Thinking of ETFs (with Vanguard)

[Spanky]

I am contemplating on opening a brokerage account (in addition to our regular accounts) in order to purchase Vanguard ETFs (e.g., VTI, VXUS, VWO) as opposed to their admiral mutual fund counterparts. The primary reason is the ability to trade without restrictions even though the number of trades will be minimal. The cost of holding ETFs is similar to that of mutual funds since the expense ratio is almost identical, buying/selling Vanguard ETFs is commission free, and reinvesting dividends from their ETFs is also available at no cost (I think). The only drawback is bid/ask spreads, and changes in discounts and premiums to net asset value, which should be minimal for these ETFs: VTI, VXUS, VWO because of high liquidity.

Any comments will be appreciated.

 

[Onward]

I own all those ETFs and others. Their expense ratios should be lower than the corresponding mutual funds.

But beware the easy and immediate tradability of ETFs. IMO this feature, which almost everyone celebrates, is much more likely to cost you $$ than to save your butt.

 

[Ready]

I was thinking about switching from the MF's to ETFs but haven't done so yet. If I do, I would only place limit orders so that I have some control over what price I get. Somehow when I think about the extra effort involved, I seem to just stay put with the MFs though.

Getting around the frequent trading restrictions has only been an issue on occasion for me since I'm mainly a buy and hold investor, but occasionally some rebalancing has caused these restrictions to trip me up a bit.

One of the biggest benefits is being able to buy Vaguard ETFs if you don't have a Vanguard account. If you do, the benefits seem to be somewhat insignificant to me.

 

[Spanky]

But beware the easy and immediate tradability of ETFs. IMO this feature, which almost everyone celebrates, is much more likely to cost you $$ than to save your butt.

That's true if one engages in frequent tradings or bad trades (due to bad market timing).

 

[LOL!]

The bulk of our portfolio has been in ETFs for awhile. But they are not the panacea that some folks think they are. Many folks cannot figure out a good limit price for buying and selling them, so they have more anxiety when placing orders. In contrast, one can place a mutual fund order at any time and they know they will get a fair price at the end of the next trading session.

Here is a list of pros and cons of ETFs vs mutual funds: ETFs vs mutual funds - Bogleheads

I'd like to note that the expense ratios of Vanguard ETFs is the same as the expense ratios the admiral share class of the same fund. That is, ETFs do not have lower expense ratios. Also the tax efficiency is the same, too. If the fund has a dividend or capital gain distribution, then the ETF and the mutual fund share class will both have those distributions. It is true that the Vanguard ETF share class helps make the fund more tax efficient, but both share classes (ETF and mutual fund) benefit from that.

That link has a couple of things missing:

1. The settlement times of trades are different. T+1 for funds, T+3 for ETFs. This has consequences for folks who want to cash out of the brokerage account after a sell order is filled. It takes a few days longer to get your money when using ETFs. So if you have an emergency and need your money the day after tomorrow, then selling the ETF won't work for you because it will take 4-5 days (settlement + ACH transfer) to get your hands on the cash.

2. While both funds and ETFs can have their dividends automatically re-invested for free, the ETF share class of a Vanguard fund pays out the dividend a few days after the mutual fund does AND then it takes a day or two for your broker to reinvest the money. The broker decides what price they pay for your shares that they buy with your money. That price can be higher or lower than the price the mutual fund investor paid. Here's an anecdotal link on that: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=123871

A couple notes about Vanguard Brokerage Services (VBS):

They are pretty bad when it comes to real-time updating of your account and about any pending transactions or recent transactions. They generally take a day or two longer than other brokers to tell you about your dividends. So if want your dividend to pay a bill such as property taxes by a certain date, then Vanguard BS is not the broker to use even for their own ETFs. Here's a link that notes this: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=87742

VBS also seems to have issues with their downloading of 1099 forms into TurboTax. They might eventually figure out how to do this for all clients all the time, but each year there are some folks who complain about this.

I used to have a couple ETFs held at VBS, but I no longer do that and prefer to use other brokers.

Word is that the mutual fund side of Vanguard and the brokerage services side are slowly getting merged better together, but they are not quite there yet.

 

[Lsbcal]

Most of our equities are in Vanguard ETF's. Works fine for me.

The only issue I see is the need to wait 3 trade days to move money to a VG bond fund. Generally I find a decent or better bond fund on the VBS side. But if I'm rebalancing and moving the money to a VG short term bond fund then I have to do this in 2 steps. I don't see why VG does not take the order and fill it after the required 3 day delay but that's their current approach i.e. sell ETF, wait until money shows up in Prime MM, buy VG short term bond fund.

 

[pb4uski]

.....A couple notes about Vanguard Brokerage Services (VBS):

They are pretty bad when it comes to real-time updating of your account and about any pending transactions or recent transactions. They generally take a day or two longer than other brokers to tell you about your dividends. So if want your dividend to pay a bill such as property taxes by a certain date, then Vanguard BS is not the broker to use even for their own ETFs. Here's a link that notes this: Bogleheads • View topic - Case Study: Broker speed of dividend payments

VBS also seems to have issues with their downloading of 1099 forms into TurboTax. They might eventually figure out how to do this for all clients all the time, but each year there are some folks who complain about this.

I used to have a couple ETFs held at VBS, but I no longer do that and prefer to use other brokers.

Word is that the mutual fund side of Vanguard and the brokerage services side are slowly getting merged better together, but they are not quite there yet.

I've been told about the merging by my Vanguard rep - first mentioned over a year ago. Was supposed to happen in 2013 as I recall but pushed out to 2014. I hope that solves the VBS issues you mention above rather than the other way around. I'll admit while I an a huge VG fan, VBS has been disappointing - clunky website.

 

[Alan]

When ETFs first came at VG I looked into them, and as LOL so nicely pointed out there didn't seem to be advantages to me over the funds. However, we are moving to the UK in a couple of years and VG funds are not recognized as HMRC Reporting Funds whereas all of the VG ETFs are. This is a big tax factor for me so this year I started transferring funds into ETFs and so far it has been painless enough but I haven't enough experience yet.