Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
It may have been an Odd Lots podcast where someone claimed recently that ETFs will gain market share over funds rather rapidly in the coming years. I would like to know if the following reasoning is factually accurate, as well as having comments on the issue generally:
Bond funds have to distribute, as a taxable event in taxable accounts, any year-end net gains from their own trading during that tax year. ETFs do not do this distribution and so are more tax efficient overall. Best I can tell, the pending dollar amount of such distributions for funds is not published until early December, with the details being fairly opaque for most of the year. So, advantage here to bond ETFs over funds.
VSBSX (Short Treasury index Admiral) has an expense ratio of 0.07%. The short term Treasury bond fund ETF has an expense ratio of 0.04%. Advantage again to ETFs over funds.
The only negative I know of for Vanguard bond ETFs is that, depending on the price action during the day, the investor might buy a little above the momentary implied NAV, and of course it is not known what the end of day NAV will be, if that matters. I suppose one could buy the ETF on a day with rising prices to perhaps avoid paying more than the value of the ETF holdings, no guarantees, but might help. Also, funds have to redeem shares on request, but ETFs have no such feature, so liquidity could be an issue. Hard to tell how important that would be, probably not important for the conservative investor who would hold in a crash anyway.
Are there any other major considerations in the area of bond funds vs. bond ETFs at Vanguard?
Bond funds have to distribute, as a taxable event in taxable accounts, any year-end net gains from their own trading during that tax year. ETFs do not do this distribution and so are more tax efficient overall. Best I can tell, the pending dollar amount of such distributions for funds is not published until early December, with the details being fairly opaque for most of the year. So, advantage here to bond ETFs over funds.
VSBSX (Short Treasury index Admiral) has an expense ratio of 0.07%. The short term Treasury bond fund ETF has an expense ratio of 0.04%. Advantage again to ETFs over funds.
The only negative I know of for Vanguard bond ETFs is that, depending on the price action during the day, the investor might buy a little above the momentary implied NAV, and of course it is not known what the end of day NAV will be, if that matters. I suppose one could buy the ETF on a day with rising prices to perhaps avoid paying more than the value of the ETF holdings, no guarantees, but might help. Also, funds have to redeem shares on request, but ETFs have no such feature, so liquidity could be an issue. Hard to tell how important that would be, probably not important for the conservative investor who would hold in a crash anyway.
Are there any other major considerations in the area of bond funds vs. bond ETFs at Vanguard?
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I think what you mentioned about ETFs being able to be more tax efficient is generally true but not universally true in practice.Carsson3 wrote: ↑Wed Oct 30, 2024 12:45 pm It may have been an Odd Lots podcast where someone claimed recently that ETFs will gain market share over funds rather rapidly in the coming years. I would like to know if the following reasoning is factually accurate, as well as having comments on the issue generally:
Bond funds have to distribute, as a taxable event in taxable accounts, any year-end net gains from their own trading during that tax year. ETFs do not do this distribution and so are more tax efficient overall. Best I can tell, the pending dollar amount of such distributions for funds is not published until early December, with the details being fairly opaque for most of the year. So, advantage here to bond ETFs over funds.
VSBSX (Short Treasury index Admiral) has an expense ratio of 0.07%. The short term Treasury bond fund ETF has an expense ratio of 0.04%. Advantage again to ETFs over funds.
The only negative I know of for Vanguard bond ETFs is that, depending on the price action during the day, the investor might buy a little above the momentary implied NAV, and of course it is not known what the end of day NAV will be, if that matters. I suppose one could buy the ETF on a day with rising prices to perhaps avoid paying more than the value of the ETF holdings, no guarantees, but might help. Also, funds have to redeem shares on request, but ETFs have no such feature, so liquidity could be an issue. Hard to tell how important that would be, probably not important for the conservative investor who would hold in a crash anyway.
Are there any other major considerations in the area of bond funds vs. bond ETFs at Vanguard?
Best to investigate and see for yourself. Use Vanguard's "advisor" site to access the last 10 years of distributions for both VSBSX and VGSH, its ETF share class.
https://advisors.vanguard.com/investmen ... tributions
https://advisors.vanguard.com/investmen ... tributions
Click on the "Export distribution data" for each one, then look at the CSV.
Both funds distributed a Short-term Capital Gain and Long-term Capital Gain in 2014, 2015, 2016, 2020, and 2021.
See the wiki article ETFs vs mutual funds for a discussion of pros & cons.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Actually, ETFs have to do a similar distribution. It's just that equity ETFs can take advantage of certain techniques that let them get rid of those net gains. Do bond ETFs do the same? It certainly seems like bond funds do distribute capital gains occasionally. Besides, thanks to Vanguard's formerly patented trick where the ETF and its sibling mutual fund are just different share classes of the same fund, VSBSX would enjoy any reduction in distributed capital gains that VGSH would be able to manage.
I don't understand what this means. The NAV represents (the fund's estimate of) the value of the holdings at the end of the day, when mutual fund transactions execute. The ETF share price (subject to the bid/ask spread) represents (the market's estimate of) the value of the holdings when the trade executes. Why would you think that either is a bad way to set the price (under normal circumstances, at least)?The only negative I know of for Vanguard bond ETFs is that, depending on the price action during the day, the investor might buy a little above the momentary implied NAV, and of course it is not known what the end of day NAV will be, if that matters. I suppose one could buy the ETF on a day with rising prices to perhaps avoid paying more than the value of the ETF holdings, no guarantees, but might help.
Well, mutual funds do have the feature that they can delay redemptions, or even force you to take securities in kind instead of cash, under particularly dire circumstances. The VSBSX prospectus says, "Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days."Also, funds have to redeem shares on request, but ETFs have no such feature, so liquidity could be an issue. Hard to tell how important that would be, probably not important for the conservative investor who would hold in a crash anyway.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I don't understand what this means. The NAV represents (the fund's estimate of) the value of the holdings at the end of the day, when mutual fund transactions execute. The ETF share price (subject to the bid/ask spread) represents (the market's estimate of) the value of the holdings when the trade executes. Why would you think that either is a bad way to set the price (under normal circumstances, at least)?The only negative I know of for Vanguard bond ETFs is that, depending on the price action during the day, the investor might buy a little above the momentary implied NAV, and of course it is not known what the end of day NAV will be, if that matters. I suppose one could buy the ETF on a day with rising prices to perhaps avoid paying more than the value of the ETF holdings, no guarantees, but might help.
Replying to Increment:
Yes, the NAV of a fund is defined as the calculated end of market day value of the fund, and of course buying and selling of fund shares is at the NAV price, overnight essentially.
At any time during the market day, there will be as you state a market value price for the ETF. In my post, I used the phrase "the momentary implied NAV", which is awkward and not a common term, and I would be grateful for a better and more standard term for the same concept.
By "the momentarily implied NAV", I am referring in my post what the NAV would be at that point in time, if counterfactually the market day were abruptly over, so the sum essentially of the all holdings' market value at that moment.
My understanding of an ETF is that the market value of the ETF at any moment can and normally does fluctuate above and below what I am calling the implied momentary NAV. If there is a better, less clumsy term, please advise on that point. However, I think the concept is clear enough. The market for the ETF shares gets a bit ahead (or behind) the implied momentary NAV, the market value of the holdings at time T, so to speak.
So one risk of the ETF approach is overpaying or underpaying, based on the market value of the underlying holdings, individually and then summed.
I just now found the following on etf.com: "The intraday net asset value (“iNAV”) is one method of establishing that point of reference. iNAV provides an intraday indicative value of an ETF based on the market values of its underlying constituents. The value is calculated by the listing exchange and then disseminated to the public every 15 seconds."
I never before came across the term "iNAV", but it is exactly what I meant by my phrasing, "the momentary implied NAV". The 15 second broadcasting is news to me.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I believe the above statement is wrong.Carsson3 wrote: ↑Wed Oct 30, 2024 2:32 pm I just now found the following on etf.com: "The intraday net asset value (“iNAV”) is one method of establishing that point of reference. iNAV provides an intraday indicative value of an ETF based on the market values of its underlying constituents. The value is calculated by the listing exchange and then disseminated to the public every 15 seconds."
I never before came across the term "iNAV", but it is exactly what I meant by my phrasing, "the momentary implied NAV". The 15 second broadcasting is news to me.
To be true, one must make the assumption that the NAV price, a accountant’s estimate of value, is more correct than the market’s price.
As someone who has struck a NAV, I tend to think that the market value (i.e. actual trading price) is more accurate.
You may have noticed I have used a fair number of weasel words. Tends. More Correct. Mainly because we are deep in the weeds on how things get priced and the myriad of technical issues, nuances, and subjective judgement that comes with this.
I personally wouldn’t worry about this.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
tell me if you see any much difference between the fund and etf you mentioned:
Source
I don't.
If you look at the quarterly after tax returns they seem pretty similar too:
https://investor.vanguard.com/investmen ... mance-fees
https://investor.vanguard.com/investmen ... mance-fees
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Well, since they are the same fund, just different shareclasses, I would expect very similar performance at the gross macro level you are examining at.arcticpineapplecorp. wrote: ↑Wed Oct 30, 2024 6:41 pm tell me if you see any much difference between the fund and etf you mentioned:
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
In characterizing the iNAV as “wrong”, I take it that you view it as less correct than the market price in the sense of less useful, unless you mean that calculating the iNAV is not straightforward.
It is refreshing to see an acknowledgement of the mystery of pricing, into which I have near zero insight. Quite a few people talk of market price determination in a glib manner, as though it were a simple affair, rather than deeply complex. I don’t see the market price as condensed wisdom, although you didn’t say that.
There would have to be empirical studies of the iNAV and the market price volatility, in contexts of rapidly falling or rapidly rising market prices. Very likely, no such studies exist.
For a high dollar purchase, which of course is relative to the investor’s resources, it seems to me plausible that some dollars are lost when the ETF market price at purchase is higher than the underlying iNAV. If the iNAV is available to the brokerage customers every 15 seconds as etf.com claims, then I would try to buy the ETF during a part of the day when the iNAV is above the market price, rather than lower. But the scope of the advantage in doing this is hard to quantify, even if likely real.
It is refreshing to see an acknowledgement of the mystery of pricing, into which I have near zero insight. Quite a few people talk of market price determination in a glib manner, as though it were a simple affair, rather than deeply complex. I don’t see the market price as condensed wisdom, although you didn’t say that.
There would have to be empirical studies of the iNAV and the market price volatility, in contexts of rapidly falling or rapidly rising market prices. Very likely, no such studies exist.
For a high dollar purchase, which of course is relative to the investor’s resources, it seems to me plausible that some dollars are lost when the ETF market price at purchase is higher than the underlying iNAV. If the iNAV is available to the brokerage customers every 15 seconds as etf.com claims, then I would try to buy the ETF during a part of the day when the iNAV is above the market price, rather than lower. But the scope of the advantage in doing this is hard to quantify, even if likely real.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
With bonds, distributing long-term capital gains can be a source of tax efficiency. If interest rates fall, selling an appreciated bond, and buying a replacement bond with lower coupon, converts some amount of future interest income into a present long-term capital gain.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
By "wrong" I mean the price is less correct. Take for example when there was a wide price difference between the mutual fund and ETF shares during low liquidity moments during the 2008 GFC and 2020 COVID. Bonds just were not trading. Since bonds where not trading there were no prices. So here is a question - what is the correct price?
Mutual funds use current prices. No current prices so they use stale prices. So they were using prices from a few days to a week prior to mark their NAVs. Hence higher prices.
The argument that some people use is that people were panic selling their ETFs. Thus lower prices for the ETF.
So quick, which had the more accurate prices?
Now I tend to believe the ETFs were the more accurate prices. Their prices better aligned to mark-to-model results that my computer was spitting out. Better aligned with the swap market which was more liquid. And the basket of bonds that Authorized Participants use had lower bid/ask spreads than individual corporate bonds.
And yes, all of the evidence is indirect
Oh good havens, lots of studies. The really good ones are proprietary, held by High Frequency Trades and market makers. There are plenty of others floating out there. The problem is that all of the evidence is indirect. As such, conclusions tend to be tentative. Worse, the answers keep on changing. The market evolves as competing traders use new strategies to win over other trades.
Unless, of course, the market prices is a more accurate reflection than the iNAV prices. In which case that transfer doesn't happen.Carsson3 wrote: ↑Wed Oct 30, 2024 7:09 pm For a high dollar purchase, which of course is relative to the investor’s resources, it seems to me plausible that some dollars are lost when the ETF market price at purchase is higher than the underlying iNAV. If the iNAV is available to the brokerage customers every 15 seconds as etf.com claims, then I would try to buy the ETF during a part of the day when the iNAV is above the market price, rather than lower. But the scope of the advantage in doing this is hard to quantify, even if likely real.
To restate, I don't think a accountants estimated value is wrong. It is backwards looking, uses stale data, and assumes that the latest market price is the actual price that the fund could trade at. On the flip side, ETF prices can be distorted by large buy/sell orders in the short term, before the APs can take action.
So let me be explicit - neither are right. However I tend to think that ETF market prices tend to a more accurate representation of the actual value.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Curious if ETF market share is a factor for you in deciding between mutual fund and ETF?
Also, was there sometime something in this thread that helps you choose?
Anything worth adding to the wiki article?
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
[Edited to fix typo]
Last edited by sycamore on Thu Oct 31, 2024 10:18 am, edited 1 time in total.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I mildly think you should. I use the analogy of manual transmissions in cars. Even if you think that they are superior to automatic transmissions they are slowly going away.sycamore wrote: ↑Thu Oct 31, 2024 6:52 amCurious if ETF market share is a factor for you in deciding between mutual fund and ETF?
Also, was there sometime in this thread that helps you choose?
Anything worth adding to the wiki article?
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
Better to make the transition now, become familiar with them, and avoid future hassles. Or you can join the thread bemoaning the closure of Vanguard’s mutual fund only platform.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
For bond ETFs the reinvestment date of dividends is later than the mutual fund. So it's not at the NAV on the date payable.
I'm trying to think, but nothing happens
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
IMO Vanguard's closing of retail mutual fund-only accounts is one thing, and the availability of the mutual funds themselves is another. Anyone can still own, buy, and sell Vanguard mutual funds on Vanguard's brokerage platform or other brokerages' platforms.alex_686 wrote: ↑Thu Oct 31, 2024 7:06 amI mildly think you should. I use the analogy of manual transmissions in cars. Even if you think that they are superior to automatic transmissions they are slowly going away.sycamore wrote: ↑Thu Oct 31, 2024 6:52 am
Curious if ETF market share is a factor for you in deciding between mutual fund and ETF?
Also, was there sometime in this thread that helps you choose?
Anything worth adding to the wiki article?
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
Better to make the transition now, become familiar with them, and avoid future hassles. Or you can join the thread bemoaning the closure of Vanguard’s mutual fund only platform.
In the short-term, brokerages are clearly the platform of choice and direct ownership of mutual funds is becoming rarer. Whether mutual funds follow the same trajectory remains to be seen. It may take decades, just like mainframes
All that said, if one actually worries about "mutual funds are going away", it would be smart to use ETFs, if only to not be worried.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
ETFs are somewhat problematic for 401K's and other DC plans for assets not being traded in a self-directed manner by participants.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
In fact a weakness of many 401k plans is an absence of sensible choices of bond funds.Northern Flicker wrote: ↑Thu Oct 31, 2024 11:33 am ETFs are somewhat problematic for 401K's and other DC plans for assets not being traded in a self-directed manner by participants.
It may be good choices can be found by using a target date fund common in 401k's or a brokerage link.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
If there is a steady shift in market share from funds to ETFs, that could indicate some likelihood of on balance some actual material advantages of ETFs over funds. So market share shifting is a suggestive point, suggesting that I look deeper into the pros and cons of ETFs vs. funds, which I am doing. I am in funds. Choosing one or the other, funds or ETFs, due to popularity of a category, would commit the bandwagon fallacy in logic, if that is what you wonder if I am committing, so "No" on that.sycamore wrote: ↑Thu Oct 31, 2024 6:52 amCurious if ETF market share is a factor for you in deciding between mutual fund and ETF?
Also, was there sometime something in this thread that helps you choose?
Anything worth adding to the wiki article?
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
[Edited to fix typo]
I do not in a brief glance notice anything in the wiki article referring to the potential of the ETF price to vary during the trading day below or above the value of the holdings. Maybe I missed it. Just now Vanguard told me that the iNAV for Vanguard ETFs is not provided anywhere on the Vanguard site. It would be good to see the variation all day by looking at a screen at multiple times during the day.
If someone has solid information and evidence in the area of iNAV variance degrees, that in my view would be a useful additon to the wiki article in your link. Maybe I can go to another financial company and view the iNAV on a screen. The Vanguard rep used the term "indicative value" for iNAV. I wonder if "i" stands for "intraday" or "indicative" originally, just curious. If the iNAV variance is tiny, I would still like some detailed data, not just take someone's word for that, someone's guesswork.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I studied this a lot before setting on my investing plan for the 3rd or 4th revision.
BND expense ratio is 0.03
VBTLX is 0.05
For me, the convenience of automatic investing is worth the 0.02 difference in expense ratio. Also, you can always convert to ETF shares from mutual funds, but not the other way without tax implications.
Perhaps once I move from accumulation phase to “idle” phase I’ll convert to ETFs.
BND expense ratio is 0.03
VBTLX is 0.05
For me, the convenience of automatic investing is worth the 0.02 difference in expense ratio. Also, you can always convert to ETF shares from mutual funds, but not the other way without tax implications.
Perhaps once I move from accumulation phase to “idle” phase I’ll convert to ETFs.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I don’t think you can convert the bond funds.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Ah! Thanks I did not know this. Back to researching some more. At least my VTSAX I can convert to VTI when the time comes.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
I think that's because the consultants often are looking at past return when choosing assets rather than considering the role of bonds in a portfolio. In some cases, they may be looking at ERs if they are getting compensated by a small share of the ER.dbr wrote: ↑Thu Oct 31, 2024 11:42 amIn fact a weakness of many 401k plans is an absence of sensible choices of bond funds.Northern Flicker wrote: ↑Thu Oct 31, 2024 11:33 am ETFs are somewhat problematic for 401K's and other DC plans for assets not being traded in a self-directed manner by participants.
But I think they will tend to choose active bond funds like the PIMCO fund over a bond index fund or treasury fund based on expected return or past return, rather than based on finding good building blocks for efficient portfolios.
Often, the bond funds in a plan are good enough though, and a decrease of a few percentage points in equity allocation can compensate for the increased bond risk.
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Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
There are 11 bond mutual funds that can be converted to ETFs:
https://personal1.vanguard.com/pdf/etfpdf.pdf
The info may be a bit dated, though. It lists, for example, VSIGX as a fund for which there is no ER advantage to the conversion, but VSIGX has an ER of 7bps while VGIT is at 4bps. I suspect that most or all of the ones listed as having the same ERs for both currently have different ERs for their ETF class.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Is Vanguard unique in this tax avoiding conversion process, based on, if I have it straight, Vanguard inventing the idea of making an ETF into a share class? Or do some other large fund companies also do this conversion from fund to ETF? I think Fidelity does not do this.Northern Flicker wrote: ↑Fri Nov 01, 2024 12:39 pmThere are 11 bond mutual funds that can be converted to ETFs:
https://personal1.vanguard.com/pdf/etfpdf.pdf
The info may be a bit dated, though. It lists, for example, VSIGX as a fund for which there is no ER advantage to the conversion, but VSIGX has an ER of 7bps while VGIT is at 4bps. I suspect that most or all of the ones listed as having the same ERs for both currently have different ERs for their ETF class.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Vanguard is currently the only one. Their patent has expired. Some funds have filed with the SEC to offer dual classes but the SEC has declined to approve and I doubt that they ever will.Carsson3 wrote: ↑Mon Nov 04, 2024 1:38 pm Is Vanguard unique in this tax avoiding conversion process, based on, if I have it straight, Vanguard inventing the idea of making an ETF into a share class? Or do some other large fund companies also do this conversion from fund to ETF? I think Fidelity does not do this.
ETF trading costs are significantly lower than mutual fund. ETFs offload the costs of trading to their Authorized Participants. Trading happens at the portfolio level. This means that the ETF shareholders would bear the trading costs for the mutual fund shareholders. The SEC considers this unfair. I agree.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Interesting. How would you weigh the following?alex_686 wrote: ↑Mon Nov 04, 2024 4:10 pmVanguard is currently the only one. Their patent has expired. Some funds have filed with the SEC to offer dual classes but the SEC has declined to approve and I doubt that they ever will.Carsson3 wrote: ↑Mon Nov 04, 2024 1:38 pm Is Vanguard unique in this tax avoiding conversion process, based on, if I have it straight, Vanguard inventing the idea of making an ETF into a share class? Or do some other large fund companies also do this conversion from fund to ETF? I think Fidelity does not do this.
ETF trading costs are significantly lower than mutual fund. ETFs offload the costs of trading to their Authorized Participants. Trading happens at the portfolio level. This means that the ETF shareholders would bear the trading costs for the mutual fund shareholders. The SEC considers this unfair. I agree.
The expense charge difference between the VGSH and the corresponding fund is .03%.
According to advisors.vanguard.com, the bid ask spread for VGSH is $ 0.07, or 0.12%. So VGSH is the clear right choice only for the very long term holder, maybe going even more than four years without trading, given that .03% is one fourth of .12%.
To me this is an odd outcome, making the fund the better choice for someone who makes moves two or three times a year, despite the ETF being characterized as the trading vehicle, which of course it is for intra-day. [I am assuming arguable point that the seller pays the entire spread in effect, as with a house sale, with the seller in typical effect paying both sides of the transaction costs, even with these new real estate rules giving other options.]
If trading costs are not part of the expense fee, which is my belief despite no one lately at Vanguard being able to understand my question in this area, then hidden higher trading costs on the fund side might pull the lever the other way towards ETFs. But that is not clear either, so far as I know.
Overall, other than the obvious point of intra-day trading, I cannot nail down a net advantage for ETFs over funds, even though I thought initially that ETFs were likely the better deal. So this has been a very useful thread, for at least me.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Trading costs are not part of the expense ratio. A key reason is that trading costs can only be estimated. Commission costs can be calculated. The impact of trading is harder. Bid/ask spreads, VWRAP help estimates. Bonds are worse. These are done over-the-counter. There are no bid/ask spreads because the market doesn’t work that way.Carsson3 wrote: ↑Mon Nov 04, 2024 6:22 pm Interesting. How would you weigh the following?
The expense charge difference between the VGSH and the corresponding fund is .03%.
According to advisors.vanguard.com, the bid ask spread for VGSH is $ 0.07, or 0.12%. So VGSH is the clear right choice only for the very long term holder, maybe going even more than four years without trading, given that .03% is one fourth of .12%.
To me this is an odd outcome, making the fund the better choice for someone who makes moves two or three times a year, despite the ETF being characterized as the trading vehicle, which of course it is for intra-day. [I am assuming arguable point that the seller pays the entire spread in effect, as with a house sale, with the seller in typical effect paying both sides of the transaction costs, even with these new real estate rules giving other options.]
If trading costs are not part of the expense fee, which is my belief despite no one lately at Vanguard being able to understand my question in this area, then hidden higher trading costs on the fund side might pull the lever the other way towards ETFs. But that is not clear either, so far as I know.
Overall, other than the obvious point of intra-day trading, I cannot nail down a net advantage for ETFs over funds, even though I thought initially that ETFs were likely the better deal. So this has been a very useful thread, for at least me.
Next, I am not sure if the ETF price actually flows in you direction. You have the problem with accountant’s estimation error using end-of-day prices which are volatile and wonky. But lets say this argument does flow to mutual funds.
That wasn’t the trading costs that I was talking about. The trading costs I was talking about are the funds’. They need to manage purchases, redemptions, and reinvesting maturing bonds, coupon cash flow, and the reconstitution of the index by the index providers - which is fairly high for bond funds.
Now at this point we kind of have to leave the hard data behind and start reading the tea leaves. After all, trading expenses can only be estimated.
When I last did this exercise about 5 years ago I figured that the break even point for a ETF that followed a large cap equity index was about 9 months. The initial cost of buying a ETF versus the lower trading cost from running the fund.
Bonds are more complex. There is a greater room for slippage because most of the time funds use negotiated partial baskets instead of large cap equity funds where the basket fully replicates the index. As such it depends on the relative strength of the fund versus its authorized participants.
As such the answer is always changing.
But I still think that, currently, thus is a more efficient method than using a traditional trading desk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard bonds: Funds vs ETFs (e.g. VGSH and VSBSX)
Reassuring that you did a study on all this. Should the word "thus" in the final sentence be "this", referring to funds?alex_686 wrote: ↑Mon Nov 04, 2024 6:54 pmTrading costs are not part of the expense ratio. A key reason is that trading costs can only be estimated. Commission costs can be calculated. The impact of trading is harder. Bid/ask spreads, VWRAP help estimates. Bonds are worse. These are done over-the-counter. There are no bid/ask spreads because the market doesn’t work that way.Carsson3 wrote: ↑Mon Nov 04, 2024 6:22 pm Interesting. How would you weigh the following?
The expense charge difference between the VGSH and the corresponding fund is .03%.
According to advisors.vanguard.com, the bid ask spread for VGSH is $ 0.07, or 0.12%. So VGSH is the clear right choice only for the very long term holder, maybe going even more than four years without trading, given that .03% is one fourth of .12%.
To me this is an odd outcome, making the fund the better choice for someone who makes moves two or three times a year, despite the ETF being characterized as the trading vehicle, which of course it is for intra-day. [I am assuming arguable point that the seller pays the entire spread in effect, as with a house sale, with the seller in typical effect paying both sides of the transaction costs, even with these new real estate rules giving other options.]
If trading costs are not part of the expense fee, which is my belief despite no one lately at Vanguard being able to understand my question in this area, then hidden higher trading costs on the fund side might pull the lever the other way towards ETFs. But that is not clear either, so far as I know.
Overall, other than the obvious point of intra-day trading, I cannot nail down a net advantage for ETFs over funds, even though I thought initially that ETFs were likely the better deal. So this has been a very useful thread, for at least me.
Next, I am not sure if the ETF price actually flows in you direction. You have the problem with accountant’s estimation error using end-of-day prices which are volatile and wonky. But lets say this argument does flow to mutual funds.
That wasn’t the trading costs that I was talking about. The trading costs I was talking about are the funds’. They need to manage purchases, redemptions, and reinvesting maturing bonds, coupon cash flow, and the reconstitution of the index by the index providers - which is fairly high for bond funds.
Now at this point we kind of have to leave the hard data behind and start reading the tea leaves. After all, trading expenses can only be estimated.
When I last did this exercise about 5 years ago I figured that the break even point for a ETF that followed a large cap equity index was about 9 months. The initial cost of buying a ETF versus the lower trading cost from running the fund.
Bonds are more complex. There is a greater room for slippage because most of the time funds use negotiated partial baskets instead of large cap equity funds where the basket fully replicates the index. As such it depends on the relative strength of the fund versus its authorized participants.
As such the answer is always changing.
But I still think that, currently, thus is a more efficient method than using a traditional trading desk.