Stupid question... MFs vs ETFs

[rodi]

What are the pros and cons of each.

Due to a corporate spinoff/acquisition, it looks like I may be able to roll my 401k out to a self directed IRA soon.

I've got a lazy portfolio of mutual funds right now... but am considering going to an ETF based version when I roll this money.

What are the pros and cons?
I know ETFs can be traded real time... but I'm doing the lazy portfolio, so COB is fine by me.
My mutual funds are all low expense ratios index funds.

I know this is probably a stupid question - but are the real advantages of ETFs over MF's - other than real time trading?

[Gotadimple]

Lower expense fees!

[youbet]

I think you're asking the question backwards. What, in your opinion, are the advantages of MF's over ETF's?

[Animorph]

Compare expense ratios for either type.

ETF's have no early redemption fees or minimum investments.

ETF's have commissions if your broker doesn't have a commission-free set of them.

Mutual funds don't have commissions, though they can have transaction fees if you stray away from the broker's fee-free set of funds.

Mutual funds trade at end of day NAV's that should represent a fair value price. ETF's may be purchased at a discount or premium to their NAV so you might want to be more careful buying or selling.

There are tax differences that I'm not up on.

[kaneohe]

rodi.......thanks for asking.....I've had the same question for yrs..........

Why are expenses lower than index funds (or are they)? Are ETFs closed-end or open? What are typical ERs for index and ETFs?

[Marc]

One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested.

Only ETFs I have are mundane indexes: SPY, QQQ, and IWM. There are Fidelity Index Mutual Funds with as low a fee structure as these ETFs so it is basically a wash for me.

Marc

[RunningBum]

Quote:

Originally Posted by Gotadimple Lower expense fees!

Not with Vanguard, if you have enough for Admiral class funds, at least for the ones I own. The fees are identical. Vanguard has a cost comparison tool and it shows that admiral class mutual funds are slightly better due to the bid/ask spread. Maybe being able to buy and sell mid-day offsets that.

Some Vanguard funds have limits on buying and selling within a 2 month period. ETFs may not have those same limits.

[Accidental Retiree]

Quote:

Originally Posted by Marc One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested. Only ETFs I have are mundane indexes: SPY, QQQ, and IWM. There are Fidelity Index Mutual Funds with as low a fee structure as these ETFs so it is basically a wash for me. Marc

I have an ETF -- SDY --in my Schwab IRA, and the dividends are reinvested.

[soupcxan]

Quote:

Originally Posted by Marc One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested.

Have fun trying to compute your basis with decades of reinvested dividends!

[Marc]

Quote:

Originally Posted by Accidental Retiree I have an ETF -- SDY --in my Schwab IRA, and the dividends are reinvested.

Sounds like i need to call Fidelity.

Marc

edited to add:

Won't make the call; basis will become a nightmare. I will just use the dividends to partially pay for the next year's Roth contribution.

[Accidental Retiree]

Quote:

Originally Posted by soupcxan Have fun trying to compute your basis with decades of reinvested dividends!

Drove me to drink every tax season -- and nearly to divorce, until I convinced my DH to stop with the damn DRIPS, already!

[RonBoyd]

Quote:

Originally Posted by Marc One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested.

I have , for example, several EFTs (DVY, IXJ, TIP, BWX, XLF, XLU, VDC, VWO, VEA, VGK, VO, VNG, IBB) in a ShareBuilder (Capital One) account which all have their dividends automatically reinvested (my choice).

[Golf cruiser]

If you are in an IRA you should not need to know what your basis is bacause you will only pay tax on what you withdraw out of the IRA regardless of any basis on anything. The main differences between MFs and ETFs,is that an ETF has a lower expense ratio, and is liquid like a single stock. There is a very large universe of ETFs and the more specific and small they are typically would have a higher expense ratio. You need a broker that will allow you complete access to all of the ETF offerings like any listed stock. Some broker dealers will limit your selection of MFs as they dont have selling agreements with all of the fund families. Like you could not buy a Vanguard fund at Fidelity. I personally like the ETFs better because I dont like paying a manager that cant beat their benchmark index....which is most funds by the way.

[LOL!]

I found the pros and cons of each by google:
ETFs vs Mutual Funds - Bogleheads

[tinlizzy]

I thought they kept track of cost basis now for MF's. You just have to specify which method.

Am I wrong?

[MichaelB]

In taxable accounts ETFs have a significant and important advantage compared with funds. Due to friendly tax regulation, ETFs are able to minimize and often completely avoid generating capital gains that result from selling shares. Mutual funds, OTOH, pass through to fund holders the gains they record when selling shares. A MF holder can incur cap gain tax liability without selling.

[LOL!]

Quote:

Originally Posted by tinlizzy I thought they kept track of cost basis now for MF's. You just have to specify which method. Am I wrong?

You are not wrong, but they also keep track of cost basis, lots, etc for ETFs. So no difference.

[LOL!]

Quote:

Originally Posted by MichaelB In taxable accounts ETFs have a significant and important advantage compared with funds. Due to friendly tax regulation, ETFs are able to minimize and often completely avoid generating capital gains that result from selling shares. Mutual funds, OTOH, pass through to fund holders the gains they record when selling shares. A MF holder can incur cap gain tax liability without selling.

Vanguard ETFs are just another share class of the corresponding Vanguard mutual fund, so the above does not apply to that situation. Instead, the Vanguard mutual fund enjoys the same tax-efficiency as the ETF. That is, the mutual fund avoids generating cap gains that result from selling shares just like the ETF does.

ETFs occassionally pay out capital gains distributions, so just be aware of that, too.

[bondi688]

One BIG difference is that non US citizens, non US resident cannot buy a MF like Vanguard Dividend Appreciation Index Fund (VDAIX) if they live outside of the US, but they can buy Dividend Appreciation Index ETF (VIG) from the NYSE.

For US investors, the 2 Big differences are
1. VIG's valuation changes minute by minute during a trading day, and MF prices are calculated once a day at the end of the day. So for traders, that is one difference.
2. When you sell shares of a Vanguard MF, Vanguard does not allow you to buy back the same fund for at least 90 days. There is no such restriction for ETF. So if you are a market timer, you need to do ETF.

[NoMoreJob]

ETFs being so liquid (tradeable throughout the day) can be a temptation to implement knee-jerk reactions which can be dangerous to a passive index investor's portfolio. If you are indeed a passive indexer being able to trade real-time is a non-issue.

ETFs may have lower fees than their counterpart mutual funds. For very low cost index funds the difference is often minuscule.

Be aware that there is a bid/ask spread when buying/selling ETFs that doesn't exist with directly purchases mutual funds. That spread goes to a broker and is often not understood by those buying and selling ETFs. The bid/ask spread does not show up in reported expense ratios for ETFs.