BND vs VBMFX?

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Shipper
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BND vs VBMFX?

Post by Shipper »

New member asks about any advantages (disadvantages) of ETF vs Mutual Fund? Did search but got 1500 replies that were not relevant (I probably didn't query correctly). Are both about the same range of bonds? Any advice or suggestions? Thanks!
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SpringMan
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Post by SpringMan »

They are different share classes of the same fund so they both hold the same bonds. They move in lockstep over time. On any given day there may be a difference in the percent move up or down. In fact I have seen the two move in opposite directions at the close. I would not be overly concerned about that, in the long run they will perform virtually the same.

Edit: Regarding advantages of the ETF, you can buy in from a brokerage where Vanguard mutual funds may not be available or cost more. The disadvantage of the ETF is if you are dollar cost averaging you will have brokerage fees for each purchase, unless you have free trades.
Last edited by SpringMan on Mon Jan 05, 2009 11:59 am, edited 1 time in total.
Best Wishes, SpringMan
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Speedy
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Post by Speedy »

Welcome to the forum. The ETF (BND) and open end fund (VBMFX) own the same portfolio of bonds. I recommend using VBMFX because of the Hidden Costs of trading ETFs, especially bond ETFs. The hidden costs can be very substantial.

You should read this recent thread on ETFs vs. open end funds: http://www.bogleheads.org/forum/viewtop ... 38&start=0

This recent article (also referenced in the above thread) discusses the problems in bond ETF arbitrage in recent months:
http://www.indexuniverse.com/sections/f ... trage.html

Regards,
Bill
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Shipper
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Post by Shipper »

It seems that the ETF is charged 0.11% and the mutual 0.19% expense fees. Is this supported or temporary? Does the ETF have any hidden fees that would account for the differences? I can purchase and sell an ETF for a flat fee of $12.50 from my Broker whereas the mutual costs a minimum of $39 to purchase and more to sell. The ETF seems better but I may be missing something. Thanks again for any help!
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SpringMan
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Post by SpringMan »

Shipper wrote:It seems that the ETF is charged 0.11% and the mutual 0.19% expense fees. Is this supported or temporary? Does the ETF have any hidden fees that would account for the differences? I can purchase and sell an ETF for a flat fee of $12.50 from my Broker whereas the mutual costs a minimum of $39 to purchase and more to sell. The ETF seems better but I may be missing something. Thanks again for any help!
The ETF has a better expense ratio than the investor shares (VBMFX) but admiral shares (VBTLX) are comparable (.1% expense ratio). You need 100K to buy admiral shares or 50K if you hold the investor shares 10 years. There are no hidden expenses I know of with the ETF. There will be a bid/ask spread and maybe a tiny premium/discount with the ETF. BND is not thinly traded so these should be minimal and are not hidden and are one time only, not on going like the expense ratio.
Best Wishes, SpringMan
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Speedy
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Post by Speedy »

The ETF seems better but I may be missing something.
Hi Shipper:

Yes, you are missing a lot. There is an old saying: "If you don't look under the rock, you won't see the worms". Did you even read the references I provided above?

At least open this link to the Vanguard website page for BND. https://personal.vanguard.com/us/funds/ ... IntExt=INT

BND closed on Friday with the following pricing:
NAV = $76,59
Market price = $78.60

Premium (Market - NAV) + $2.01
The approximate premium for using BND instead of VBMFX is therefore 2.01/76.59 = 2.62%. So, by using BND instead of VBMFX, you would be losing 2.62% of your investment. With an annual expense ratio savings of 0.08%, it would take 32 years to make it up.

I acknowledge the end of day premium may not be indicative of what goes on during the trading day, but it sould give you an idea that by ignoring the deviation of NAV vs. Market price of an ETF, you are not looking under the rock.

I know the argument that you might get the same premium when you sell, but you also might get a discount when you sell, thereby compounding your loss.

As Mr. Jack Bogle has preached, ETFs are not good for small investors.

If you are going to invest in ETFs, you need to keep your eye on the ball, and it is much more complex than most realize.

Regards,
Bill
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Shipper
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Post by Shipper »

Speedy wrote: You should read this recent thread on ETFs vs. open end funds:
This recent article (also referenced in the above thread) discusses the problems in bond ETF arbitrage in recent months:

Regards,
Bill
Thanks for the links! they were very informative and answered most of my concerns (after digesting them). Looks like an interesting subject along with this forum. Thanks again.
PS I had to delete your links in the quote to post this reply. I'm subject to a 4 day rule before posting links (even though these are not my links) :(
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Shipper
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Post by Shipper »

Bill,
I was reading the links as you typed; and, because I'm such a slow typist, you must have assumed that I ignored your post. Have patience with me-you will be old someday also. 8)
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SpringMan
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Post by SpringMan »

According to Rick Ferri, the author of the ETF Book, it is a good idea to avoid buying ETFs within 1/2 hour of the market opening and 1/2 hour of the market closing. This avoids some of the risks mentioned by speedy and others. Also, I recommend using limit orders as opposed to market orders, then you know exactly what price you are paying, assuming the order executes.
Best,
Best Wishes, SpringMan
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Speedy
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Post by Speedy »

Shipper wrote:Bill,
I was reading the links as you typed; and, because I'm such a slow typist, you must have assumed that I ignored your post. Have patience with me-you will be old someday also. 8)
Hi Shipper:

Sorry I came across as being impatient. I have a strong conviction that many small investors underestimate the Hidden Costs of ETF transactions and that if they really understood the topic they would either:

1. Pay the slightly higher costs of using the open end fund, or
2. Take the time to learn the "P's and Q's" of ETF transactions.

I made the mistake myself of not really understanding ETF transactions for quite some time.

BTW, I'm no spring chicken either.

Best regards,
Bill
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Speedy
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Post by Speedy »

Hi Shipper:

This link is to the Yahoo Finance interactive graph for BND and "^BND-IV". ^BND-IV is the intraday value of BND and it represents the value of the bond portfolio of BND at any particlulr time. At the end of the day, it will be equal to the NAV of BND:

http://finance.yahoo.com/echarts?s=BND# ... =undefined

If the link doesn't work, just go to Yahoo Finance and use interactive graph for BND and compare it to ^BND-IV.

The data in the graph will update over time, so if you look at this a week from now, it will show different data. Data for ^BND-IV is only available at Yahoo Finance for 5 days, so if you want to save this graph print it out.

Some observations about the graph as of 12:06 pm pacific time:

1. The volatility of BND (market price) greatly exceeds the volatility of it's own IIV.
2. ON Friday Jan 2, the market price exceeded the IIV by roughly 1% most of the day.
3. For a brief time today, the market price was slightly below the IIV.
4. In the last few minutes, the market price has shot up relative to the IIV and is currently trading at about a premium of 1.2%.

For anyone buying and selling ETFs, this is one thing it is a good idea to look at before just entering the order.

I acknowledge that it is possible that an investor will be lucky and get a good price when buying and selling ETFs without looking to see what is going on, but my experience with rolling the dice is not particularly good.

Bid/ask spread is another Hidden Cost of using ETFs that should not be ignored.

BTW, I agree that is often a good idea to use limit orders when buying and selling ETFs.

Regards,
Bill
skoor
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Post by skoor »

I can speak first hand of the "danger" of ETFs, if you just roll the dice. and don't really understand the issues.

I read a very pro ETF book that made mutual funds seem a poor choice. So I opened a Scottrade and '"played" buying a few ETFs and other stocks just for the practice. I was thinking I would be willing to spend several cheap $7 trades, so expected to to spend $56+ some market timing lost/gain.

Ouch! Underestimated the bid/ask and market volatility. So this little less lesson cost me about $175 that I should have spend on more book and time researching.

So I backed-off and spend around the same amount on books recommend by this forum and other respected resources plus the time researching.

And I am in the process of opening/funding a Vanguard mutual fund IRA account. :-)


I do see possible future with limit orders, lower ER if held a long time and possible not short term/redemption fees. And as has been recommended on this forum, you can use the VANGUARD calculator to help understand the trade-off . I see them now as just another option to consider not some holy grail.
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