Mutual Funds vs ETF's. Which do you use?

[Dwhit]

In the next few months I will be moving a chunk of ESOP money to an IRA. Originally, I had made notes to split this money between various mutual funds and ETF's.

But I am inexperienced with ETF's, and I don't really recall seeing ETF's mentioned a lot on this board. So I was wondering if many actually use ETF's, and if there are any things I might need to look out for if I do use them

Thanks!

 

[bingybear]

I use ETFs almost exclusively in taxable accounts. I do not us MF at all in taxable accounts.
I hold both ETFs and MF in IRA account.

Roth accounts right now are individual stocks and ETFs, but I would consider holding MF in Roths.

ETFs... other than understanding what you're investing in.. just like MF, likely the biggest difference is to look at the liquidity. How many shares trade on average. Look at number of share existing and bid ask spread. You want the small bid-ask spread during market hours. You want large number of shares trading.

 

[MRG]

Does your ESOP contain stock, that's appreciated? Do you know about an NUA? Please at least look at this option, it can save you piles on taxes. You cannot do a NUA after you rollover an IRA.

Yes many here use ETF'S. I'm about 50/50.

 

[Dwhit]

Does your ESOP contain stock, that's appreciated? Do you know about an NUA? Please at least look at this option, it can save you piles on taxes. You cannot do a NUA after you rollover an IRA

The way my company's ESOP worked was that upon retirement ( I was 57) they cashed out all my company stock, and I was required to invest it tax deferred into an account of their choosing ( which had several investment options). But at no time did I have the ability to withdraw money from this account until I reach 60 and 1/2 years ( coming up soon). Do you think ther is any chance to use NUA in this situation?

 

[MRG]

The way my company's ESOP worked was that upon retirement ( I was 57) they cashed out all my company stock, and I was required to invest it tax deferred into an account of their choosing ( which had several investment options). But at no time did I have the ability to withdraw money from this account until I reach 60 and 1/2 years ( coming up soon). Do you think ther is any chance to use NUA in this situation?

I don't think so. I've only known it to be used on company stock holdings.

I'm betting someone smarter than me will know. If you have a good tax person they'll know for sure.

 

[Sunset]

I use a bunch of ETF's ,
- they give you great diversification (like mutual funds).
- they are cheaper than mutual funds, it varies but I often notice difference of .40 % or more.
- you can trade them like stocks, which is a blessing and a curse depending upon your style.
- you don't get surprise at tax time of capital gains declared which mutual funds can do (this is really important in taxable accounts) and note: the declaration of capital gains does NOT mean you actually get the money in your pocket.

If you look at Vanguard site for example on mutual funds, right at the top they offer the "same" thing as an ETF at a lower cost compared to the investor class of fund.
https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT#tab=3

 

[pb4uski]

I use both. I prefer funds, but both are ok. The only thing that I don't like about ETFs is the pesky discount/premium on those that are not broadly traded. Other than that to me it is 6 of one of a half dozen of another.

 

[DrRoy]

ETFs... other than understanding what you're investing in.. just like MF, likely the biggest difference is to look at the liquidity. How many shares trade on average. Look at number of share existing and bid ask spread. You want the small bid-ask spread during market hours. You want large number of shares trading.

In the last 10 years or so, I have only made buys of ETF's. They have lower costs than MF's. I still hold funds that I bought earlier than that.

 

[samclem]

I'm 100% MFs. Reasons:
- Inertia. I started with MFs, have no reason to change.
- Same price and fees as ETFs (Admiral shares)
- Faster tax forms. Brokerage accounts are allowed to get their tax forms later than MF accounts, according to the government regs.
- Availability of what I want: There's no ETF for the Vanguard target date retirement funds. There's no ETF for Wellington. Etc
- Price spread: This is usually not a problem with funds that are traded a lot, but there's sometimes a considerable difference between an ETFs purchas and sale prices and the NAV of its contents. Some ETFs plummeted (briefly) during the "flash crash." It's not a major factor to me, but I still don't have to worry about it, and don't need to check for it when I sell/buy.

The only reason I have considered ETFs is to get around Vanguard's "frequent trading" policy. I'm not a frequent trader, but I take a withdrawal from a fund for some reason, then I rebalance a month later and need to buy more of that fund, it can be a PITA. I guess it hasn't bothered me enough to cause me to buy ETFs.

 

[LOL!]

I use both, but mostly have ETFs.

A good write-up of pros and cons:
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

Probably the main thing for me is that all ETFs are available at all my brokers, but Vanguard mutual funds are not.

Many people have a fear of ETFs because they can't figure out a price that they want to buy and sell them. With a mutual fund, one has no choice: you get the price given to you after you place your order.

 

[mathjak107]

i use all etf's but they do have their draw backs .

etf's can be more volatile than funds since they are traded and can be sold short .

bond etf's can sell at pretty wide discounts or premiums compared to the same open ended fund . buy at at a premium and sell at a discount and you can take a heavier loss if rates rise .

stock etf's trade closer to nav but not always .

we saw a huge break down after brexit on some very popular etf's like dvy .

the selling was so unbalanced that arbitraging to keep the nav steady became impossible .

at one point dvy and a few others were down 35% while the assets were down only 5% . it eventually corrected itself but not before those with stop losses got hammered at huge losses .

etf's can be ill-liquid at times .

i have one etf that even in good times has to wait for a buyer to come along . an open ended fund always buys the shares back .

 

[Dawg52]

Both.

 

[bingybear]

i use all etf's but they do have their draw backs .

stock etf's trade closer to nav but not always .

we saw a huge break down after brexit on some very popular etf's like dvy .
the selling was so unbalanced that arbitraging to keep the nav steady became impossible .

at one point dvy and a few others were down 35% while the assets were down only 5% . it eventually corrected itself but not before those with stop losses got hammered at huge losses .

I don't recall this happening to this level @ brexit, but I may have been too busy with other things. This did happen late August 2015 with the China scare. As I recall circuit breakers were halting trading on specific investments include individual stocks. This would cause problems pricing anything that had these individuals stocks as a component.

One thing people overlook is that if that panic selling were to happen at the end of the day, Mutual Funds would be priced in mid panic. While the MF looked more stable, it may have been an illusion that was due to the timing of the short crash.

etf's can be ill-liquid at times .

i have one etf that even in good times has to wait for a buyer to come along . an open ended fund always buys the shares back .

One other thing some ETFs do (and some MF may do is to use derivatives (options or other forms of interest in some assets) for part of the portfolio. Even on some broad indexes, they may hold some of the assets as options or the like. From what I've seen in my own ETFs are these usually to cover the small cap part of the indexes. This likely has little effect except during a mass exit where there would not be enough of the actual small cap shares to cover a mass sell off. I have not checked MF for the same thing. I don't have much invested in MF.

 

[GalaxyBoy]

Since Vanguard admiral shares aren't available in my Schwab accounts I use the corresponding ETFs to get the lower expense ratio. A couple of jobs ago my 401(k) had lousy choices but offered a self directed brokerage account option. Within the SDBA, mutual funds cost $50 per trade but ETFs cost $10 per trade. So I used ETFs there, accumulating my contributions in cash and investing once every few paychecks.

 

[grasshopper]

I use ETF's in my taxable accounts, no surprise capital gains at the end of the year, and MF's (Wellington) in tax advantaged accounts(bonds).

 

[MichaelB]

we saw a huge break down after brexit on some very popular etf's like dvy .

the selling was so unbalanced that arbitraging to keep the nav steady became impossible .

at one point dvy and a few others were down 35% while the assets were down only 5% . it eventually corrected itself but not before those with stop losses got hammered at huge losses .

Not doubting that there were wild price swings on some of the less liquid ETF's, but not DVY. Volume was heavier than average (2.5x) but the price stayed between a very narrow range: $83.79 - $82.08, closing at $82.63. According to Yahoo Finance. Investopedia finance shows a similar price range for that day.

Making sure ETFs have the liquidity to withstand sudden market changes is important, but DVY seems to satisfy that criteria.

 

[bingybear]

Not doubting that there were wild price swings on some of the less liquid ETF's, but not DVY. Volume was heavier than average (2.5x) but the price stayed between a very narrow range: $83.79 - $82.08, closing at $82.63. According to Yahoo Finance. Investopedia finance shows a similar price range for that day.

Making sure ETFs have the liquidity to withstand sudden market changes is important, but DVY seems to satisfy that criteria.

DVY on Aug 24th 2015
Aug 24, 2015 high 73.79 low 48.00

where ^GSPC
Aug 24, 2015 high 1,965.15 low 1,867.01

I think 8/24/15 was a better day to see the effects of panic selling overwhelming the exchanges.

edit: I think a lot of the spread was due to people selling with market orders when the buyers had really low limit orders... early in the day.

 

[LOL!]

i use all etf's but they do have their draw backs .

etf's can be more volatile than funds since they are traded and can be sold short .

bond etf's can sell at pretty wide discounts or premiums compared to the same open ended fund . buy at at a premium and sell at a discount and you can take a heavier loss if rates rise .

stock etf's trade closer to nav but not always .

we saw a huge break down after brexit on some very popular etf's like dvy .

the selling was so unbalanced that arbitraging to keep the nav steady became impossible .

at one point dvy and a few others were down 35% while the assets were down only 5% . it eventually corrected itself but not before those with stop losses got hammered at huge losses .

etf's can be ill-liquid at times .

i have one etf that even in good times has to wait for a buyer to come along . an open ended fund always buys the shares back .

Almost everything you listed above I would consider to be an ADVANTAGE to ETFs if one is BUYING and that's also why I like them. One can sometimes get a real deal by ripping off unsuspecting sellers.

I would not use a low-volume illiquid ETF though.

One may ask, "But what if you wanted to sell instead of buy during those volatility swings?"

My answer would be, "I would use my mutual funds if I had to sell in such times."

 

[bradaz2488]

Got completely out of MF at the beginning of 2014 and into ETF and Index funds. My taxable account at Charles Schwab is all ETF's and my tax deferred account at Fidelity is Index funds. My average expense ratio is 0.06%. I have the same "type" (LG cap, SM cap etc..) of funds at both and try to buy equal portions in each account at the same time when the market dips. I know it is not apple-to-apples comparison, the ETF account has performed 2% higher then the Index funds. My guess is on the days I bought into the market the ETF traded immediately just like stocks and the Index funds (like MF) trade at end of day when stocks tend to recover when there is a big intraday dip. Been very happy with both types of funds with the low expense ratio. May look at changing to ETF funds at Fidelity, but at the time they offered Ishares ETF for no trading fees. I also heard they my be offering their own ETF's (?)...

 

[COcheesehead]

ETF's in taxable accounts for their tax efficiency.
MF's in deferred accounts.
I feel that gives me the diversification of both indexes and managed funds.
I am happy with the strategy.

 

[Cobra9777]

We only own ETFs, primarily to avoid year-end CG distributions and because ERs are generally lower compared to an equivalent mutual fund. Bid/ask spreads are not much of an issue for us because we only own very large, highly liquid ETFs and don't trade except occasional rebalancing. We own a mix of Vanguard and iShares ETFs and all our accounts are at Fidelity. iShares ETFs trade free at Fidelity while Vanguard ETFs incur a $4.95 trading commission. Vanguard mutual funds would be quite costly to trade.

 

[Dwhit]

I don't think so. I've only known it to be used on company stock holdings.

I'm betting someone smarter than me will know. If you have a good tax person they'll know for sure.

Regarding the use of NUA for my ESOP, from what I can find on the Internet, I believe I am out of luck there. My company was an S-Corp, which could stretch out the stock repurchase over 5 to ten years. ( they went ahead and repurchased all of my stock upon my retirement). But regardless, they always eventually re-purchase all stock and do not allow distribution of stock outside the ESOP to retirees (turns out SCorps are not required to offer stock distributions for their ESOPs) So I think NUA would not be available.

But thanks for the heads up anyway! Always nice to know ahead of time about something that might be of benefit. Usually I find out too late

 

[nun]

I'm 100% MFs because of inertia. If I ever return to the UK I'll go over to 100% Vanguard ETFs in my taxable accounts because the UK taxes those like UK domestic funds. I can stay with mutual funds in the tax deferred accounts because the retirement account wrapper protects them from UK tax until withdrawals are taken.


Sent from my iPhone using Early Retirement Forum

 

[Fedup]

I have both. Mutual funds that are not mirroring the market. ETFs for the rest.

 

[NW-Bound]

It used to be that of my equity holdings, 1/2 was in MFs and 1/2 was in ETF and individual stocks.

I have slowly divested of most MFs, and at this point the MFs are only about 1/5 the values of the ETFs and individual stocks.