ETF vs Index Funds

[audreyh1]

I tend to rebalance in the first trading day or two of January, and that particular time of year is generally positive for equities and negative for bonds unless we are coming off a bear market year. This is just fine with me as I’m most often trimming from equities and adding to bonds when I rebalance, unless we are coming off a bear market year.

Regardless, the daily moves are just noise especially if you look back a year later.

 

[Slater]

I dont know much but this is what I do know, only pertains to vanguard...
vti etf vs vtsax mutual fund...
you have to have a minimum of I think $3500 to open a vtsax mutual fund...
Mutual fund you can delegate auto invest & set an investment amount & frequency, hence auto pilot....
vti etf, no minimum, all you need is the one share cost..
vti etf you can not implement "auto pilot", can only manually invest..
vanguard will allow you to start with an etf untill you hit the min, then convert / transfer those funds over to a mutual fund so you can take advantage of auto pilot & set-up monthly auto investment strategy.....
your welcome!

 

[retire48in2018]

For an index fund

- mutual fund allow auto reinvestment. There are zero cost index mutual funds

- Advantages of ETF - buy/sell within day, Options on larger ETFs exist for more sophisticated investing.

If you’re talking a simple portfolio management - mutual fund index get slight edge, especially long term buy/hold.

There are some sector funds unique to mutual and ETFs.

Short term and/or sophisticated investing - ETF.

I own no ETFs, only mutual funds. In my brokerage account, I have Fidelity zero cost total market mutual fund.

 

[engineernerd]

I favor (index) ETFs because you can use limit orders. I use them defensively, to protect me from instability along the lines of the 2010 "flash crash."


While I would hope that the mutual fund management would step in to prevent crazy unwarranted price swings from harming innocent buyers and sellers of their fund shares, with limit orders I don't have to depend on that, I'm automatically protected from selling at too low a price or buying at too high a price.

 

[xlf11]

VG also allows fraction shares on ETF as well.

 

[COcheesehead]

I favor (index) ETFs because you can use limit orders. I use them defensively, to protect me from instability along the lines of the 2010 "flash crash."


While I would hope that the mutual fund management would step in to prevent crazy unwarranted price swings from harming innocent buyers and sellers of their fund shares, with limit orders I don't have to depend on that, I'm automatically protected from selling at too low a price or buying at too high a price.

Wouldn’t a limit order trigger and you’d sell only to see the shares bounce back like they did in 2010?

 

[engineernerd]

Wouldn’t a limit order trigger and you’d sell only to see the shares bounce back like they did in 2010?

A limit order is where you say to sell a certain number of shares, but only if/when the price is at or above the limit you choose. I usually choose the 60-day option for how long they should keep trying to sell (and I can always cancel at an earlier date if I want, unless the sale already executed).

So my order will not go through at a lower price than I choose.


Regarding the flash crash, my memory is that only some of the affected transactions were rescinded by the authorities. The ones that happened above something like 85% of fair value did not get a do-over. And it was only happenstance that the crash happened at the time of day that it did rather than, say, right before the end of the trading day.

 

[COcheesehead]

A limit order is where you say to sell a certain number of shares, but only if/when the price is at or above the limit you choose. I usually choose the 60-day option for how long they should keep trying to sell (and I can always cancel at an earlier date if I want, unless the sale already executed).

So my order will not go through at a lower price than I choose.

I know what a limit order is. What I am asking is why you would want a limit order to trigger as in your example a during flash crash where the shares would be sold only to have them bounce back as they did in 2010. Limit orders can be as dangerous as they can be a safety valve. You can be stopped out of a position just by a temporary spike downward.

 

[engineernerd]

What I am asking is why you would want a limit order to trigger as in your example a during flash crash where the shares would be sold only to have them bounce back as they did in 2010. Limit orders can be as dangerous as they can be a safety valve. You can be stopped out of a position just by a temporary spike downward.

The point is that my order would NOT execute during the flash-crash dip, but would instead execute when the price recovered to what I expected/wanted.


I'm not sure what you mean by "stopped out of a position"?

 

[COcheesehead]

The point is that my order would NOT execute during the flash-crash dip, but would instead execute when the price recovered to what I expected/wanted.


I'm not sure what you mean by "stopped out of a position"?

Stopped out happens when you have a limit order and the spread widens for an odd event - a flash crash for an example - and the limit executes only to have the market reset to a closer spread later in the day or week. Meaning your order happens at a bad time. Without a limit, your position just bounces.
I am not sure how a limit wouldn’t execute on the way down, but would on the way up as you say unless your limit is above market, but that doesn’t protect you on the downside.

 

[engineernerd]

Stopped out happens when you have a limit order and the spread widens for an odd event - a flash crash for an example - and the limit executes only to have the market reset to a closer spread later in the day or week. Meaning your order happens at a bad time. Without a limit, your position just bounces.
I am not sure how a limit wouldn’t execute on the way down, but would on the way up as you say unless your limit is above market, but that doesn’t protect you on the downside.

"Spread"?


"Without a limit, your position just bounces"? Is this relevant if I sell first, then once that goes through, I buy whatever else I choose (or take the money to spend)?


My only goal is to not be scr**ed by the flash crash itself. So I set my limit price at just a little above the current price, and am fine with selling at my limit price no matter whether it is on the way down or on the way up. I'm a long-term investor.

 

[COcheesehead]

"Spread"?


My only goal is to not be scr**ed by the flash crash itself. So I set my limit price at just a little above the current price, and am fine with selling at my limit price no matter whether it is on the way down or on the way up. I'm a long-term investor.

Spread = when asks and bids widen, sometimes wildly.
I’ll leave you with this, setting a sell just above market does not protect you on the downside as you say. The ETF may never reach that price and you’ll take the full hit of the downward slide. The market could bounce back and you’ll sell on the bounce only to no longer be in the position or “stopped or limited out”.
Be careful, do some more research on your strategy, it’s generally not one implemented by a long term investor.

 

[OldShooter]

... I would hope that the mutual fund management would step in to prevent crazy unwarranted price swings. ...

It's actually worse than you think. One thing I don't like about ETFs is that there is actually a third person at the table, one with financial objectives different than mine: the "authorized participant." (https://www.investopedia.com/terms/a/authorizedparticipant.asp)

The authorized participant is a sort of market maker who is allowed to profit from ETF arbitrage opportunities. When seas are calm, this is probably not a big deal but when things get a little wild it is sometimes in the authorized participant's best interest to close his arbitrage window and not be a participant at all. This is where the bid/ask can become temporarily uncoupled from the NAV.

 

[engineernerd]

It's actually worse than you think. One thing I don't like about ETFs is that there is actually a third person at the table, one with financial objectives different than mine: the "authorized participant." (https://www.investopedia.com/terms/a/authorizedparticipant.asp)

The authorized participant is a sort of market maker who is allowed to profit from ETF arbitrage opportunities. When seas are calm, this is probably not a big deal but when things get a little wild it is sometimes in the authorized participant's best interest to close his arbitrage window and not be a participant at all. This is where the bid/ask can become temporarily uncoupled from the NAV.

This is why I have a diversified portfolio, with not too much $ in any one ETF. If I need cash right away and my limit order to sell an ETF sits too long un-executed, I can cancel that order and sell something else instead while I wait for any temporary market instability to be resolved.
But if an intraday glitch causes my mutual-fund sell order to execute at a much lower price than I expect or intend, there is nothing I can do about it except complain and hope someone intervenes to reverse my transaction.

 

[OldShooter]

This is why I have a diversified portfolio, with not too much $ in any one ETF. If I need cash right away and my limit order to sell an ETF sits too long un-executed, I can cancel that order and sell something else instead while I wait for any temporary market instability to be resolved.
But if an intraday glitch causes my mutual-fund sell order to execute at a much lower price than I expect or intend, there is nothing I can do about it except complain and hope someone intervenes to reverse my transaction.

If your limit order strategies work for you that's great. I think it is the case, though, that on a wild day all ETFs' price action will be highly correlated.

 

[engineernerd]

If your limit order strategies work for you that's great. I think it is the case, though, that on a wild day all ETFs' price action will be highly correlated.

Not sure I agree, but even so, worst case is I either find a non-ETF source of funds or go without for a few days until the mess is sorted out. I'm not at risk of finding out after the fact that I sold my holdings during a major and completely unjustified price dip.

 

[temartin]

True, but

Pros and cons to this...with ETF you need to be aware of the bid/ask spread, unless you are willing to place a market order.

That's true, but with a mutual fund, you don't know the price when you place the buy/sell order either. they are priced after market close.

 

[MRG]

I tend to rebalance in the first trading day or two of January, and that particular time of year is generally positive for equities and negative for bonds unless we are coming off a bear market year. This is just fine with me as I’m most often trimming from equities and adding to bonds when I rebalance, unless we are coming off a bear market year.

Regardless, the daily moves are just noise especially if you look back a year later.

Exactly. IMHO it only makes a difference in a taxable account buying non-Vangaurd mutual funds.