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Vanguard Index Funds or ETF's
Old 02-05-2012, 09:39 AM   #1
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Vanguard Index Funds or ETF's

I have been reading about the differences between index funds and ETF's.
It appears ETF's have great appeal because they can be traded any time of day like individual stocks. No waiting for the one time close of day selling.
(I do like that) But I understand there is a little spread sometimes between the bid and asking on them, but they say it is not great and is often corrected.

The positive for index funds seems to be you can set up automatic deposits for them, so they would be popular for many people for their 401K's and such. But since I'm retired and this would not apply to me as I am not working and in the accumulation phase, I don't see any other benefit, unless I haven't read about it.

What all do you know about the differences, and why did you go the way you did go?
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Old 02-05-2012, 11:36 AM   #2
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A few comments:

1) ETF spreads are all over the map depending a lot on the ETF's volume. Also you cannot count on a spread being always narrow, like in a panic period. The spread on VEU is generally 1 penny but VSS can go up to 15 cents last I looked -- so I don't use VSS.

2) VG index funds in the international area might get you a fairer price. It has been said that it is wise to trade international ETF's early in the day when those foreign markets are mostly open.

3) What I do not like about VG funds is that if you sell some of a holding you have to wait 60 days to buy, unless you do your purchase by mail. So frequent rebalancing (one example) can be a pain.

4) It can be a bit nerve wracking trading ETF's. You need a simple plan.
VG brokers will actually do the buy/sells for you with no commission charge, I think. I did this once while looking at the trading screen to follow price movements.

5) Always use limit orders on ETF's.

FWIW, our equity portfolio is almost all ETF's. Reason is primarily in item #3 above. Bond side is all funds.
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Old 02-05-2012, 01:11 PM   #3
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If you have access to commission-free ETF's then it's great. If not, those commissions might add up if you like to rebalance frequently or buy/sell shares monthly as part of accumulation/withdrawal. Then again if you are an active rebalancer you can get in trouble with short-term redemption fees and "no transaction fee" claw backs with mutual funds. So one or the other may suit your style better and cost less in transaction fees.
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Old 02-05-2012, 03:30 PM   #4
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Wiki article link: ETFs vs Mutual Funds
I prefer ETFs in a taxable account for the ease of tax-loss harvesting and tracking of lots.

I prefer bond mutual funds over bond ETFs for the ease of automatica dividend reinvestment. These bond assets would be in a tax-advantaged account.

The 15 cent spread on VSS is not so bad since the price per share is $80 to $100.
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Old 02-05-2012, 04:52 PM   #5
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Quote:
Originally Posted by modhatter View Post
I have been reading about the differences between index funds and ETF's.
I am pretty sure that all ETF's are index funds. Index mutual funds/ETF's tarck an index. If you plan on DCA, multiple purchases, ETF costs can add up.
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Old 02-05-2012, 05:49 PM   #6
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I use an ETF in my 401k brokerage account to save transaction costs. There are no acceptable mutual fund choices in the base 401k but I can trade nearly anything I want in the self directed brokerage account. However, mutual fund trades cost 49.95 while ETF trades cost 9.95. I accumulate my bi-weekly contributions in a stable value fund, and then about every 2-3 months I put it all in the BND ETF (along with the funds from liquidating the company match which was in megacorp stock - I do this every paycheck). So, in this case, the ETF saves me money vs. the mutual fund. Once I achieve my desired AA in total bond market, I'll look at where future investments should go.

YMMV.
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Old 02-06-2012, 09:08 AM   #7
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Originally Posted by Lsbcal View Post
3) What I do not like about VG funds is that if you sell some of a holding you have to wait 60 days to buy, unless you do your purchase by mail. So frequent rebalancing (one example) can be a pain.
We have about half in VG and half in Fidelity with similar funds in each. We don't frequently trade but if we need to sell equities (e.g. to fund expenses) and want to balance that trade we can generally make a close match in one of the other funds.
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Old 04-11-2012, 02:01 PM   #8
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(Reviving a recent thread)
I'm setting up accounts for a relative and had to choose between Vanguard's MSCI EAFE ETF (symbol VEA) and their similar Admiral MF (symbol VTMGX)

Comparison:
Expense Ratio: VTMGX = .18% , VEA = .12% (a higher difference than normal)
Bid/Ask spread: VTMGX = 0 , VEA = approx .03%
Premium/Discount vs NAV: VTMGX=0, VEA = Approx 0.30%

That premium over NAV can be a hidden gotcha. If I buy that ETF, I'll be getting .3% less stock than if I buy the MF, and that means my dividend payouts will always be .3% less than they'd otherwise be. And if I sell and the ETF is selling at a discount to NAV, I'll take a hit--on some days in 2011 it sold at a 50 basis point (.5%) discount to the NAV. So, despite the lower ER, it's certainly not a slam-dunk in favor of the ETF. If you get on the wrong side of a 75 basis point change in the premium/discount rate, you could have paid for over a decade of the higher MF expenses. Or, you might luck out and come out well if the swing is the other way.

I rebalance infrequently, so being able to trade "right now" isn't important to me. I like to keep things simple and needing to check the premium/discount level before I buy/sell a holding is one more complexity I don't need.
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Old 04-11-2012, 02:19 PM   #9
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If you don't plan to sell soon, would like the lower expense of the ETF but aren't sure trading costs or buying at a premium, you can buy the mutual fund and then ask Vanguard to convert into the ETF.
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Old 04-11-2012, 02:35 PM   #10
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I have never understood how the premium/discount data relates to real life trades. I believe this data is towards the close of trading so does not really cover the within day variations. Generally it is suggested to trade 1/2 hour after the open and 1/2 hour before the close.
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Old 04-11-2012, 04:11 PM   #11
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I have never understood how the premium/discount data relates to real life trades. I believe this data is towards the close of trading so does not really cover the within day variations. Generally it is suggested to trade 1/2 hour after the open and 1/2 hour before the close.

Especially on foreign stocks this could be just perfectly rational after hours valuation changes.

If OP is really concerned about paying a premium, you can track both the MF and ETF. Buy the ETF. Note how many shares of the MF you could have bought, including the ETF commision. When you want to sell, check the MF price and set an ETF sell limit price that at least matches the MF gain, again with commission (and dividends) included. If they track pretty closely or the ETF usually does better you will then be sure you did better than buying the MF.
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Old 04-11-2012, 04:51 PM   #12
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Using the data you provided, wouldn't the ETF be ahead in about 5 1/2 years? (ignoring compounding).

(.03 + .30)/(.18 - .12) = 5.5

But then I guess you have commissions to buy and sell to consider.
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Old 04-11-2012, 05:49 PM   #13
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Once you are in this range, the expense ratios do not really matter at all. There should be no commissions to buy/sell ETFs. If you pay a commission, you should switch brokers.

The premium/discount to NAV doesn't really matter either as it has a good chance of being about the same in the future.

So what does matter? Convenienence as perceived by you. Some folks are scared of bid/ask spreads, but they don't really matter either. Some folks like to submit orders when the market is closed which is pretty much a no-no with ETFs. Anyways, the convenience factors are different for different people and are listed in the previous link I gave.
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Old 04-11-2012, 06:43 PM   #14
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Using the data you provided, wouldn't the ETF be ahead in about 5 1/2 years? (ignoring compounding).

(.03 + .30)/(.18 - .12) = 5.5

But then I guess you have commissions to buy and sell to consider.
No, it was a 30 BP (.3%) premium when I buy today (when I looked earlier). If I sell at a 50 BP discount (this ETF was selling at that discount a lot in 2011), then that's a total "cost" of 80 BP or .8%.

The difference in the ERs is .06%, so .8/.06 = 13.33 years (again, ignoring compounding)

The thing that impressed me is that the vagaries of the premium/discount to NAV could easily swamp the impact of the small difference in expense ratios. And it can take a long time (months) for the price to come back to NAV. With the MF, I know I get the NAV price every night, no rolling the dice.
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Old 04-11-2012, 07:51 PM   #15
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... With the MF, I know I get the NAV price every night, no rolling the dice.
Especially with internationally oriented funds, I'm not sure that the end of day pricing from the fund accurately reflects the local foreign market prices. Many of those markets are closed at that point. May be wishful thinking.
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