fund that to execute those orders out in the open market?

[alex_686]

Retail investors like mutual funds over ETFs. They have massive assets with Vanguard. This gives Vanguard scale, scale leads to lower costs. Retail investors don't care much about a lower tracking error of 0.01% to 0.03%. Heck, they can't even calculate it. No reasons to make the vast majority of your client angry by forcing them into ETFs.

On the flip side, most of the assets in these funds are run by institutional investors. That extra 0.02% of extra return is worth millions when you have invested billions. If they feel that a fund has slipped into second place in terms of efficiency than those intuitional investors will yank their billions of dollars from Vanguard, destroying their scale, causing them to fall further behind.

You are just making up numbers out of whole cloth. They have no basis in empirical fact. ETFs don't have lower net costs that accrue to investors. If anyone is being mislead, it isn't the open-end funds that disclose their expenses but the ETF investors who believe that the lower expense ratio provides increased returns and have their trader expenses hidden.

You know that neither mutual funds nor ETFs disclose their trading costs because there is no way to calculate trading expesnes.

And if that is true, then I wasted a couple years of my life doing portfolio attribution using some really cool data sets.

[beyou]

Fidelity and many other active managers are coming out with Active ETFs as we speak. A former employer of mine who was 100% an active manager (offers NO index fund products) is creating ETFs today as we speak.

And the fund industry has never come out with a product that was more favorable for the fund provider than for investors in the product?

Can you tell me of another industry that is disinterested in their own welfare ? Any business needs to sell what they think people want to buy. Sometimes people don’t know what is best for themselves, as evidenced by many comments and discussions here where reasonable people can’t agree on what is best for themselves.

[beyou]

Folks who believe that lower expense ratios for ETFs result in higher returns for investors are the same people who believe that the Tooth Fairy provides free money. Just because you can't see the expense doesn't mean it is really free.

All that ETFs have done is taken a cost of trader wages that is reported on the books as an expense for the open-ended fund and outsourced those trader wages so they are off the books.

Anyone who thinks that those outside traders work for free must also believe in the Tooth Fairy.

But, they argue, the outside traders make their money off the spreads from other less sophisticated retail traders. That's partly true, but some of those spreads also come out of the hides of fund investors.

Below is a forensic analysis of an actual heartbeat trade for an ETF. They show that the broker/dealers (Authorized Participants) and marketmakers both profit from these trades.

But the bottom line shows that there is some slippage in the transactions that comes out of fund investors' pockets. It turns out the free lunch isn't free. Fund investors are paying for those off the books traders.

And that explains why the hypothetical expense advantage of ETFs is illusory. The ETF has just moved a trading cost that is on the books and visible for the open-ended fund and replaced it with an invisible cost that is off the books for ETFs. The lower cost of ETFs is great for the mutual fund company that doesn't want to pay for their own traders. Not so good for investors.

https://insight.factset.com/the-heartbe ... -forensics

If not day trading this is irrelevant.

[anagram]

Wonderful. So you are saying the next thing Vanguard is going to do is force all MF holders to convert to ETFs? However we all have to remember we are the "owners" of Vanguard.

If it were not for capital gains I would sell and buy at another provider.

Yes, and as a owner I agree. One needs to keep up with the times to remain competitive, else Vanguard will wither on the vine. I will point out that Ford no longer makes a Model T. The innovator's dilemma. Change or die.

On that, 30 years ago I could make a solid argument that manual transmissions were superior to automatic transmissions. I really can't make that argument anymore. Technology has advanced. Now you really can't find manual transmissions anywhere expect as a weird status symbol on the higher sport trims.

I still drive a manual but I can see the writing is on the wall.

Well Ford stopped making sedans because as an innovator it was only going to make $120,000 electric trucks and gas trucks. How is that working out for Ford now? Ford has changed and looks increasingly likely that it will die.

$3 Billion down this drain just this year.

https://www.cnn.com/2023/03/23/business ... ndex.html

My point is not all innovations are good. Lemmings all running together over a cliff.

You are very wrong about manual transmissions. They are much much more reliable especially compared to CVTs and much less expensive to maintain. Good luck getting 200K out of a CRV with a 1.5L Turbo engine with a CVT.

[alex_686]

You are very wrong about manual transmissions. They are much much more reliable especially compared to CVTs and much less expensive to maintain. Good luck getting 200K out of a CRV with a 1.5L Turbo engine with a CVT.

Wife's Subaru w/ a CVT just passed 250k. Yeah, that is just a data set of one, but..... I just went looking for a new car. The CVTs and automatics have better gas mileage than the manuals. The failure rates of transmissions of all flavors are fairly low.

As for innovation. Well, even 10 years ago I would have kind of agreed with you. But just look at those trend lines for improved reliability and performance for CVTs. I mean, I would never buy a year one model from anyone. Give the manufactures a few years to work out the kinks.

On that, how confident are you that in 20 years manual transmissions will continue to be better than manual ones from a prospective of Total Cost of Ownership? So initial costs, fuel costs, repair and maintenance costs.

[Northern Flicker]

Fidelity and many other active managers are coming out with Active ETFs as we speak. A former employer of mine who was 100% an active manager (offers NO index fund products) is creating ETFs today as we speak.

And the fund industry has never come out with a product that was more favorable for the fund provider than for investors in the product?

Can you tell me of another industry that is disinterested in their own welfare ? Any business needs to sell what they think people want to buy. Sometimes people don’t know what is best for themselves, as evidenced by many comments and discussions here where reasonable people can’t agree on what is best for themselves.

My point was that just because fund companies offer active ETFs doesn't mean they are good for investors. Your argument was that there is a lot of interest in offering active ETFs. My point is that in terms of whether they are good for investors, that is a red herring.

The process of arbitraging the ETF against the underlying shares to keep market prices close to NAV may not work well when APs have to track a constantly changing portfolio. And deviations between creation baskets and the ETF portfolio can enable the APs to pick the pockets of the ETF investors. With an index ETF, index tracking provides a measure of transparency. An active ETF will have too many moving parts and not enough transparency for me to feel comfortable that my interests are being protected adequately.

[alex_686]

The process of arbitraging the ETF against the underlying shares to keep market prices close to NAV may not work well when APs have to track a constantly changing portfolio. And deviations between creation baskets and the ETF portfolio can enable the APs to pick the pockets of the ETF investors. With an index ETF, index tracking provides a measure of transparency. An active ETF will have too many moving parts and not enough transparency for me to feel comfortable that my interests are being protected adequately.

I haven't worked directly with this issue but my understanding is that it works mostly fine.

If I recall correctly there is a fair amount of difference between DFA's small cap value fund verse ETF. The small cap fund is able to dig deeper into the illiquid small cap value stocks than the ETF.

[Northern Flicker]

The process of arbitraging the ETF against the underlying shares to keep market prices close to NAV may not work well when APs have to track a constantly changing portfolio. And deviations between creation baskets and the ETF portfolio can enable the APs to pick the pockets of the ETF investors. With an index ETF, index tracking provides a measure of transparency. An active ETF will have too many moving parts and not enough transparency for me to feel comfortable that my interests are being protected adequately.

I haven't worked directly with this issue but my understanding is that it works mostly fine.

We don't have much of a track record, and there is no easy way to measure it. With an index fund, the creation basket is fairly static, and the same types of techniques used for index fund portfolio management by sampling can be used to design ETF creation baskets that are representative of the ETF portfolio.

[alex_686]

We don't have much of a track record, and there is no easy way to measure it. With an index fund, the creation basket is fairly static, and the same types of techniques used for index fund portfolio management by sampling can be used to design ETF creation baskets that are representative of the ETF portfolio.

The lack of a track record isn't exactly on point. Things move fast. Anything over a year is probably worthless in determining trading efficiency. Max is 3 years. The trading world is like rock, paper, scissors. The dominate strategy of last year probably won't be the dominate strategy of next.

But yeah, doing this stuff is really hard. It was hard when I had access to the actual trade ledgers. From the outside it is harder. If I recall correctly PIMCO's actively traded ETF juiced it's NAV with the use of a pricing quirk around small lots.

[Northern Flicker]

But yeah, doing this stuff is really hard. It was hard when I had access to the actual trade ledgers. From the outside it is harder. If I recall correctly PIMCO's actively traded ETF juiced it's NAV with the use of a pricing quirk around small lots.

Active mutual funds already have enough transparency questions without slathering on more.

[alex_686]

Active mutual funds already have enough transparency questions without slathering on more.

To be fair, active ETFs are more transparent that mutual fund ETFs. IIRC funds have to report their positions quarterly, active ETFs monthly.