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

[RunningBum]

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.

OK, but my point (not clearly made) was that the post just gave some random info with no indication of whether it was different for ETFs vs mutual fund or not, which kind of seemed (to me) to imply that it might somehow different.

But, whatever. I started following the thread because I want to take some CG losses in VG Total International (admiral) and buy back after the wash period and when VG allows me to buy back in. Wondering if I should buy the ETF then instead of the MF, but I'm not seeing any difference important to me. I guess with the ETF, in the future I wouldn't have the buy back wait limitation, but it looks to be the same as the wash rule period so I doubt I'd want to anyway. Then again, since there is no difference maybe I will just buy the ETF.

 

[gerntz]

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.

This article

Evanson Asset Management - DFA vs. Indexes and ETF's

discusses ETF concerns under "POTENTIAL RISKS WITH ETF'S"

 

[LOL!]

I started following the thread because I want to take some CG losses in VG Total International (admiral) and buy back after the wash period and when VG allows me to buy back in. Wondering if I should buy the ETF then instead of the MF, but I'm not seeing any difference important to me. I guess with the ETF, in the future I wouldn't have the buy back wait limitation, but it looks to be the same as the wash rule period so I doubt I'd want to anyway. Then again, since there is no difference maybe I will just buy the ETF.

In this case, Vanguard ETF vs Vanguard index mutual fund, there are no differences important to you.

And yes, Vanguard did recently change the frequent trading policy so that the buy trade restriction is now the same as the wash-sale period. Of course, you can simply exchange losing shares of VTIAX into VFWAX and go about your business, but maybe that is what you were going to do anyways. (You didn't imply this, but for others VTIAX into VXUS is a substantially identical replacement and would trigger the wash sale rule.)

A pretty good listing of pros and cons is found here: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

 

[Lsbcal]

This article

Evanson Asset Management - DFA vs. Indexes and ETF's

discusses ETF concerns under "POTENTIAL RISKS WITH ETF'S"

I interpret that article as a plug for DFA access via Evanson.

 

[LOL!]

This article

Evanson Asset Management - DFA vs. Indexes and ETF's

discusses ETF concerns under "POTENTIAL RISKS WITH ETF'S"

And the Evanson notes stress why I like ETFs during flash crashes:

According to a Trim Tabs report, ETF investors are so bad at picking the right time to buy or short-sell the equity markets that those doing exactly the opposite of what ETF players did over the past decade would have ended up with 700% profits.

 

[jim584672]

Interesting... The ETF has a lower expense ratio than the Investor shares.

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 0.17%
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) 0.05%
Vanguard Total Stock Market ETF (VTI) 0.05%

 

[RunningBum]

Interesting... The ETF has a lower expense ratio than the Investor shares.

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 0.17%
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) 0.05%
Vanguard Total Stock Market ETF (VTI) 0.05%

That seems to be the standard with VG. If you don't have enough for admiral shares, this leads heavily toward ETF.

 

[gerntz]

I interpret that article as a plug for DFA access via Evanson.

Of course that can be the overall view of the entire article. I was talking just the ETF RISKS section - as I noted. Perhaps they're over-emphasized, but at least it gives points to consider that you may not be aware of - and to accept or dismiss as you like. Now if the points are inaccurate, that's something to be concerned with.

 

[Lsbcal]

Of course that can be the overall view of the entire article. I was talking just the ETF RISKS section - as I noted. Perhaps they're over-emphasized, but at least it gives points to consider that you may not be aware of - and to accept or dismiss as you like. Now if the points are inaccurate, that's something to be concerned with.

I don't mean to offend you for bringing up the article. Frankly I do not know who to believe on some of this stuff. Few of us have the expertise or data to analyze this.

I do trust Vanguard and if they can bring out ETF's that are mirrored by funds then I would think that in at least these ETF's it is safe to put my money. I hold both ETF's and funds but use ETF's because they are easier to implement my particular investment approach. Some funds have no ETF counterpart and so I buy the funds in that case.

If someone can point out excessive risks with ETF's like VTV, VOE, or VBR then I'd be interested in the discussion. If you plot VVIAX versus it's ETF VTV, they overlap. Same for VMVAX and VOE, etc.

 

[walkinwood]

My understanding is that ETFs are more tax efficient than an equivalent mutual fund because the ETF does not incur capital gains when an ETF holder decides to sell shares.

Are there other reasons why an ETF is more tax efficient than an equivalent mutual fund (think index rather than an active ETF)?

 

[audreyh1]

My understanding is that ETFs are more tax efficient than an equivalent mutual fund because the ETF does not incur capital gains when an ETF holder decides to sell shares.

Are there other reasons why an ETF is more tax efficient than an equivalent mutual fund (think index rather than an active ETF)?

I don't think that's true. You will incur cap gains when you sell shares depending on the basis established when you bought the shares. It's the cap gains distributions that may be reduced compared to a similar mutual find.

 

[LOL!]

My understanding is that ETFs are more tax efficient than an equivalent mutual fund because the ETF does not incur capital gains when an ETF holder decides to sell shares.

Are there other reasons why an ETF is more tax efficient than an equivalent mutual fund (think index rather than an active ETF)?

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds#Tax_efficiency

Depends on what you mean by "equivalent." Also an investor will incur (realize) capital gains if they sell their ETF shares at a higher price than they paid for their shares (just ilke stock investor or a mutual fund investor).

 

[donheff]

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

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

I am a mutual fund guy and always watch what is happening with the overall market toward the end of the day and put in sell orders after 3:30. Like soupcxan, I never worried about flash crashes. But bingybear's comment raised my paranoia antenna. I guess there is nothing to prevent an EOD flash crash that trashes a good market through closing screwing up what should have been a stellar time to withdraw. I guess the only way to avoid a potential disaster is to avoid huge EOD transactions. Instead of cashing out a whole year's withdrawal on a single day, or dumping the proceeds of a house sale into funds at one time (as I am likely to face this year) it would be safer to break up the total into several transactions on different days. Better safe than sorry.

 

[bingybear]

I am a mutual fund guy and always watch what is happening with the overall market toward the end of the day and put in sell orders after 3:30. Like soupcxan, I never worried about flash crashes. But bingybear's comment raised my paranoia antenna. I guess there is nothing to prevent an EOD flash crash that trashes a good market through closing screwing up what should have been a stellar time to withdraw. I guess the only way to avoid a potential disaster is to avoid huge EOD transactions. Instead of cashing out a whole year's withdrawal on a single day, or dumping the proceeds of a house sale into funds at one time (as I am likely to face this year) it would be safer to break up the total into several transactions on different days. Better safe than sorry.

My comment was not just about MF investors pulling money on a specific day, but having a market freeze at the end of the day. When fear is high one often can see a down draft at the end of the day...often before weekends as some like to be out of the market if they are scared foreign markets will continue down and pull assets out. Even without the weekend effect that sometimes happens, their still is nothing that would prevent an 8/24 event from happening at EOD. I can "imagine" that some MF holders could increase the effect by doing a redemption out of fear and making drop worse. MF are priced at EOD, thus if the "flash crash" is at the end of the day, the MF will capture the down price for that day.

I'm not anti MF. But if you hold an ETF to the end of the day, what is the difference of the MF and ETF? Oh, you can see how the price of the ETF varied during the day. The value of the MF just does not record them. The bigger difference.... you can sell the ETF during the day... this may be an advantage... or not as you can sell near the bottom of a mid day flash crash.

MF or ETFs, they are investments and have risks. If there are many less buyers than sellers, the price will drop. To the extent that the ability to create/destroy shares can keep up... both MF and ETF will fall in value. A difference might be the HY MF that froze redemptions because the bonds it was holding were becoming illiquid. The ETF would likely just drop in price. The MF is hoping by slowing the closure will allow them to sell the bonds at better prices. Maybe this will work... maybe not.

 

[audreyh1]

But we've been through this stuff. Lots of volatile cliff hanger days in 2008. Nothing that indicated MF transactions weren't orderly. Nothing to disconnect them from underlying securities.

 

[walkinwood]

I don't think that's true. You will incur cap gains when you sell shares depending on the basis established when you bought the shares. It's the cap gains distributions that may be reduced compared to a similar mutual find.

I wasn't clear (what's new?) I do understand that I would pay cap gains on any shares I sold.

I meant that I, as an investor in the ETF, would not realize capital gains if someone else sold their shares. In the mutual fund world, the manager would have to sell shares and the cap gains would impact every share owner. In the ETF world, the cap gains would only be paid by the seller.

 

[bingybear]

But we've been through this stuff. Lots of volatile cliff hanger days in 2008. Nothing that indicated MF transactions weren't orderly. Nothing to disconnect them from underlying securities.

2015 3rd Ave stopped redemptions of the HY MF. One example given... so not nothing.

While I suspect that the market makers/authorized participants [AP]may have not filled the demand for people selling shares (agreeing with your point), I knew many that picked up individual stocks at deeply discounted prices inline with the drop in ETF prices early in the day. I'm not sure how disconnected the ETFs in those moments of time and how that extended to the end of the day (when it could be compared to MF).

As said before.... do what makes you comfortable.

 

[Gotadimple]

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.

+1

 

[tmm99]

I've always been a MF person but I will have to start buying ETF's instead, because I am now a Canadian resident and the US doesn't allow US citizens who reside in Canada to trade non-registered (non-IRA, non-401K, etc) money in the US, except to sell and to reinvest dividends. I can buy ETF's and stocks in Canada while US MF's are off-limits. So, I'd say thank goodness for the ETF's.

 

[NW-Bound]

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.

I am going to add a bit more about HFT for people who are not inclined to read the above referenced book.

Suppose an institutional investor wanted to buy 1,000 shares of Apple stocks. He saw that at the current lowest ask price of $104.50, there were 100 shares offered on exchange A, 300 shares on exchange B, etc..., plenty of shares offered to fill his order at the price he wanted. So he figured that if he sent out a market order, he would get it filled at that price.

What happened was that his order got to exchange A milliseconds before it got to the other exchanges. The HFT guys saw his order, and quickly canceled their shill orders on the other exchanges. Our hapless stock buyer got only 100 shares at the "advertised price" (bait), and the rest of his order filled at higher prices.

However, as a small investor, when I buy a stock or an ETF, I get what I see, even when I use market orders and not limit orders. It's because my orders are small enough that they get filled immediately at that ask price. Occasionally, I even get a penny or a fraction of it below the price I expect, even though I use a limit order. Weird, huh?

 

[LOL!]

Another book on HFT that came out before The Flash Boys is Scott Patterson's "Dark Pools". HFTtraders ply the dark pools, too. I think Schwab, TDAmeritrade, and Fidelity have such pools.

Most orders of more than 100 to 200 shares get split into smaller orders automatically nowadays because folks know that these HFT folks will jump on larger orders. If your broker is not doing that for your large orders, then you might wish to consider a different broker.

And price improvement should be routine at one's broker. The reasons is that all brokers get paid a rebate by the exchange for sending their orders to the exchange. Your broker should give you some of that rebate and not keep it in their own pocket.

 

[Lsbcal]

Vanguard in 2014 was supportive of HFT. Here is one link: Vanguard chief defends high-frequency trading firms

Mr McNabb also dismissed claims that HFT firms sniff out when a large buyer or seller is trying to trade so they can push the market against them.

He said Vanguard had examined these so-called "market impact" costs, by looking at tracking error in its exchange-traded index funds. "We actually have a really good perspective on this, and there's no question in our mind that the cost to investors through funds has come down," he said.

 

[LOL!]

There is no doubt that the cost has come down. And quite a lot … especially with no commissions on ETF trades.

That does not mean though one should not be wary of getting ripped off. If nothing else, just realize that I am trying to rip-off the person on the other side of my trades --- both buying and selling.

 

[NW-Bound]

What McNabb said was that HFT did not hurt his index funds or ETFs. That is true with any investor who does not trade frequently. When they are successful, HFT guys extract a tiny bit off the orders, and they cannot do that on every order.

HFT is a friction cost, and while I do not like to see people taking any profit off my activities while adding nothing, I have a lot more higher frictions in other transactions in life to worry about (sales tax, real-estate commissions, shipping costs, etc...) that I do not stay up night worrying about HFT. Of course, if you are a day trader, it will bother you more.

By the way, the above link shows an interview with Bogle who had something to say about HFT. Being too impatient to watch the video, I'd rather read a transcript but they do not have that.

 

[ERD50]

So can any of us take advantage of future flash-crashes? I think a few reported getting some real deals on the last big one, though some of these were also cancelled?

Place a buy limit order on SPY at maybe 15~20% below opening price on Monday, and change it only when SPY moves 5% or more? You could place this on margin so as not to drag your performance with un-invested funds while you were waiting for Godot.

Don't let the word 'margin' frighten you. If you have a 70/30 AA, you could place an order for an added 10% of your portfolio, and still be covered with your fixed income. You could look at your 70/30 as becoming 80/30 (110 total), and that would mean a allocation of ~ 73/27 when brought down to a 100% viewpoint - not far from 70/30. And the idea would be to do a quick sell after the fast dip.

-ERD50