Stupid question... MFs vs ETFs

[rodi]

What are the pros and cons of each.

Due to a corporate spinoff/acquisition, it looks like I may be able to roll my 401k out to a self directed IRA soon.

I've got a lazy portfolio of mutual funds right now... but am considering going to an ETF based version when I roll this money.

What are the pros and cons?
I know ETFs can be traded real time... but I'm doing the lazy portfolio, so COB is fine by me.
My mutual funds are all low expense ratios index funds.

I know this is probably a stupid question - but are the real advantages of ETFs over MF's - other than real time trading?

 

[Gotadimple]

Lower expense fees!

 

[youbet]

I think you're asking the question backwards. What, in your opinion, are the advantages of MF's over ETF's?

 

[Animorph]

Compare expense ratios for either type.

ETF's have no early redemption fees or minimum investments.

ETF's have commissions if your broker doesn't have a commission-free set of them.

Mutual funds don't have commissions, though they can have transaction fees if you stray away from the broker's fee-free set of funds.

Mutual funds trade at end of day NAV's that should represent a fair value price. ETF's may be purchased at a discount or premium to their NAV so you might want to be more careful buying or selling.

There are tax differences that I'm not up on.

 

[kaneohe]

rodi.......thanks for asking.....I've had the same question for yrs..........

Why are expenses lower than index funds (or are they)? Are ETFs closed-end or open? What are typical ERs for index and ETFs?

 

[Marc]

One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested.

Only ETFs I have are mundane indexes: SPY, QQQ, and IWM. There are Fidelity Index Mutual Funds with as low a fee structure as these ETFs so it is basically a wash for me.

Marc

 

[RunningBum]

Lower expense fees!

Not with Vanguard, if you have enough for Admiral class funds, at least for the ones I own. The fees are identical. Vanguard has a cost comparison tool and it shows that admiral class mutual funds are slightly better due to the bid/ask spread. Maybe being able to buy and sell mid-day offsets that.

Some Vanguard funds have limits on buying and selling within a 2 month period. ETFs may not have those same limits.

 

[Accidental Retiree]

One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested.

Only ETFs I have are mundane indexes: SPY, QQQ, and IWM. There are Fidelity Index Mutual Funds with as low a fee structure as these ETFs so it is basically a wash for me.

Marc

I have an ETF -- SDY --in my Schwab IRA, and the dividends are reinvested.

 

[soupcxan]

One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested. It is nice to have the extra cash but I would rather have the dividends automatically reinvested.

Have fun trying to compute your basis with decades of reinvested dividends!

 

[Marc]

I have an ETF -- SDY --in my Schwab IRA, and the dividends are reinvested.

Sounds like i need to call Fidelity.

Marc

edited to add:

Won't make the call; basis will become a nightmare. I will just use the dividends to partially pay for the next year's Roth contribution.

 

[Accidental Retiree]

Have fun trying to compute your basis with decades of reinvested dividends!

Drove me to drink every tax season -- and nearly to divorce, until I convinced my DH to stop with the damn DRIPS, already!

 

[RonBoyd]

One thing I don't like about my ETFs (mine are held in taxable account) is that dividends are not reinvested.

I have , for example, several EFTs (DVY, IXJ, TIP, BWX, XLF, XLU, VDC, VWO, VEA, VGK, VO, VNG, IBB) in a ShareBuilder (Capital One) account which all have their dividends automatically reinvested (my choice).

 

[Golf cruiser]

cost basis

If you are in an IRA you should not need to know what your basis is bacause you will only pay tax on what you withdraw out of the IRA regardless of any basis on anything. The main differences between MFs and ETFs,is that an ETF has a lower expense ratio, and is liquid like a single stock. There is a very large universe of ETFs and the more specific and small they are typically would have a higher expense ratio. You need a broker that will allow you complete access to all of the ETF offerings like any listed stock. Some broker dealers will limit your selection of MFs as they dont have selling agreements with all of the fund families. Like you could not buy a Vanguard fund at Fidelity. I personally like the ETFs better because I dont like paying a manager that cant beat their benchmark index....which is most funds by the way.

 

[LOL!]

I found the pros and cons of each by google:
ETFs vs Mutual Funds - Bogleheads

 

[tinlizzy]

I thought they kept track of cost basis now for MF's. You just have to specify which method.

Am I wrong?

 

[MichaelB]

In taxable accounts ETFs have a significant and important advantage compared with funds. Due to friendly tax regulation, ETFs are able to minimize and often completely avoid generating capital gains that result from selling shares. Mutual funds, OTOH, pass through to fund holders the gains they record when selling shares. A MF holder can incur cap gain tax liability without selling.

 

[LOL!]

I thought they kept track of cost basis now for MF's. You just have to specify which method.

Am I wrong?

You are not wrong, but they also keep track of cost basis, lots, etc for ETFs. So no difference.

 

[LOL!]

In taxable accounts ETFs have a significant and important advantage compared with funds. Due to friendly tax regulation, ETFs are able to minimize and often completely avoid generating capital gains that result from selling shares. Mutual funds, OTOH, pass through to fund holders the gains they record when selling shares. A MF holder can incur cap gain tax liability without selling.

Vanguard ETFs are just another share class of the corresponding Vanguard mutual fund, so the above does not apply to that situation. Instead, the Vanguard mutual fund enjoys the same tax-efficiency as the ETF. That is, the mutual fund avoids generating cap gains that result from selling shares just like the ETF does.

ETFs occassionally pay out capital gains distributions, so just be aware of that, too.

 

[bondi688]

One BIG difference is that non US citizens, non US resident cannot buy a MF like Vanguard Dividend Appreciation Index Fund (VDAIX) if they live outside of the US, but they can buy Dividend Appreciation Index ETF (VIG) from the NYSE.

For US investors, the 2 Big differences are
1. VIG's valuation changes minute by minute during a trading day, and MF prices are calculated once a day at the end of the day. So for traders, that is one difference.
2. When you sell shares of a Vanguard MF, Vanguard does not allow you to buy back the same fund for at least 90 days. There is no such restriction for ETF. So if you are a market timer, you need to do ETF.

 

[NoMoreJob]

ETFs being so liquid (tradeable throughout the day) can be a temptation to implement knee-jerk reactions which can be dangerous to a passive index investor's portfolio. If you are indeed a passive indexer being able to trade real-time is a non-issue.

ETFs may have lower fees than their counterpart mutual funds. For very low cost index funds the difference is often minuscule.

Be aware that there is a bid/ask spread when buying/selling ETFs that doesn't exist with directly purchases mutual funds. That spread goes to a broker and is often not understood by those buying and selling ETFs. The bid/ask spread does not show up in reported expense ratios for ETFs.

 

[AndrewJackson]

One BIG difference is that non US citizens, non US resident cannot buy a MF like Vanguard Dividend Appreciation Index Fund (VDAIX) if they live outside of the US, but they can buy Dividend Appreciation Index ETF (VIG) from the NYSE.

For US investors, the 2 Big differences are
1. VIG's valuation changes minute by minute during a trading day, and MF prices are calculated once a day at the end of the day. So for traders, that is one difference.
2. When you sell shares of a Vanguard MF, Vanguard does not allow you to buy back the same fund for at least 90 days. There is no such restriction for ETF. So if you are a market timer, you need to do ETF.

How about auto reinvestment? Especially if you have an account with vanguard? Does vanguard allow fractional ownership of shares for the ETF?

 

[bondi688]

How about auto reinvestment? Especially if you have an account with vanguard? Does vanguard allow fractional ownership of shares for the ETF?

From Vanguard web site:
"This no-fee, no-commission reinvestment program allows you to reinvest dividend and capital gains distributions from any or all eligible stocks, closed-end mutual funds, or exchange-traded funds (ETFs) in your Vanguard Brokerage account in additional shares of the same securities. All eligible distributions paid by the securities you designate must be reinvested."

So like stocks, you can reinvest the whole dividend and get fractional shares.

 

[AndrewJackson]

From Vanguard web site:
"This no-fee, no-commission reinvestment program allows you to reinvest dividend and capital gains distributions from any or all eligible stocks, closed-end mutual funds, or exchange-traded funds (ETFs) in your Vanguard Brokerage account in additional shares of the same securities. All eligible distributions paid by the securities you designate must be reinvested."

So like stocks, you can reinvest the whole dividend and get fractional shares.

It seems like etfs would be the better choice if you are choosing between vanguard mfs or etfs just based off of the expense ratios. Is there a hassle factor that I am forgetting for non taxed roth accounts?

 

[bondi688]

It seems like etfs would be the better choice if you are choosing between vanguard mfs or etfs just based off of the expense ratios. Is there a hassle factor that I am forgetting for non taxed roth accounts?

Through some accounting practice that I do not fully understand, MF cost basis somehow got put higher by averaging over time, so there will be less LTCG tax when you sell. Capital gain on ETF seems to be the simple mathematical difference between price you paid when you bought, and the selling price you got later. Cost basis is not a factor in IRA or Roth. If you have fractional share of ETF left over when you sell, the brokerage will automatic sell those fractional left over without commission.

You should read the commentds of Golf Cruiser and LOL! in this thread, those are helpful in sorting out between ETF and MF.

 

[kaneohe]

quite a strange thread to me........"everybody" says ETFs have lower ERs than MF but I see no data. Are they/you referring to the avg ETF vs the avg MF?
I could believe that, I suppose, but I have trouble believing that a good ETF could be much better than a good index MF.