Fund vs. ETF

[Looking4Ward]

I have the majority of my investments in Wellington & Wellesley, but I'm considering setting up a new investment "bucket" following the three fund strategy and an AA of 40% US equity, 20% international equity, 40% US bond.

Each of the Vanguard funds have an ETF equivalent with the same ER:

VTSMX (total US stock) = VTI

VGTSX (total International stock) = VXUS

VGTSX (total US bond) = BND

What would be the advantages/disadvantages of using the ETF's over the funds?

 

[LOL!]

ETFs vs mutual funds - Bogleheads

Dividends are also usually paid on different days.

Settlement is T+1 for funds and T+3 for ETFs.

 

[Animorph]

The main advantage of ETF's is that you can buy and sell during the day. If you want to do that, and they're commission free, go for it.

Otherwise it might be easier to get the NAV price at the end of the day without having to worry about a premium/discount on the ETF price or the bid/ask spread.

Mutual funds settle in one day and ETF's settle in three days, so it may take a little longer to sell for cash.

 

[Looking4Ward]

Thank you!

 

[Agni]

They are also different in the way taxes are accounted for. It seems that ETFs are more tax efficient than Funds.
https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

 

[Hopeful]

How does it work if you want the dividends reinvested with an ETF? Do you have to set up some type of DRIP program with the broker?

 

[Looking4Ward]

They are also different in the way taxes are accounted for. It seems that ETFs are more tax efficient than Funds.
https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

Although that is apparently not true with Vanguard, who has a patent on a particular method in which they've setup the funds and ETF equivalents whereby the tax-inducing capital gains are passed from the funds to the ETF (if I understand the process correctly):

"Vanguard ETFs are structured as another share class of a mutual fund, like Admiral or Investor shares. This is a process unique to Vanguard, protected by a patent until 2023, with two important consequences for the mutual fund investor:
Tax efficiency: the mutual fund shares benefit from the disposition of capital gains through ETF shares, making Vanguard funds with ETF share classes as efficient as an ETF.
Conversion: mutual fund shares can be converted to ETF shares without a taxable event. This helps when transferring assets to another broker, including charitable donations. Conversion in the other direction is not possible.
The second point is an argument to start with mutual fund shares, if unsure. One can always convert to ETF later if needed."

That info came from the link LOL! furnished above.

 

[Looking4Ward]

How does it work if you want the dividends reinvested with an ETF? Do you have to set up some type of DRIP program with the broker?

"Dividend differences: Most mutual fund investors take advantage of their fund's automatic dividend reinvestment feature. That saves them the hassle of deciding what to do with the cash that comes their way periodically. If and when the mutual fund pays out a cash dividend, your cut of the dough is automatically reinvested in shares, or partial shares of the fund.

With dividend-paying ETFs, that moolah winds up in your brokerage account instead, just like the dividend on a regular stock. If you want to reinvest that cash, you have to make another purchase -- and you'll get smacked with your usual trading fee unless your broker allows you to reinvest dividends for no extra cost. Many do."

From this link: Mutual Funds vs. Exchange Traded Funds

 

[FIRE'd@51]

If it is relevant to you, you can write covered calls against an ETF (most have options).

 

[LOL!]

How does it work if you want the dividends reinvested with an ETF? Do you have to set up some type of DRIP program with the broker?

Yes, for ETFs it is a broker function to reinvest your dividends, so check with your broker. My brokers do not charge for ETF dividend reinvesting just like they do not charge for stock dividend reinvesting. One gets fractional shares too just like with a mutual fund.

The mechanics and timing of dividend reinvestment are different at different brokers. With a mutual fund one gets the NAV without any friction, but with an ETF, the broker gets the cash a day or two after the payout and then sets a price for the new shares bought. The broker sets the price, not you.

See also:
Bogleheads • View topic - ETF dividend reinvestment price - what did you get?
Bogleheads • View topic - Case Study: Broker speed of dividend payments

 

[nun]

There's an obscure advantage of Vanguard ETFs over mutual funds for US tax payers living in the UK because the ETFs are recognized as "reporting funds" by the UK tax authorities and capital gains are taxed at capital gains rates....not at income tax rates as would be the case with the mutual funds.

 

[Hopeful]

Thanks for the clarification on dividends. For now I will stick to the Admiral shares for ease of reinvestment. Maybe in the draw-down phase I would consider converting to ETF equivalents.

 

[LOL!]

@Hopeful, if you have Admiral shares, then you have the same low expense ratio as the ETFs, so there would be no advantage for you to convert to ETFs as far as I can tell.