Death of MF? Vanguard active etf's.

[gcgang]

https://www.marketwatch.com/amp/story/guid/BF7D8E52-D447-11E7-8E50-41CEEA71C61F

Vanguard introduces 6 active etfs w er starting at 0.13%.

I wonder how backtesting these strategies compares w passive on an after tax (assume highest tax rate?) basis.

I know it's just different versions of "smart beta", but I think I hear a turbocharger kicking in on the outflows from traditional mutual funds.

 

[VanWinkle]

https://www.marketwatch.com/amp/story/guid/BF7D8E52-D447-11E7-8E50-41CEEA71C61F

Vanguard introduces 6 active etfs w er starting at 0.13%.

I wonder how backtesting these strategies compares w passive on an after tax (assume highest tax rate?) basis.

I know it's just different versions of "smart beta", but I think I hear a turbocharger kicking in on the outflows from traditional mutual funds.

I think the ETF revolution is unsettling to many young investors. It makes them think they should trade it and market time. I agree with Jack Bogle on the over exposure of emotions to ETFs

VW

 

[gcgang]

I think the ETF revolution is unsettling to many young investors. It makes them think they should trade it and market time. I agree with Jack Bogle on the over exposure of emotions to ETFs

VW

Idk if I'd agree w "over" exposure of emotions - same behavioral bias of selling low and buying high will probably hurt individual investor returns.

 

[LOL!]

A few things:

1. Many people don't know what mutual funds are. They may have variable annuities or collective investment trusts or CDs or stable value funds in their 403(b), 401(k), SEP, 529 plans. Or they may have started with stocks and ETFs in the first place.

2. Passive index investing is not a majority of invested assets anyways, so these ETFs may be just more of the same to most folks.

3. Most people have never heard of Jack Bogle nor Vanguard.

4. Many [young] folks probably start with ETFs instead of mutual funds with their personal investing. After all the minimums are much less and ETFs are more like stocks. How many posts have we seen for folks who started with robinhood, or Wealthfront or Betterment and so on. Those aren't mutual funds they are using.

 

[OldShooter]

A few more things:

1) An ETF is a mutual fund.

2) ETFs are distinguished from conventional mutual funds by the ability to day-trade them. They are also distinguished by the involvement of "authorized participants." These are third parties whose behavior may become very exciting (for everyone) in a dramatically dropping market and it's the main reason I prefer to stay away from ETFs.

3) "Smart Beta" is a meaningless buzzword coined by active managers attempting to continue collecting fees from people who have heard of and only dimly understood the concept of passive investing. "Factor-based Investing" is very similar, but oriented to selling to people who have heard of and only dimly understood the CAPM, Fama/French 3-factor model, and its wannabe successors. These buzzwords will capture market share as does any assortment of new snake oil. Give them five or ten years and we'll see if the snake oil has any beneficial properties.

4) Any new concept will have backtested well. Ho hum. It's my understanding that a correlation between market activity and solar eclipses backtests well. As did the hemline correlation and the All-Star Game correlation. With thousands of parameters including the price of salt in Madagascar and the thickness of the polar ice cap, it is pretty easy to find correlations that backtest well. See Nate Silver's "the signal and the noise," particularly "overfitting."

Bogle's wisdom applies to any new fund: "Don't do something, just stand there!" (Even if you don't know who Bogle is.)

 

[pn3069]

I just think Vanguard is trying to keep up with the Jones' (or shall we say Blackrock & Schwab?)

A bit of a feeding frenzy.. this reminds me of the breakfast cereal commercials a couple of decades ago where they said "they got almonds, we got almonds..... they got raisins and we got raisins."

 

[gcgang]

A few more things:

1) An ETF is a mutual fund.

2) ETFs are distinguished from conventional mutual funds by the ability to day-trade them. They are also distinguished by the involvement of "authorized participants." These are third parties whose behavior may become very exciting (for everyone) in a dramatically dropping market and it's the main reason I prefer to stay away from ETFs.

https://www.investopedia.com/ask/answers/09/mutual-fund-etf.asp

ETF's and MF's are both funds. Lot of differences.

 

[43210]

https://pressroom.vanguard.com/news...d-ETFs-With-Suite-Of-Factor-Funds-112817.html

"Five single factor funds are designed for financial advisors and institutional investors seeking to achieve specific risk or return objectives through targeted factor exposures: minimum volatility, value, momentum, liquidity, and quality. ..."

They're responding to the desires of "financial advisors and institutional investors" (and, yes, retaining/gaining AUM) and are probably suggesting to regular retail investors that they should be fine with the regular Vanguard funds.

 

[Alan]

https://www.investopedia.com/ask/answers/09/mutual-fund-etf.asp

ETF's and MF's are both funds. Lot of differences.

Thanks for the link. I personally like the lack of capital gain distributions, I would not know how to report them on my HMRC return.

ETFs create and redeem shares with in-kind transactions that are not considered sales. Thus, taxable events are not triggered. Redemptions create tax events in mutual funds, but they do not create tax events in ETFs. When a forced sale of stock occurs, mutual funds record and distribute higher levels of capital gains than ETFs. In addition, ETFs have greater tax efficiency due to a structure that allows them to substantially decrease or avoid capital gains distributions altogether. This difference can greatly affect the overall rate of return, even if an ETF and mutual fund both track the identical index.

 

[OldShooter]

... ETF's and MF's are both funds. Lot of differences.

Well, in the end it's in the eye of the beholder, I guess. But Investopedia is hardly the gold standard for information.

https://www.investopedia.com/terms/m/mutualfund.asp is their main mutual fund page. They don't differentiate between ETFs and traditional mutual funds at all. They do imply, though, that all mutual funds are exchange traded: "Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease ..." The rest of the piece is pretty solid, however.

Their piece on ETFs (https://www.investopedia.com/terms/e/etf.asp) is not bad, especially in explaining "authorized participants." In the intro video, though, an airhead babe with a nice job title hardly gets anything right: For example, she breathlessly explains that "one single ETF can represent an entire segment of the market." True of course, but no different than traditional mutual funds. "Another important aspect of exhange traded funds is that they track an index." False; there are plenty of ETFs that don't track indexes. Then, "It's different from a mutual fund in that you don't have a manager actually selecting what's in the fund." Apparently (a) she doesn't know that indexing was invented in the conventional mutual fund world (John Bogle, 1975) and (b) that a large number of index funds are conventional mutual funds, and (c) that ETFs aren't run by robots. Those bits of misinformation in the just first minute of the clip.

The page you linked to is also a garden of misinformation: (a) there is no fundamental difference between ETFs and conventional mutual fund management fees. Actively managed funds of either type will have higher fees than index funds. (b) The fact that some traditional mutual funds have loads (also 12b1 fees, which they missed) is irrelevant in an apples-to-apples comparison of funds. They do point out the taxation difference, which I did not.

So, relying on Investopedia is risky at best. But they do opine that there are "significant differences." I would say "minor differences" but YMMV.

 

[Alan]

So, relying on Investopedia is risky at best. But they do opine that there are "significant differences." I would say "minor differences" but YMMV.

My mileage does vary

The fact that ETFs do not create taxable events with capital gain distributions is a significant difference for me over MFs. Before I switched to ETFs I would now be trying to estimate the capital gain distributions coming in December so I could estimate my annual income to figure things like how much IRA money to convert to a Roth.

Also the fact that ETFs "report" into HMRC means that they are treated like an individual stock so they are not considered PFIC's and their dividends and capital gains when shares are sold receive very favorable tax treatment.

 

[OldShooter]

My mileage does vary ...

Yup. Makes sense. In my case virtually everything is in sheltered accounts, so this small difference between mutual fund types is not of interest to me.

I suppose I could stir the pot a little more by observing that a REIT is also a mutual fund but I won't do that.

 

[Alan]

Yup. Makes sense. In my case virtually everything is in sheltered accounts, so this small difference between mutual fund types is not of interest to me.

I suppose I could stir the pot a little more by observing that a REIT is also a mutual fund but I won't do that.

I also have an IRA and a Roth as does my wife and they still contain only MFs as the capital gains distributions don’t have tax implications either in the US or UK.

 

[Hermit]

I just got a survey from Vanguard asking what would motivate me to move from MFs to Vanguard Brokerage Platform and ETFs. Questions like "Paying a service fee to maintain current account"; "Removal of key services (check writing, direct deposit, new purchases, directed dividends, etc.)" Sounds like they are thinking about moving from MF to ETF to me. Sounds like they might be seriously thinking about this.

I have not been so ticked off about something from an investment company in quite a number of years. If they follow through with forcing people into their brokerage accounts they will probably "motivate" me to move my money elsewhere.

What is interesting is that I started the process to roll my 401k, which is the majority of my stash, to Vanguard. I guess I will be waiting for a while and looking at alternatives. May it will be best to spread it around between low cost options.

 

[LOL!]

The fact that ETFs do not create taxable events with capital gain distributions is a significant difference for me over MFs.

Sorry, but ETFs do sometimes have capital gains distributions. In particular, any Vanguard mutual fund that has an ETF share class that has a cap gain distribution will also cause the ETF share class to have a cap gain distribution.

In 2016, several Vanguard bond ETFs had cap gains distributions. It is a matter of historical record, so they can all be seen on the Vanguard.com web site.

Also some newly created ETFs have cap gains distributions until things settle down. This happened back in 2009, for instance. So these new factor/active ETFs may have cap gains distributions next year.

 

[43210]

I just got a survey from Vanguard asking what would motivate me to move from MFs to Vanguard Brokerage Platform and ETFs. Questions like "Paying a service fee to maintain current account"; "Removal of key services (check writing, direct deposit, new purchases, directed dividends, etc.)" Sounds like they are thinking about moving from MF to ETF to me. Sounds like they might be seriously thinking about this.

I have not been so ticked off about something from an investment company in quite a number of years. If they follow through with forcing people into their brokerage accounts they will probably "motivate" me to move my money elsewhere.

What is interesting is that I started the process to roll my 401k, which is the majority of my stash, to Vanguard. I guess I will be waiting for a while and looking at alternatives. May it will be best to spread it around between low cost options.

They are most definitely not "thinking about moving from MF to ETF". That's crazy. They simply move your funds to the new streamlined brokerage account, where if you wish you can have MF or ETF, or many other investments, and if you want, you can have only MF forever.

Most people who have done this transition have found it simple and painless. It's actually a change for the better, and it needed to be done, instead of the previous separate accounts.

Also, it seems you posted in the wrong thread. Maybe you wanted this one.
http://www.early-retirement.org/forums/f28/transition-vg-accounts-89549.html

 

[Alan]

Sorry, but ETFs do sometimes have capital gains distributions. In particular, any Vanguard mutual fund that has an ETF share class that has a cap gain distribution will also cause the ETF share class to have a cap gain distribution.

In 2016, several Vanguard bond ETFs had cap gains distributions. It is a matter of historical record, so they can all be seen on the Vanguard.com web site.

Also some newly created ETFs have cap gains distributions until things settle down. This happened back in 2009, for instance. So these new factor/active ETFs may have cap gains distributions next year.

Oh, oh, well it has only been 2 years that I have had equity ETF’s, VTI and VYM so I guess I will have to tackle capital gain distributions with HMRC when they happen.

 

[Scuba]

My mileage does vary



The fact that ETFs do not create taxable events with capital gain distributions is a significant difference for me over MFs. Before I switched to ETFs I would now be trying to estimate the capital gain distributions coming in December so I could estimate my annual income to figure things like how much IRA money to convert to a Roth.



Also the fact that ETFs "report" into HMRC means that they are treated like an individual stock so they are not considered PFIC's and their dividends and capital gains when shares are sold receive very favorable tax treatment.

I agree. This is why I got out of MF's and went to ETF's and individual stocks many years ago. If you're in a high bracket, it really makes a difference.

 

[alaska55]

My mileage does vary

The fact that ETFs do not create taxable events with capital gain distributions is a significant difference for me over MFs. Before I switched to ETFs I would now be trying to estimate the capital gain distributions coming in December so I could estimate my annual income to figure things like how much IRA money to convert to a Roth.

Also the fact that ETFs "report" into HMRC means that they are treated like an individual stock so they are not considered PFIC's and their dividends and capital gains when shares are sold receive very favorable tax treatment.

You might want to change that to say, In most cases. Sometime this year ishares changed the configuration of their Asset Allocation core funds (AOA,AOR,AOM,and AOK. This created some gains this year. It's not pretty. I own AOR, I'm a expat so I'm not suppose to hold Mutual funds, TD Ameritrade will let me keep my account but no MF's. I use to be in vanguard lifestrategy moderate growth, AOR pretty close to the same.

www.ishares.com/us/capital-gains-distributions

 

[Hermit]

They are most definitely not "thinking about moving from MF to ETF". That's crazy. They simply move your funds to the new streamlined brokerage account, where if you wish you can have MF or ETF, or many other investments, and if you want, you can have only MF forever.

Most people who have done this transition have found it simple and painless. It's actually a change for the better, and it needed to be done, instead of the previous separate accounts.

Also, it seems you posted in the wrong thread. Maybe you wanted this one.
http://www.early-retirement.org/forums/f28/transition-vg-accounts-89549.html

As I read it, the survey had a strong push toward ETFs and moving MF to ETFs. Sorry, I can't give you a reference to it.

 

[Alan]

You might want to change that to say, In most cases. Sometime this year ishares changed the configuration of their Asset Allocation core funds (AOA,AOR,AOM,and AOK. This created some gains this year. It's not pretty. I own AOR, I'm a expat so I'm not suppose to hold Mutual funds, TD Ameritrade will let me keep my account but no MF's. I use to be in vanguard lifestrategy moderate growth, AOR pretty close to the same.

www.ishares.com/us/capital-gains-distributions

I stand corrected, thanks for the update.

 

[Hermit]

They are most definitely not "thinking about moving from MF to ETF". That's crazy. They simply move your funds to the new streamlined brokerage account, where if you wish you can have MF or ETF, or many other investments, and if you want, you can have only MF forever.

Most people who have done this transition have found it simple and painless. It's actually a change for the better, and it needed to be done, instead of the previous separate accounts.

Also, it seems you posted in the wrong thread. Maybe you wanted this one.
http://www.early-retirement.org/forums/f28/transition-vg-accounts-89549.html

As I read it, the survey had a strong push toward ETFs and moving MF to ETFs. Sorry, I can't give you a reference to it.

I called the number on the survey e-mail. They agreed with you that there was not a push to move people from MF to ETF. Thanks for the help. I'll talk to the Vanguard folks in more detail on their regular line about moving money in a couple of days.