Mutual Funds vs ETFs

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skor99
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Mutual Funds vs ETFs

Post by skor99 »

Is there any advantage to holding mutual funds if a comparable ETF is available? ETF can be traded during the day unlike mutual funds. There are no cap gains distributions in ETFs. What do mutual funds offer that ETFs do not ?
Silk McCue
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Re: Mutual Funds vs ETFs

Post by Silk McCue »

We have a Wiki just for this topic. Enjoy.

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

Cheers
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Brianmcg321
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Re: Mutual Funds vs ETFs

Post by Brianmcg321 »

The ability to make automatic deposits into the fund. Buying in dollar amounts and not having anything left over.
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JoMoney
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Re: Mutual Funds vs ETFs

Post by JoMoney »

skor99 wrote: Thu Jan 20, 2022 9:17 pm Is there any advantage to holding mutual funds if a comparable ETF is available? ETF can be traded during the day unlike mutual funds. There are no cap gains distributions in ETFs. What do mutual funds offer that ETFs do not ?
ETF's most certainly can distribute capital gains.
Vanguard's International Dividend Appreciation ETF (VIGI) had a pretty big one at the end of last year....
https://investor.vanguard.com/etf/profi ... tions/vigi

Trading isn't a good thing, having the option to trade more frequently "during the day", is just more of a not-good thing.

Mutual funds have simplified transactions, once a day, always trade at the funds Net Asset Value (at market close), with no bid/ask spreads and other market frictions that add to the expense.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
UpperNwGuy
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Re: Mutual Funds vs ETFs

Post by UpperNwGuy »

Forum member alex_686 has been pretty consistent in telling us that ETFs are the future of investing. Hope he chimes in on this thread.
quietseas
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Re: Mutual Funds vs ETFs

Post by quietseas »

Brianmcg321 wrote: Thu Jan 20, 2022 9:23 pm The ability to make automatic deposits into the fund. Buying in dollar amounts and not having anything left over.
You can do both with ETFs at M1 Finance, and can buy ETFs in dollars at Fidelity.
This is a limitation of the brokerage platform not an inherent defect in the design of ETFs.

Vanguard has a pilot to offer purchases of ETFs in dollars (at least one forum member was chosen to participate). I expect Vanguard Brokerage will offer this within a year or two at least for Vanguard ETFs.

Advantages of ETFs in taxable accounts:
* portable to another brokerage where they can be bought and sold without commissions
* IRS treats ETFs favorably over mutual funds for capital gains distributions (with the exception being Vanguard's patent for ETF share classes of a mutual fund).
* more tax loss harvest partner choices available using ETFs from Vanguard, Schwab, iShares, SSgA, Avantis, and others

For all types of accounts (some people may not see these as important)
* access to factor strategies like Avantis without a paying an AUM fee
* slightly lower expense ratios because ETFs are cheaper to operate than mutual funds

If you are using Vanguard index funds at Vanguard brokerage you can always convert from mutual funds to ETFs. Try buying some ETF shares in a tax deferred account and see if you like it. If you don't like it sell them and buy mutual fund shares.
retire2022
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Re: Mutual Funds vs ETFs

Post by retire2022 »

I like ETFs over Mutual Funds

-ETFs you can time a specific price or Buy at market price.

-likewise you can time your sale to a specific price.

Mutual funds you are stuck with NAV at assumed
Price when you place your order before 4:00pm essentially blind or market, likewise for sale same one is blind.

That said with Vanguard account majority is ETFs VOO but I keep VFIAX the admirals version as a sweep account for loose change.
exodusNH
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Re: Mutual Funds vs ETFs

Post by exodusNH »

quietseas wrote: Thu Jan 20, 2022 10:11 pm
Brianmcg321 wrote: Thu Jan 20, 2022 9:23 pm The ability to make automatic deposits into the fund. Buying in dollar amounts and not having anything left over.
Vanguard has a pilot to offer purchases of ETFs in dollars (at least one forum member was chosen to participate). I expect Vanguard Brokerage will offer this within a year or two at least for Vanguard ETFs.
That might be me. :) Yes, they're piloting exact amount purchases of Vanguard ETFs, not just whole dollars. I.e., you can buy $250.73.

You need to submit them as market orders. It otherwise works well. They purchase out to 4 decimal places.

You cannot schedule automatic purchases though. That's still limited to mutual funds.
sycamore
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Re: Mutual Funds vs ETFs

Post by sycamore »

quietseas wrote: Thu Jan 20, 2022 10:11 pm ...
Advantages of ETFs in taxable accounts:
* IRS treats ETFs favorably over mutual funds for capital gains distributions (with the exception being Vanguard's patent for ETF share classes of a mutual fund).
^^ I'm not familiar with that. Aren't capital gains distributions treated the same regardless of whether they were distributed by an ETF or mutual fund?

I mean ETFs have a way of avoiding / minimizing capital gains in the first place, but the distributions themselves are treated the same.
backpacker61
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Re: Mutual Funds vs ETFs

Post by backpacker61 »

If you have a traditional IRA at Vanguard, and want to make use of their automated RMD service, the investments to be sold to fund the distributions have to be invested in Vanguard mutual funds, not individual stocks, bonds, non-Vanguard mutual funds, or ETF's.
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nisiprius
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Re: Mutual Funds vs ETFs

Post by nisiprius »

It's a matter of personal preference and some people have valid personal preferences for mutual funds.

You can't buy mutual funds at Robinhood. I'm going to state that without further comment.

If you're used to the procedures for buying and selling stocks and your off-the-cuff feeling is that you like ETFs, there's no point digging deeply to find out if there are any huge benefits to mutual funds that you're missing. Go ahead and use ETFs. Be aware that mutual funds exist in the rare event that you need something you can get in a mutual fund but not an ETF.

The big reason I like mutual funds is the "fire-and-forget" nature. I don't have to hang around online and nursemaid the transaction. I don't need to make the transaction during hours when the market is open and get savaged by after-hours trading glitches. My investment time frames, even in retirement, are long enough that I can shrug aside the fifty-fifty chance that the price will go up or down between 7 a.m. and 4 p.m.

Anything that creates an urgency to focus attention on short periods of time is bad for my nerves and almost certainly bad for my investing.

It's probably the "fire-and-forget" nature that makes automated actions easier. I'm currently using Vanguard's automated RMD service, and I've chosen monthly payments. I'm not really sure, but I don't think I can do that with ETFs? [added]Backpacker61 says you can't. Maybe I need to qualify that with "yet" or "at Vanguard."

There's a lot of irrelevant rhetoric along the lines of "get with the program, all the kewl people use ETFs, it's Pepsi ETFs for those who think young." alex_686's argument seems to be that ETFs are a better and more sensible structure for the providers. Vanguard said once that "our advisors" prefer ETFs "because they can fit them into the same workflow as stocks." Advantages for providers and advisors may well mean mutual funds are ultimately doomed.

I think we'll have another datapoint soon when the ICI comes out with its 2022 factbook, but this is the latest data I have on total assets. The dotted lines are just eyeball fits. That's a log scale--people have 4 times as much money invested in mutual funds as they do in ETFs. The ratio for institutional investors is probably overwhelmingly in ETFs but I'm not an institutional investor. If the dotted lines turn out to be an accurate prediction, by 2040 there may be four times is much in ETFs as in mutual funds and it may start to be an uncomfortable world for mutual fund investors and it may be advisable to switch to avoid being far out of the mainstream.

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Last edited by nisiprius on Fri Jan 21, 2022 8:26 am, edited 5 times in total.
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JoMoney
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Re: Mutual Funds vs ETFs

Post by JoMoney »

retire2022 wrote: Thu Jan 20, 2022 10:27 pm I like ETFs over Mutual Funds

-ETFs you can time a specific price or Buy at market price.

-likewise you can time your sale to a specific price.

Mutual funds you are stuck with NAV at assumed
Price when you place your order before 4:00pm essentially blind or market, likewise for sale same one is blind.

That said with Vanguard account majority is ETFs VOO but I keep VFIAX the admirals version as a sweep account for loose change.
If you're a frequent trader, or expect to make large moves in/out of your positions ETF's are the way to go.
But for fund owners, the concept of having a 'mental stop loss' or selling point for a mutual fund has been around for a long time, if a day comes where your fund crosses your threshold level, the next day you buy/sell ... It's that simple. Granted things can move around a percent or two over a day, but that should be meaningless noise for most buy and hold investors, and is relatively trivial to those just making some minor rebalancing at the edges. Focusing on trading and in minor daily changes, is antithetical to everything Mr.Bogle tried to teach, which is perhaps why he was so vocal about his contempt for ETF's, seemingly a lot of that was for behavioral reasons.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
alex_686
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Re: Mutual Funds vs ETFs

Post by alex_686 »

OP: Chose whichever product is more intuitive to you. Both are fine products.
nisiprius wrote: Fri Jan 21, 2022 8:13 am There's a lot of irrelevant rhetoric along the lines of "get with the program, all the kewl people use ETFs, it's Pepsi ETFs for those who think young." alex_686's argument seems to be that ETFs are a better and more sensible structure for the providers. Vanguard said once that "our advisors" prefer ETFs "because they can fit them into the same workflow as stocks." Advantages for providers and advisors may well mean mutual funds are ultimately doomed.
To put this in context, the operational costs of running at ETF over a mutual fund are around 25% to 50% lower. Or a reduction in the expense ratio of 0.01% to 0.03%. ETFs also have a drastically lower trading expense which are not counted in the expense ratio.

For the investor this may be small cheese, for the providers these are big boulders. I think ETFs are generally the better product, but I am comparing mole hills here, not mountains. There are nuances here.

I expect that fund providers will start poking their client to convert. Maybe in 10 years, maybe 20.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
quietseas
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Re: Mutual Funds vs ETFs

Post by quietseas »

sycamore wrote: Fri Jan 21, 2022 7:21 am
quietseas wrote: Thu Jan 20, 2022 10:11 pm ...
Advantages of ETFs in taxable accounts:
* IRS treats ETFs favorably over mutual funds for capital gains distributions (with the exception being Vanguard's patent for ETF share classes of a mutual fund).
^^ I'm not familiar with that. Aren't capital gains distributions treated the same regardless of whether they were distributed by an ETF or mutual fund?

I mean ETFs have a way of avoiding / minimizing capital gains in the first place, but the distributions themselves are treated the same.
Nothing new, just wording.

From the Bogleheads wiki below describes the favorable treatment the IRS allows for ETFs over mutual funds:
The ETF structure is likely to make stock ETFs more tax-efficient than stock mutual funds.

When a mutual fund or ETF sells a stock, it has a taxable capital gain (or loss) equal to the difference between what it received and what it paid. When an institutional investor converts shares of an ETF to stock, the ETF provider can give away the shares of stock with the lowest purchase price; these are the shares which would have the highest gain if sold. Thus ETFs can often reduce the capital gains they must distribute. The ETF redemption process does not reduce dividends; therefore, taxable bond and REIT ETFs, asset classes with total returns comprised primarily of non-qualified dividend income, still have a high tax cost.
https://www.bogleheads.org/wiki/Exchang ... fund#Taxes
K.18
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Re: Mutual Funds vs ETFs

Post by K.18 »

Sorry if that is not really related, I'm new to investing.
When Vanguard or any investment bank in a fund's info page displays a hypothetical growth of 10k chart, does it account yearly expense ratio subtraction?
Or to see how much would I get a customer invested 10 years ago I would need to do calculations?
Makefile
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Re: Mutual Funds vs ETFs

Post by Makefile »

K.18 wrote: Mon Jan 24, 2022 7:52 pm Sorry if that is not really related, I'm new to investing.
When Vanguard or any investment bank in a fund's info page displays a hypothetical growth of 10k chart, does it account yearly expense ratio subtraction?
Or to see how much would I get a customer invested 10 years ago I would need to do calculations?
Yes, they do.
And to reiterate, the major Vanguard stock index funds have a conversion privilege from mutual fund to ETF, but not the reverse. So you can't go wrong buying such a mutual fund. Take from that what you will.
Silk McCue
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Re: Mutual Funds vs ETFs

Post by Silk McCue »

K.18 wrote: Mon Jan 24, 2022 7:52 pm Sorry if that is not really related, I'm new to investing.
When Vanguard or any investment bank in a fund's info page displays a hypothetical growth of 10k chart, does it account yearly expense ratio subtraction?
Or to see how much would I get a customer invested 10 years ago I would need to do calculations?
The returns are net of fund expenses. If you were paying a broker an AUM fee (Assets under management) to manage your funds for you it would not. If you have other questions it would better to start a new post.

Might I suggest this link if you are looking to learn more.

https://www.bogleheads.org/wiki/Getting_started

Cheers
K.18
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Re: Mutual Funds vs ETFs

Post by K.18 »

Thank you for the replies! Understanding this kind of little things really makes me feel better :o
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