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

[RunningBum]

Quote:

Originally Posted by LOL! Several Vanguard bond funds had capital gains distributions at the end of 2015. But if the ETF share class had them, then so did the mutual fund share classes. These were index funds, too. So I think that cap gains distributions will be rare, but not unheard of. Also important are the fraction of dividends that are qualified. This past year (2015) even the Vanguard Total Stock Market Index fund did NOT have 100% qualified dividends.

But that fraction is the same for ETFs as it is for the like mutual fund, or is this another thing only true at VG? I thought the intent of this thread is to identify the differences so one could decide on ETF vs. MF. Information that is the same for both doesn't really add anything.

[REWahoo]

Quote:

Originally Posted by RunningBum I thought the intent of this thread is to identify the differences so one could decide on ETF vs. MF. Information that is the same for both doesn't really add anything.

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.

[LOL!]

Quote:

Originally Posted by RunningBum Information that is the same for both doesn't really add anything.

I think it does add something. I've seen people that believe that ETFs are more tax efficient than mutual funds. Or that ETFs are more tax efficient than index funds. That is not always true.

ETFs are generally more tax efficient than actively-managed mutual funds.

ETFs may be more tax efficient than the index funds of many financial institutions. That is, not all index funds are tax efficient.

Vanguard index funds may (or may not) be more tax efficient than the index funds of other financial institutions.

Vanguard ETFs and Vanguard index funds are just different share classes of the same underlying index mutual fund, so they will have the same tax efficiency.

By tax efficiency, I mean how much tax one would expect to have to pay on an investment for the year if one bought shares at the beginning of the year for a taxable account and did not sell them. So with a buy-and-hold approach, one is taxed on distributions which could consist of Long-Term capital gains, short-term capital gains, non-qualified dividends, and qualified dividends.

Ideally, the most tax-efficient investment would increase in value and not pay out any distributions. Of course, the trivial case where the investment loses money is the most tax efficient, but we really do not want that.

And I'm not writing about tax-exempt muni bond fund dividends here. We know those can be considered tax-efficient.

[NW-Bound]

Quote:

Originally Posted by bingybear My understanding of HFT is much more intrusive than just very fast orders. They observe orders coming and in can detect incoming orders, make a decision, and change their own standing orders before the ones they observed actually get placed. This requires very high end data equipment close to the exchanges with way to sample and delay incoming orders while changing/creating orders faster than it takes other peoples orders to get to the exchange. It helps if they have faster pipe into the exchange.

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.

[Tekward]

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.

[RunningBum]

Quote:

Originally Posted by REWahoo 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]

Quote:

Originally Posted by audreyh1 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!]

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by gerntz 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!]

Quote:

Originally Posted by gerntz 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:

Quote:

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]

Quote:

Originally Posted by 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%

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

[gerntz]

Quote:

Originally Posted by Lsbcal 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]

Quote:

Originally Posted by gerntz 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]

Quote:

Originally Posted by 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)?

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!]

Quote:

Originally Posted by 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)?

https://www.bogleheads.org/wiki/ETFs...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]

Quote:

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

Quote:

Originally Posted by soupcxan 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]

Quote:

Originally Posted by donheff 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.