Free ETFs at VG. But why ETFs?

fundseeker · Post by **fundseeker** » Sun May 09, 2010 8:04 am

I know many of you are proponents of ETFs, and I see now that for Voyager clients, ETF trades are free. So, now that I might seriously consider switching from MFs to ETFs, what is the advantage? It looks like the expenses might be a little less, but do I really want to be watching the market throughout the day and trading like I do for some individual stocks? I doubt it. I already struggle with market timing with my MFs. Plus, although I do not think I would sell as the market sinks during some days, maybe my MFs have a nice built in safeguard to help me out. Am I missing something here about the need for ETFs? Thanks. Tom

mikep · Post by **mikep** » Sun May 09, 2010 8:30 am

The advantage is lower expense ratio than the MF and avoid purchase/redemption fees on a few funds (for example international small VFSVX). But you do have the bid/ask spread.

No need to watch the market throughout the day. ETF's can be bought and held or market timed just like the MF. There's no rule that says if you own ETF's you have to watch the market throughout the day and market time.

See this page to compare costs over the long-term.
https://personal.vanguard.com/us/faces/ ... ontent.jsp

edge · Post by **edge** » Sun May 09, 2010 8:41 am

mikep wrote:The advantage is lower expense ratio than the MF and avoid purchase/redemption fees on a few funds (for example international small VFSVX). But you do have the bid/ask spread.

No need to watch the market throughout the day. ETF's can be bought and held or market timed just like the MF. There's no rule that says if you own ETF's you have to watch the market throughout the day and market time.

See this page to compare costs over the long-term.
https://personal.vanguard.com/us/faces/ ... ontent.jsp

While all of this is true, I think the poster is wondering if he has the mental discipline to NOT trade ETFs throughout the day.

Obviously, we cannot answer this question for him but I can say that I own ETFs and I trade as much as I do with my MFs (hardly ever and only to meet IPS or to take advantage of very unique circumstances).

fundseeker · Post by **fundseeker** » Sun May 09, 2010 9:11 am

Thanks for the replies. So, if I decide I should switch to ETFs for lower expenses, is it true that I have to sell my MF, which will be a taxable event?

Also, would someone help me understand some of the differences in the numbers below? I just got this information from VG's website for the the Total Stock Market MF and its ETF equivalent. It looks like I will be paying twice the amount for the ETF. Maybe I need to go to remedial ETF school, huh? Thanks again. Tom

VTSMX
Price as of 05/07/2010 $27.60
Change –$0.49 –1.74%
SEC yield as of 05/07/2010 1.48% B
52-week high 04/23/2010 $30.42
52-week low 07/08/2009 $21.48
Range $8.94 41.62%
05/07/2010 $27.60
05/06/2010 $28.09
05/05/2010 $29.05
05/04/2010 $29.28
05/03/2010 $30.03

VTI (the ETF equivalent)
Last price
PSE as of 05/07/2010 $56.62 Change –$1.09 –1.89%
52-week high 04/23/2010 $62.49
52-week low 07/08/2009 $44.13
52-week difference $18.36 41.60%
NAV as of 05/07/2010 $56.71 Change –$1.01 –1.75%
SEC yield as of 05/07/2010 1.58% B
Refresh last price
Open $57.67
Previous close $57.71
Day range $55.84 - $58.10

acr123 · Post by **acr123** » Sun May 09, 2010 9:17 am

Do NOT sell mutual fund to buy equivalent ETF!!! Call Vanguard and ask to convert mutual fund to its ETF. This is at NAV and it actually exchanges one type of share class to another.

rustymutt · Post by **rustymutt** » Sun May 09, 2010 10:00 am

acr123 wrote:Do NOT sell mutual fund to buy equivalent ETF!!! Call Vanguard and ask to convert mutual fund to its ETF. This is at NAV and it actually exchanges one type of share class to another.

Thanks ACR!

Post by **LadyGeek** » Sun May 09, 2010 10:12 am

The wiki has a remedial ETF school (tutorials). Please see Exchange Traded Funds on the Bogleheads Wiki.

There's no mention about exchanging (NOT selling) mutual funds to ETFs. Perhaps we missed something here, as it seems that this should be an up-front warning (I wasn't aware of this myself).

Could someone suggest what to put on the wiki page? This isn't my background, so I'd rather have an expert supply the wording. Wiki editors can update the page directly.

exeunt · Post by **exeunt** » Sun May 09, 2010 12:12 pm

A benefit of ETFs is they don't have minimum purchase requirements. This lets you more finely slice and dice your portfolio without huge sums of money and one of the biggest reasons why I'm converting my mutual funds.

nisiprius · Post by **nisiprius** » Sun May 09, 2010 8:33 pm

exeunt wrote:A benefit of ETFs is they don't have minimum purchase requirements. This lets you more finely slice and dice your portfolio without huge sums of money and one of the biggest reasons why I'm converting my mutual funds.

1) ??? But if you already own the mutual funds, you must already be above the minimum purchase requirements for them, so why would you need to convert them?

2) I don't want to be insensitive to those just getting started, but the minimum requirement for most of Vanguard's funds is $3,000. That means that if your portfolio is $60,000, which isn't a huge sum for someone who's been saving for a decade, you can easily buy an amount equal to 5% of your portfolio. Why would you would need to slice and dice finer than that? Are you trying to allocate less than 5%? Or is your portfolio total down in the low five digits?

livesoft · Post by **livesoft** » Sun May 09, 2010 8:38 pm

My teenager made less than $500 in income last year. She has a Roth IRA with 100% of her earnings in the Roth IRA. No Vanguard fund is accessible to her, but she can buy an ETF or two to get going.

xerty24 · Post by **xerty24** » Sun May 09, 2010 9:01 pm

mikep wrote:But [with ETFs] you do have the bid/ask spread.

With mutual funds, they too have to pay the bid/ask spread when they buy and sell on your behalf. You don't see this cost itemized, and it comes out of the total return of the fund invisibly, just like the mutual fund trading commissions. Of course the mutual fund's commissions are much lower than yours, and likewise their ability to pay less than the full spread (through a variety of clever approaches) is also much better than yours, so there's an advantage to MFs here but it's not the full amount.

Post by **LadyGeek** » Sun May 09, 2010 9:37 pm

I found the Vanguard conversion rules. Caution - don't do this in the reverse direction (ETF to mutual fund). From The Vanguard ETF® Difference:

Tax-free conversion from mutual fund to ETFs

Unlike any other ETF, Vanguard ETFs are a different share class of existing mutual funds, which means you can convert your client’s Vanguard® index mutual fund shares to the equivalent Vanguard ETFs tax-free. While there is a small administrative fee for the conversion, there is no tax consequence in making that conversion. No other ETF has that advantage. (One caveat: You cannot do the process in reverse. You can't convert from the Vanguard ETF to the mutual fund without selling shares and possibly incurring capital gains taxes or violating wash-sale rules.)

The wiki has been updated to caution readers about the difference between conversion and selling of mutual funds to obtain ETFs.

Please see Exchange Traded Funds on the Bogleheads Wiki.

GammaPoint · Post by **GammaPoint** » Mon May 10, 2010 12:21 am

nisiprius wrote:1) ??? But if you already own the mutual funds, you must already be above the minimum purchase requirements for them, so why would you need to convert them?

Even if I had MFs and preferred them to trading ETFs, I would still consider converting at least 50% of each of my MF positions into ETFs. This way you would get the lower ER on half of your position, yet you would rebalance with the mutual fund portion (if that's the kind of trading you prefer to do).