I don't think I'll be using ETFs after all.

[audreyh1]

When I first started investing in our retirement portfolio, (late 90s) the choices of ETFs were quite limited so I stuck with mutual funds.

Of course since 2000, the ETFs available have mushroomed. All sorts of choices, some very low cost.

I have been watching them for quite a while. But lately come to the conclusion that I am unlikely to use that vehicle after all.

1. I can't get past the stock like "trading" aspect - buying and selling during market hours, rather than the end of day reconciliation of a mutual fund. Even when commission free.

2. So many institutional investors heavily use ETFs to hedge or speculate. Not to mention the high frequency traders.

3. IMO there are some serious technical problems with ETFs, not to mention some liquidity issues. Every time we have a heavy down market day there seem to be major technical problems and numerous mini flash crashes. And lately I have been reading articles about ETFs not meeting liquidity requirements and other violations. I think these problems will become more prevalent until they are forced to clean up their act. This will be slow going.

If there are problems with trading ETFs during high volume up/down market days - what is the point? I'm just not willing to deal with setting limits, watching a trading screen, etc. Been there, done that.

 

[LOL!]

1. I have to agree: If you cannot get past the stock-like aspect, then ETFs are not for you.

2. Surprisingly, some common ETFs that I use have low-ish volumes. Here are three of them VTI (total US market), VSS (small-cap foreign), and BND (total bond market).

I wish HFTraders did more with them such as with VNQ (REIT) and VEA (large-cap developed foreign). VNQ and VEA typically have 1 cent bid/ask spreads and my brokers typically give me better than the ask price when I buy and better than the bid price with I sell.

3. I am only aware of two days of mini flash crashes and not "numerous" days. I think those are great days to buy ETFs, so that is a definite advantage for ETFs as long as you are not selling any affected ETFs.

But I use both mutual funds and ETFs. I can see why folks do not like ETFs.

A couple of things I don't like about Vanguard mutual funds (I don't use other brands of mutual funds):

A. Restricted from buying online after selling.

B. For practical purposes it is impossible to gift Vanguard mutual fund shares to charities and it is difficult to gift them to my children.

Neither A nor B are of any major concern for me though. And mutual funds have the advantages of easy automated periodic investing and automated periodic withdrawals which can be big plusses.

 

[Sunset]

Actually mutual funds can be much worse. ETF's can be sold to some other buyer even as the market tanks.

Mutual funds can refuse to redeem your shares, you cannot sell and are trapped. Even the SEC is concerned.
Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries - WSJ

This issue is not simply related to this type of mutual fund but affects all mutual funds. I read about one mutual fund that has refused to redeem the investors money for the past 10 years, and just announced it would again delay for an additional year.

As an investor in one of these zombie mutual funds, you don't get your money when you need it, and you cannot even claim a loss on your taxes.

I'm willing to use all forms of investment, mutual funds, etf's and individual stocks, as each has some type of advantage for the investor.

 

[audreyh1]

3. I am only aware of two days of mini flash crashes and not "numerous" days. I think those are great days to buy ETFs, so that is a definite advantage for ETFs as long as you are not selling any affected ETFs.

When I said numerous - I was talking the numerous individual ETF occurrences on the given day. Like on 8/24/15. Not numerous days.

A couple of things I don't like about Vanguard mutual funds (I don't use other brands of mutual funds):

A. Restricted from buying online after selling.

B. For practical purposes it is impossible to gift Vanguard mutual fund shares to charities and it is difficult to gift them to my children.

Neither A nor B are of any major concern for me though. And mutual funds have the advantages of easy automated periodic investing and automated periodic withdrawals which can be big plusses.

These don't seem to be a problem with Fidelity. Certainly B works very well at Fidelity along with their DAF, and I tend to gift mutual fund shares to our DAF. I haven't tried to gift shares to individuals, but I get the impression Fidelity would handle that well.

As for buying online after selling - I think Fidelity may impose fees if you sell too soon after buying, but only if you don't already own shares that meet the short-term trading time period imposed on a given fund.

Roundtrip Transactions
We monitor the number of roundtrip transactions in shareholder accounts. A roundtrip is a mutual fund purchase or exchange purchase followed by a sell or exchange sell within 30 calendar days in the same fund and account. It is important to remember that share aging FIFO (First In First Out) is not considered when buy and sell transactions are evaluated for roundtrips.

Fund Level Blocks
Shareholders that place a second roundtrip transaction in the same fund within a 90-day period will be blocked from making additional purchases and exchange purchases into that fund for 85 days. This block will be applied to other accounts under the same registration.
All accounts affected by the fund level block will be monitored for an additional 12 months following the expiration of the block. If another roundtrip occurs in that fund in any of those accounts during this time, another fund level block will be applied for 85 days.

Full "Excessive Trading" policy: http://personal.fidelity.com/produc...tforms_Tools/excessive_trading_policies.shtml

Yes, I can see if you anticipate the possibility of frequent trading you might want to avoid mutual funds as your vehicle.

 

[audreyh1]

Actually mutual funds can be much worse. ETF's can be sold to some other buyer even as the market tanks.

Mutual funds can refuse to redeem your shares, you cannot sell and are trapped. Even the SEC is concerned.
Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries - WSJ

This issue is not simply related to this type of mutual fund but affects all mutual funds. I read about one mutual fund that has refused to redeem the investors money for the past 10 years, and just announced it would again delay for an additional year.

As an investor in one of these zombie mutual funds, you don't get your money when you need it, and you cannot even claim a loss on your taxes.

I'm willing to use all forms of investment, mutual funds, etf's and individual stocks, as each has some type of advantage for the investor.

Really not worried about that comparitve scenario. Under that scenario the ETF spread will become huge. I don't think the ETF will fare any better. There are investments that should not be wrapped in either an ETF nor a mutual fund. Hopefully the SEC will crack down on this.

I'm not worried about avoiding mutual funds that have major liquidity issues. I only invest in very broad asset classes, and I avoid concentrated funds.

 

[LOL!]

I had a Fidelity 401(k) account. Fidelity screwed up their calculation of 90 days and charged me 29 cents on a 6-figure transaction which I will attribute to a computer round-off error. I was pissed not only by that, but by their first response ("Oh, that doesn't make sense. I'll put in a work order to get it fixed") and their second response ("Thank you for contacting Fidelity. We are happy to report we addressed your problem.") when in fact they had done nothing. OK, I'll admit it's stupid, but they still have my 29 cents and will always have it because I moved my 401(k) elsewhere.

 

[audreyh1]

I had a Fidelity 401(k) account. Fidelity screwed up their calculation of 90 days and charged me 29 cents on a 6-figure transaction which I will attribute to a computer round-off error. I was pissed not only by that, but by their first response ("Oh, that doesn't make sense. I'll put in a work order to get it fixed") and their second response ("Thank you for contacting Fidelity. We are happy to report we addressed your problem.") when in fact they had done nothing. OK, I'll admit it's stupid, but they still have my 29 cents and will always have it because I moved my 401(k) elsewhere.

Too bad. I think I've only had to contact them twice in 25 years to correct an error - one of which was kind of understandable. Both corrected immediately.

 

[bingybear]

I understand your view. 8/24/15 was interesting to look at with the short term freeze in the market. Many stocks had the same issues early on 8/24. I would pose this point, if the freeze happened at the end of the day, you likely would have seen the MF drop like a rock. It would be exacerbated by people putting in sell order which would cause the MF to be out selling near the end of day to raise redemption funds.

Don't assume that MF are exempt just because they only take a snapshot at the end of the day.

That said, the mechanism for creating/destroying ETF shares on 8/24 did not keep up with what was happening.
My guess on 8/24 was you had stop loss orders and some panicked investor with market orders selling early with only some bottom fishing limit order buying.
Do what you are comfortable with, but don't be shocked when MF crash at the end of a day. If ETF prices were visible only at the end of the day... one would never have known about the dip. MF would have had a big dip if they tracked their pricing during the day.

 

[Gotadimple]

There are ETFs, and then there are those OTHER ETFs.

I use ETFs that follow a specific broad market index in place of index mutual funds. I believe I am getting the same results at a lower expense ratio. I also select an ETF that has a history of good trading volume. I think it all depends on how you slice your asset allocation.

Those OTHER ETFs based on market indices that are proprietary are similar to specialty mutual funds with lots of turnover and high expenses. I leave those for the traders to play with.

Rita

 

[jim584672]

I like ETFs over open ended funds.

Some advantages...
Not locked into a mutual fund company to buy shares.
ETF shares are marginable, count as collateral in a margin account.
Very low fees on most of them.
No frequent trading restrictions.
Intra day tradability.
Many are commission free, depending on the Broker.
Usually* no great disparity between NAV and share price. *Except in flash crashes.

 

[Senator]

I'm just not willing to deal with setting limits, watching a trading screen, etc. Been there, done that.

Who has to do that? Just put your order in, and forget it. I buy/sell a limit order, set at the market level. Then I just sleep at night.

 

[soupcxan]

No annual forced capital gains distribution tax bill, that's why I switched to ETFs in my taxable account.

I do not care about flash crashes as I am not forced to sell in the midst of one.

My ETF's expense ratio is 10 bp lower than the equivalent mutual fund. Saves me money every year.

 

[Alan]

Who has to do that? Just put your order in, and forget it. I buy/sell a limit order, set at the market level. Then I just sleep at night.

Exactly what I do.

No annual forced capital gains distribution tax bill, that's why I switched to ETFs in my taxable account.

That is a nice feature and one I hadn't appreciated before I switched to ETF's in my taxable accounts. I had looked at ETF's in the past but decided that I didn't see much advantage to my way of index investing over mutual funds. However, as part of our plans to move back to the UK next year I had to convert to HMRC recognized ETF's as they receive the same favorable tax treatment as individual stocks do.

In my IRA and Roth I still use mutual funds (Wellington and Wellesley).

 

[FUEGO]

Who has to do that? Just put your order in, and forget it. I buy/sell a limit order, set at the market level. Then I just sleep at night.

Pretty much what I do too. Or if I have time to watch it I might try to pick up a few cents better price by splitting the bid/ask spread.

At fidelity I think it's just a few extra clicks to transact an ETF versus a mutual fund (you have to specify order type and limit price).

All else being equal, I slightly prefer mutual funds over ETFs because it is a little easier to buy and sell (I can specify to exchange a dollar amount from one fund to another, for example) but I don't mind buying ETFs if they come with a lower ER or it's more convenient to own them. I don't care about the extra liquidity of ETFs because I so rarely trade that it wouldn't benefit me.

 

[Lsbcal]

...

1. I can't get past the stock like "trading" aspect - buying and selling during market hours, rather than the end of day reconciliation of a mutual fund. Even when commission free.

Mostly I am selling one ETF and buying another to rebalance or whatever. In that case I sell at the bid or maybe 1 cent below for a quick execution. If I set it 1 cent below it often seems to give me a better execution price then right at the bid. Then I turn around immediately and buy at the ask or 1 cent above. This works fine even on 6 figure trades.

2. So many institutional investors heavily use ETFs to hedge or speculate. Not to mention the high frequency traders.

I doubt those institutions are using Vanguard ETF's but this is just a feeling on my part. I use primarily VG ETF's and I think it is a good thing that they have an MF counterpart although I don't have any info that indicates this is an added strength. Except if the ETF got out of whack, wouldn't arbitrage with the MF counterpart be employed by traders or even VG itself?

3. IMO there are some serious technical problems with ETFs, not to mention some liquidity issues. Every time we have a heavy down market day there seem to be major technical problems and numerous mini flash crashes. And lately I have been reading articles about ETFs not meeting liquidity requirements and other violations. I think these problems will become more prevalent until they are forced to clean up their act. This will be slow going.

Again I would like to think that the major ETF's like SPY and VG ETF's are not a problem. If an ETF has a small bid-ask spread then it is probably pretty liquid. Well, I do worry about markets being manipulated but this is free floating anxiety on my part. Here is a link the the VG monthly bid-ask spreads: https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/bidaskspread

We were on vacation during that last August blip in the markets. It would be very unlikely that I'd be trying to execute during one of those events. But I *always* use limit orders.

One other thing to mention. When I place trades I have a spreadsheet with my intentions all filled out. I then go to the trading screen and place that order. Helps me to feel ordered and I can keep notes on what happened.

Lastly I copied the image below from some discussion of HF trading. I kept it to remind me that this stuff is way beyond my expertise and not to get a big head about trading. While we are doing executions in days (Mutual Funds) or seconds like ETF's, others are doing trades in milliseconds or maybe even in microsecond bursts (like in a pipe).

 

[audreyh1]

Some good practical advice in this thread. Thanks!

 

[RunningBum]

No annual forced capital gains distribution tax bill, that's why I switched to ETFs in my taxable account.

Doesn't seem to be true with Vanguard's ETFs, from what I read. But maybe only VG.

 

[LOL!]

Several Vanguard bond funds had capital gains distributions at the end of 2015. But if the ETF share class had them, then so did the mutual fund share classes. These were index funds, too.

So I think that cap gains distributions will be rare, but not unheard of.

Also important are the fraction of dividends that are qualified. This past year (2015) even the Vanguard Total Stock Market Index fund did NOT have 100% qualified dividends.

 

[bingybear]

Mostly I am selling one ETF and buying another to rebalance or whatever. In that case I sell at the bid or maybe 1 cent below for a quick execution. If I set it 1 cent below it often seems to give me a better execution price then right at the bid. Then I turn around immediately and buy at the ask or 1 cent above. This works fine even on 6 figure trades.
I doubt those institutions are using Vanguard ETF's but this is just a feeling on my part. I use primarily VG ETF's and I think it is a good thing that they have an MF counterpart although I don't have any info that indicates this is an added strength. Except if the ETF got out of whack, wouldn't arbitrage with the MF counterpart be employed by traders or even VG itself?
Again I would like to think that the major ETF's like SPY and VG ETF's are not a problem. If an ETF has a small bid-ask spread then it is probably pretty liquid. Well, I do worry about markets being manipulated but this is free floating anxiety on my part. Here is a link the the VG monthly bid-ask spreads: https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/bidaskspread

We were on vacation during that last August blip in the markets. It would be very unlikely that I'd be trying to execute during one of those events. But I *always* use limit orders.

One other thing to mention. When I place trades I have a spreadsheet with my intentions all filled out. I then go to the trading screen and place that order. Helps me to feel ordered and I can keep notes on what happened.

Lastly I copied the image below from some discussion of HF trading. I kept it to remind me that this stuff is way beyond my expertise and not to get a big head about trading. While we are doing executions in days (Mutual Funds) or seconds like ETF's, others are doing trades in milliseconds or maybe even in microsecond bursts (like in a pipe).

My understanding of HFT is much more intrusive than just very fast orders. They observe orders coming and in can detect incoming orders, make a decision, and change their own standing orders before the ones they observed actually get placed. This requires very high end data equipment close to the exchanges with way to sample and delay incoming orders while changing/creating orders faster than it takes other peoples orders to get to the exchange. It helps if they have faster pipe into the exchange.

 

[ziggy29]

OK, I'll admit it's stupid, but they still have my 29 cents and will always have it because I moved my 401(k) elsewhere.

I'll take "First World Problems" for $800, Alex....

 

[RunningBum]

Several Vanguard bond funds had capital gains distributions at the end of 2015. But if the ETF share class had them, then so did the mutual fund share classes. These were index funds, too.

So I think that cap gains distributions will be rare, but not unheard of.

Also important are the fraction of dividends that are qualified. This past year (2015) even the Vanguard Total Stock Market Index fund did NOT have 100% qualified dividends.

But that fraction is the same for ETFs as it is for the like mutual fund, or is this another thing only true at VG? I thought the intent of this thread is to identify the differences so one could decide on ETF vs. MF. Information that is the same for both doesn't really add anything.

 

[REWahoo]

I thought the intent of this thread is to identify the differences so one could decide on ETF vs. MF. Information that is the same for both doesn't really add anything.

I'd like to know everything I can about the difference between the two, including the fact there may be little difference in some cases.

 

[LOL!]

Information that is the same for both doesn't really add anything.

I think it does add something. I've seen people that believe that ETFs are more tax efficient than mutual funds. Or that ETFs are more tax efficient than index funds. That is not always true.

ETFs are generally more tax efficient than actively-managed mutual funds.

ETFs may be more tax efficient than the index funds of many financial institutions. That is, not all index funds are tax efficient.

Vanguard index funds may (or may not) be more tax efficient than the index funds of other financial institutions.

Vanguard ETFs and Vanguard index funds are just different share classes of the same underlying index mutual fund, so they will have the same tax efficiency.

By tax efficiency, I mean how much tax one would expect to have to pay on an investment for the year if one bought shares at the beginning of the year for a taxable account and did not sell them. So with a buy-and-hold approach, one is taxed on distributions which could consist of Long-Term capital gains, short-term capital gains, non-qualified dividends, and qualified dividends.

Ideally, the most tax-efficient investment would increase in value and not pay out any distributions. Of course, the trivial case where the investment loses money is the most tax efficient, but we really do not want that.

And I'm not writing about tax-exempt muni bond fund dividends here. We know those can be considered tax-efficient.

 

[NW-Bound]

My understanding of HFT is much more intrusive than just very fast orders. They observe orders coming and in can detect incoming orders, make a decision, and change their own standing orders before the ones they observed actually get placed. This requires very high end data equipment close to the exchanges with way to sample and delay incoming orders while changing/creating orders faster than it takes other peoples orders to get to the exchange. It helps if they have faster pipe into the exchange.

Some more information: One should read Flash Boys - A Wall Street Revolt by Michael Lewis to understand what HFT is all about.

Basically, a large stock order is usually filled on multiple stock exchanges. The price quotes on these exchanges are supposed to be synchronized, but unless one has the same access delay to the exchanges, his order will be seen on one exchange before it appears on the others. A firm with fast access can see your order on one of the exchanges first, then "front-runs" your order on the other exchanges, and makes a few pennies per share on your order.

HFT guys skim money off large institutional investors including all mutual funds. If you trade less frequently, it does not affect you, whether you hold stocks or ETFs. If your MF manager trades frequently, you will get hurt indirectly even if you buy-and-hold.

 

[Tekward]

Intelligent for whom?

That is one of the reasons I chose not to use the Schwab Intelligent Investor robot investing. They send your trades to a third party, enabling HFT, which happens every time they rebalance. It sounds like a churning opportunity.