Are ETFs Just Plain Superior To Mutual Funds?
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Are ETFs Just Plain Superior To Mutual Funds?
Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
My 401k custodian does not allow ETF purchases, so there’s one case where mutual funds are preferred.
Hasn’t this topic been beaten to death already?
Re: Are ETFs Just Plain Superior To Mutual Funds?
1. When you want to invest every penny.Are there cases where the MF is preferred?
2. Rebalancing is easier.
3. Automatic buying may be easier depending on the platform.
not financial advice
Re: Are ETFs Just Plain Superior To Mutual Funds?
Behavioral reasons are the best argument that I've seen. If you were worried that market fluctuations might affect your ability to buy and hold, then end-of-day NAV based pricing might keep the MF holder from trying to trade as much -- but that's a bit of stretch. Somehow, I don't see that mattering much to a panicking investor.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
In my Vanguard account I can auto purchase mutual funds. I can also automatically sell shares and have the proceeds directed to the settlement fund. This is not currently the case with ETFs.Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Yes, to me the most significant advantage of MFs is automation options. In the accumulation stage money can be automatically deposited or withdrawn, which is a great benefit. Target date and other automatic re-balancing mutual funds are a great option for people who don't have much time for investing, so just want to set and forget.AlwaysLearningMore wrote: ↑Wed Mar 29, 2023 11:58 amIn my Vanguard account I can auto purchase mutual funds. I can also automatically sell shares and have the proceeds directed to the settlement fund. This is not currently the case with ETFs.Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Meh. VTSAX in taxable works fine for me. I don't find myself wishing I had VTI instead.
Re: Are ETFs Just Plain Superior To Mutual Funds?
I prefer Vanguard's mutual funds because they don't trade like stocks and it's very easy to invest or sell dollar amounts. It seems like the investment industry is embracing ETFs and over time they will get cheaper. But the number of ETFs and the moronic things they track is getting ridiculous and bubble like. I saw an ETF that tracks the 6 largest U.S. banks. You could just buy the stock of the 6 largest banks, none of them have an outrageous share price. It's getting silly.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
It's hard to comment on generalities. Did they substantiate that claim in any way?
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Vanguard ETFs and mutual funds can be very close to identical. For example VPU and VUIAX. Except that some think the mutual fund version is better. So what was the question?
Re: Are ETFs Just Plain Superior To Mutual Funds?
The way forward is to ask the person to show you their math.Random Walker wrote: ↑Wed Mar 29, 2023 12:23 pm The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
You might want to update the thread title, otherwise it looks the same as all the other threads asking a similar question (to which I'd answer that ETFs are superior for active traders, and if not an active trader, then I'm not seeing what's superior).
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Index funds are superior than actively managed mutual funds with regard to taxes. People often mistakenly equate ETFs with Index funds, but there are mutual funds that are also index funds. In fact Vanguard has index funds with both ETF and Mutual Fund variants - each is simply a different "class" of the same fund.Random Walker wrote: ↑Wed Mar 29, 2023 12:23 pm The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
ETFs can generally avoid paying out capital gains at the end of the year.Random Walker wrote: ↑Wed Mar 29, 2023 12:23 pm The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
Dave
However, Vanguard mutual funds that have an ETF class are able to use the ETF to flush out capital gains. E.g., VTSAX and VTI. In this case, use whatever you prefer.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I won't even consider ETFs for bond funds that hold mortgages or corporate bonds, and prefer a mutual fund structure to an ETF for TIPS if ER is close. I'm nonetheless willing to hold VTIP, STIP, or SCHP. I'm fine with short or intermediate treasuries in an ETF.Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
When AP's arbitrage away discounts to NAV for an ETF that holds an asset class that can have liquidity problems, where do you think the money they make on the arbitrage comes from?
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I like the portability of ETFs. I like everything else about mutual funds.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
The question isn't even worth discussion without a clear definition of what you mean by "just plain superior."
My answer is no, of course not. It depends on the personal characteristics of the investor.
alex_686 has said on occasion something to the effect that from the point of view of the mutual fund/ETF provider, it is a superior structure, but that is from their point of view.
First of all, you introduce a distraction with "assuming similar holdings characteristics when comparing an ETF and a MF," because one of the obvious issues both ways is with mutual funds that have no close ETF equivalent and ETFs that have no close mutual fund equivalent. I would guess that you are using DFA mutual funds, and that the DFA funds you are using probably have no truly close mutual fund equivalents, for example. Most target-date funds, including Vanguard's and DFAs, have no truly close ETF equivalents. But let's accept your restriction.
Here are some obvious ways in which ETFs are not "just plain superior" for buy-and-hold investors.
1) They are not superior for any investor who, for whatever reasons, prefer to place their orders outside of market hours.
2) It may not be a big deal, but ETFs, bond ETFs in particular, are subject to what Rick Ferri has called the bond ETF discount problem. He calls it "a problem". A buy-and-hold investor must occasionally sells, and if it is on a day when the ETF is trading at a discount to NAV, they will get less money than if they had sold the mutual fund. ETF fans may say that this is not "a problem" because the market price of the ETF is actually a truer representation of NAV then the official NAV--but it still means you get less money.
3) As things stand as of 2023 CE, ETFs are not superior in many brokerages if you want to set up automatic transactions for specified numbers of dollars.
4) ETF fans claim that mutual fund transactions aren't really any easier than ETF transactions. But I'm the judge for whether they are for me, and I say that for me, they are. For example, I tried to place ETF limit orders at Fidelity and never succeeded, even when I set the limit exactly at the ask. Every time, by the time I gave up in frustration and placed market orders, the market had moved against me.
5) Claims of tax efficiency and lower costs fade in the grey light of "maybe" when inspected. For example, many broadly claiming superior tax efficiency for ETFs will, if pressed, qualify that with "except at Vanguard."
6) On the other hand, ETFs are just plain superior to mutual funds for clients of Robinhood, because Robinhood does not offer mutual funds at all. But I would be surprised to hear that you are a Robinhood client.
My answer is no, of course not. It depends on the personal characteristics of the investor.
alex_686 has said on occasion something to the effect that from the point of view of the mutual fund/ETF provider, it is a superior structure, but that is from their point of view.
First of all, you introduce a distraction with "assuming similar holdings characteristics when comparing an ETF and a MF," because one of the obvious issues both ways is with mutual funds that have no close ETF equivalent and ETFs that have no close mutual fund equivalent. I would guess that you are using DFA mutual funds, and that the DFA funds you are using probably have no truly close mutual fund equivalents, for example. Most target-date funds, including Vanguard's and DFAs, have no truly close ETF equivalents. But let's accept your restriction.
Here are some obvious ways in which ETFs are not "just plain superior" for buy-and-hold investors.
1) They are not superior for any investor who, for whatever reasons, prefer to place their orders outside of market hours.
2) It may not be a big deal, but ETFs, bond ETFs in particular, are subject to what Rick Ferri has called the bond ETF discount problem. He calls it "a problem". A buy-and-hold investor must occasionally sells, and if it is on a day when the ETF is trading at a discount to NAV, they will get less money than if they had sold the mutual fund. ETF fans may say that this is not "a problem" because the market price of the ETF is actually a truer representation of NAV then the official NAV--but it still means you get less money.
3) As things stand as of 2023 CE, ETFs are not superior in many brokerages if you want to set up automatic transactions for specified numbers of dollars.
4) ETF fans claim that mutual fund transactions aren't really any easier than ETF transactions. But I'm the judge for whether they are for me, and I say that for me, they are. For example, I tried to place ETF limit orders at Fidelity and never succeeded, even when I set the limit exactly at the ask. Every time, by the time I gave up in frustration and placed market orders, the market had moved against me.
5) Claims of tax efficiency and lower costs fade in the grey light of "maybe" when inspected. For example, many broadly claiming superior tax efficiency for ETFs will, if pressed, qualify that with "except at Vanguard."
6) On the other hand, ETFs are just plain superior to mutual funds for clients of Robinhood, because Robinhood does not offer mutual funds at all. But I would be surprised to hear that you are a Robinhood client.
Last edited by nisiprius on Thu Mar 30, 2023 12:28 pm, edited 1 time in total.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Basically said that with MF you pay capital gains every year as a function of other people’s sales of shares but with ETF only pay capital gains when your own shares are sold. I find it hard to believe there are any free lunches, so I’m curious. That being said, I know there is a trend for MFs to convert to ETFs, and I think there has to be something positive behind that trend.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Dave
Re: Are ETFs Just Plain Superior To Mutual Funds?
As I noted, this can be true for non-Vanguard mutual funds and for Vanguard funds that don't have an ETF shares class.Random Walker wrote: ↑Wed Mar 29, 2023 1:08 pmBasically said that with MF you pay capital gains every year as a function of other people’s sales of shares but with ETF only pay capital gains when your own shares are sold. I find it hard to believe there are any free lunches, so I’m curious. That being said, I know there is a trend for MFs to convert to ETFs, and I think there has to be something positive behind that trend.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Dave
The "free" lunch is that it's cheaper for a provider to run an ETF than a mutual fund because then APs are the ones bearing the trading costs. The cost to you is in the explicit bid/ask spread you pay when you buy or sell.
With ETFs, when the APs redeem shares of ETFs for the underlying basket of stocks, the ETF provider can give them the shares with the lowest basis, essentially evaporating the capital gains from the fund. This is technically possible with mutual funds, but not commonly done.
They are probably more accurate, pricing wise since you have the collective market setting the value, not the funds' small group of accountants.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
ETFs are the future of retail funds. The amount of money invested in ETFs is growing at a staggering rate. I watch Bloomberg ETF IQ just to keep up with trends in the industry. It seems like every mutual fund provider is jumping into the ETF market. Many are offering actively managed ETFs with expense ratios ten times higher than passively managed ETFs. One ETF described on this week’s show had an expense ratio of 1.65%! Bogleheads would be apoplectic over expense ratios that high.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
ETFs use a technique called heartbeat trades to manage capital gains. Theoretically, mutual funds can do this, but it has not been done in practice (other than with Vanguard dual share class funds). I think there are some practical barriers for mutual fund heartbeat trades that will require participation of counterparties like APs for ETFs. And there may be issues ensuring that mutual fund participants are getting a fair deal. Institutional mutual funds may use the fundamental mechanism of that by letting large investors withdraw assets in-kind to avoid pushing capital gains onto remaining investors. Withdrawals in-kind likely would not be of interest to most retail investors.Random Walker wrote: ↑Wed Mar 29, 2023 1:08 pmBasically said that with MF you pay capital gains every year as a function of other people’s sales of shares but with ETF only pay capital gains when your own shares are sold.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Vanguard equity index funds that are share classes of a fund with ETF share classes have this advantage as well. They also can use the lowest cost basis shares for inclusion in newly minted ETF shares.
In a tax-qualified account, heartbeat trades are just an unnecessary cost.
Re: Are ETFs Just Plain Superior To Mutual Funds?
Obligatory wiki reference: https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Mutual funds are the present.
They have a staggering way to go.Dead Man Walking wrote: ↑Wed Mar 29, 2023 2:05 pmThe amount of money invested in ETFs is growing at a staggering rate.
"Staggering." How much is that in numbers?
At their present rates of growth, it will take about ten years, not to supersede mutual funds, but just to draw even.
At the rate Wang Laboratories was growing in the 1970s, it would have been bigger than IBM by the 1990s.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Convenience. I am willing to pay one extra basis point ($10 annually on a $100K investment) to hold a mutual fund rather than an ETF, so that transactions are easier and cost-free. When the ETF and mutual fund costs differ by more than one basis point, I'll use the ETF. For example, I hold the ETF class VSS of Vanguard FTSE All-World Ex-US Small-Cap, because this fund did not have Admiral shares when it opened. (And this is a case where the ETF has significant costs of its own; the volume is low enough that I need to trade only when the market is open, and sometimes have to wait half an hour for a spread to narrow.)Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Re: Are ETFs Just Plain Superior To Mutual Funds?
All I can say is that I saw odd things happen during the Covid pandemic panic in spring of 2020. Bid/Ask spreads and NAV discount/premiums both widened. A Small Cap Value ETF that I owned was particularly affected.Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
I also wonder about a liquidity mismatch between Bond ETFs that are liquid vs. individual Bonds that aren't all that liquid. This could create a problem during a panic.
This is not to argue against ETFs, it is a good lesson to not sell investments during a market panic. There are advantages and disadvantages to this structure compared to mutual funds. Whatever problems there are with the structure would be temporary and would show up in a crisis, I am not deterred and believe ETFs to be a perfectly good vehicle for investors.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I prefer MF only for automation of investing every paycheck. Other than that, I consider them pretty equivalent with VG. TBF, I only use broad market index funds so there may be instances of ETFs or MF in speciality situations that are better for that….
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Re: Are ETFs Just Plain Superior To Mutual Funds?
What is an "AP?"
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Authorized Participant. Wiki here: https://www.bogleheads.org/wiki/Authorized_participants
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Re: Are ETFs Just Plain Superior To Mutual Funds?
it can happen anytime so investors should keep their eye on whether they're buying efts above or below nav.nedsaid wrote: ↑Wed Mar 29, 2023 8:08 pmAll I can say is that I saw odd things happen during the Covid pandemic panic in spring of 2020. Bid/Ask spreads and NAV discount/premiums both widened. A Small Cap Value ETF that I owned was particularly affected.Random Walker wrote: ↑Wed Mar 29, 2023 11:49 am Whether we’re talking total stock market investors (VTI v. VTSMX) or factor junkies (AVDV v. DISVX), is the ETF structure just plain superior to the MF structure for buy and hold investors? I’m assuming similar holdings characteristics when comparing an ETF and a MF. Are there cases where the MF is preferred? Thanks,
Dave
I also wonder about a liquidity mismatch between Bond ETFs that are liquid vs. individual Bonds that aren't all that liquid. This could create a problem during a panic.
This is not to argue against ETFs, it is a good lesson to not sell investments during a market panic. There are advantages and disadvantages to this structure compared to mutual funds. Whatever problems there are with the structure would be temporary and would show up in a crisis, I am not deterred and believe ETFs to be a perfectly good vehicle for investors.
just a couple weeks ago the guys from Talking Real Money had a write in about an avantis fund that had a really large premium (like either 8% or 13% if memory serves) above nav for one of their funds and the hosts (Don MacDonald and Tom Cock) especially Don thought the person writing in didn't know what they were talking about because that seemed way too large for avantis, yet Don checked and he actually found at one point the avantis fund in question did have a huge premium above nav. Even he was surprised at that.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
IMO, ETFs, except a few bps cheaper, are Just Plain Inferior.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
There's this:Random Walker wrote: ↑Wed Mar 29, 2023 1:08 pmBasically said that with MF you pay capital gains every year as a function of other people’s sales of shares but with ETF only pay capital gains when your own shares are sold. I find it hard to believe there are any free lunches, so I’m curious. That being said, I know there is a trend for MFs to convert to ETFs, and I think there has to be something positive behind that trend.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Dave
Also, not all ETFs are created equal:ETFs are tax-efficient but not tax-free
Investors should keep in mind that, although ETFs are highly tax-efficient, they may occasionally distribute capital gains. The primary goal of index-based ETFs is to track the target index as closely as possible. Maintaining tax efficiency is another important goal for Vanguard's portfolio managers, but that's ultimately one of multiple secondary objectives—which include managing transaction costs and adding benchmark-relative value—that Vanguard balances in the best interest of our diverse shareholder base.
Although the ETF creation/redemption process described earlier improves tax efficiency, realized capital gains distributions remain possible. Redeeming ETF shares in kind can minimize the ETFs' need to sell securities at a taxable gain, thereby reducing the need for realized gains to be distributed to ETF shareholders. But this process does not eliminate capital gains for shareholders, who will generally realize a taxable gain or a loss when they sell their ETF shares. Furthermore, ETFs may engage in taxable transactions to buy and sell securities, such as when a target index is rebalanced and certain securities are added to or removed from it.
Although several factors can contribute to ETFs' realization of capital gains, perhaps the most important is the consistent appreciation of an ETF's holdings over an extended period. Global equities have generally enjoyed significant gains, with only brief interruptions, for more than a decade. As a result, many ETFs hold securities with unrealized capital gains that can become realized through the normal course of portfolio operations.
What investors should know
For most investors, ETF capital gains distributions are simply a marginal reduction in the control that investors have over timing the realization of gains. Capital gains distributions by an ETF bring forward the payment of taxes that would otherwise be embedded in the ETF's net asset value and therefore might be realized when the shares are eventually sold. Put another way, when an ETF distributes capital gains to its shareholders, taxes are paid on those gains now rather than at a future time when an investor sells the ETF shares at a gain.
Keep in mind that capital gains distributions generally have no impact on an ETF's performance. Once the capital gains are distributed, the price of the ETF is generally reduced by the amount of the distribution. Note, too, that investors in tax-advantaged accounts such as IRAs and retirement plans are generally unaffected by capital gains distributions.
source:
https://advisors.vanguard.com/insights/ ... pitalgains
https://investor.vanguard.com/investor- ... tributions
https://www.schwab.com/learn/story/etfs ... ed-to-know
here's some good examples of etfs that do have cap gains distributions, so the types of etfs you buy do matter:
https://www.ishares.com/us/capital-gains-distributions
if you're interested in index funds (low cost, no load, etc) I think it's a red herring. If you're interested in actively managed etfs/mutual funds it's true that:
The percentage of equity ETFs paying capital gains was significantly lower than mutual funds in all categories. Even for active equity ETFs, only a little over 11% paid out gains, compared with 63% of their mutual fund counterparts. Similarly, 3% of the active fixed-income ETFs paid capital gains, while 13% of active fixed-income mutual funds did.
source: https://www.americancentury.com/insight ... ency-etfs/
Last edited by arcticpineapplecorp. on Wed Mar 29, 2023 9:00 pm, edited 1 time in total.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I like that when go online, I can see the real time value of my holdings. Why, because when I rebalance, one can’t rebalance when the market is closed, and when the market is open, day old values give less accurate rebalancing inputs.
I like low fees, but ETFs aren’t always lowest fee option for some asset classes.
I find some asset classes the only fund covering exactly what you may prefer, could be only sold as a mutual fund. Less true every day, but historically true. More options every day, but then go back to above issues, fees.
Overall, I prioritize the desired asset sector, then fees and finally if I can get that real time as an etf, I will take it over an all else equal fund, if both choices exist.
I like low fees, but ETFs aren’t always lowest fee option for some asset classes.
I find some asset classes the only fund covering exactly what you may prefer, could be only sold as a mutual fund. Less true every day, but historically true. More options every day, but then go back to above issues, fees.
Overall, I prioritize the desired asset sector, then fees and finally if I can get that real time as an etf, I will take it over an all else equal fund, if both choices exist.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I feel the same way. No issues.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Talked about a metric called the tax cost ratio. I read the definition of tax cost ratio and not totally sold on it. One thing that would matter is the projected net after taxes returns of an etf and MF that are virtually identical in every way except the structure: such as DISVX v. DISV, VTI v. VTSMX, BOTSX v. BSVO.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
You rebalance based on real-time prices during trading hours?
Given that rebalancing is a fairly rough tactic anyway -- just trying to keep your asset allocation from getting way too far out of whack -- I don't see the problem with figuring one's asset allocation in the off hours and trading mutual funds at the end of the next trading day. (I own both ETFs and mutual funds.)
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Re: Are ETFs Just Plain Superior To Mutual Funds?
nisiprius wrote: ↑Wed Mar 29, 2023 12:55 pm First of all, you introduce a distraction with "assuming similar holdings characteristics when comparing an ETF and a MF," because one of the obvious issues both ways is with mutual funds that have no close ETF equivalent and ETFs that have no close mutual fund equivalent. I would guess that you are using DFA mutual funds, and that the DFA funds you are using probably have no truly close mutual fund equivalents, for example. Most target-date funds, including Vanguard's and DFAs, have no truly close mutual fund equivalents. But let's accept your restriction.
No not a distraction, it’s the core of my question. I’m a hardcore believer in systematic, passive, factor investing. I basically believe you get what the factors give you. True, I am invested in DFA funds. But some of them have converted from MFs to ETFs and at least one (DISVX / DISV) created the ETF and kept the MF. And of course Avantis now has ETFs with loadings similar to DFA MFs. So I’m wondering if new additions to a given asset class / collection of factors should go into an ETF over MF for some obvious tax reason that I’ve been oblivious to.
Dave
Re: Are ETFs Just Plain Superior To Mutual Funds?
At Vanguard, the tax costs are essentially equal, because the ETF is a share class of the mutual fund and thus both share the tax benefit. Very few of Vanguard's equity ETFs have distributed capital gains.Random Walker wrote: ↑Wed Mar 29, 2023 9:43 pmTalked about a metric called the tax cost ratio. I read the definition of tax cost ratio and not totally sold on it. One thing that would matter is the projected net after taxes returns of an etf and MF that are virtually identical in every way except the structure: such as DISVX v. DISV, VTI v. VTSMX, BOTSX v. BSVO.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
For non-Vanguard funds, the ETF should be more tax-efficient, so taxable investors with Avantis or DFA should use the ETF.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
Have you read some of the Larry comments in articles that say the rapid trend to passive / indexing has made markets less liquid and more volatile?nedsaid wrote: ↑Wed Mar 29, 2023 8:08 pm All I can say is that I saw odd things happen during the Covid pandemic panic in spring of 2020. Bid/Ask spreads and NAV discount/premiums both widened. A Small Cap Value ETF that I owned was particularly affected.
I also wonder about a liquidity mismatch between Bond ETFs that are liquid vs. individual Bonds that aren't all that liquid. This could create a problem during a panic.
Dave
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Re: Are ETFs Just Plain Superior To Mutual Funds?
That is possible, but I'm curious how it would be measured. Markets are more liquid today than they were 40+ years ago when index funds were getting started.Random Walker wrote: ↑Wed Mar 29, 2023 10:54 pmHave you read some of the Larry comments in articles that say the rapid trend to passive / indexing has made markets less liquid and more volatile?nedsaid wrote: ↑Wed Mar 29, 2023 8:08 pm All I can say is that I saw odd things happen during the Covid pandemic panic in spring of 2020. Bid/Ask spreads and NAV discount/premiums both widened. A Small Cap Value ETF that I owned was particularly affected.
I also wonder about a liquidity mismatch between Bond ETFs that are liquid vs. individual Bonds that aren't all that liquid. This could create a problem during a panic.
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Re: Are ETFs Just Plain Superior To Mutual Funds?
ETFs for less tax-efficient portfolios have also generally been able to avoid distributing capital gains.Longdog wrote: ↑Wed Mar 29, 2023 12:31 pmIndex funds are superior than actively managed mutual funds with regard to taxes. People often mistakenly equate ETFs with Index funds, but there are mutual funds that are also index funds. In fact Vanguard has index funds with both ETF and Mutual Fund variants - each is simply a different "class" of the same fund.Random Walker wrote: ↑Wed Mar 29, 2023 12:23 pm The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
Dave
The fund can manage the gains from internal security sales, and there are not withdrawals triggering sales to generate taxable gains because investors sell the ETF shares to another investor rather than withdrawing from the fund.
Re: Are ETFs Just Plain Superior To Mutual Funds?
I hold Fidelity’s 500 Index Fund (FXAIX) in my taxable account and the last time it distributed capital gains was 4/05/19. So while it may happen it doesn’t mean it will.Random Walker wrote: ↑Wed Mar 29, 2023 1:08 pmBasically said that with MF you pay capital gains every year as a function of other people’s sales of shares but with ETF only pay capital gains when your own shares are sold. I find it hard to believe there are any free lunches, so I’m curious. That being said, I know there is a trend for MFs to convert to ETFs, and I think there has to be something positive behind that trend.Hyperchicken wrote: ↑Wed Mar 29, 2023 12:26 pm It's hard to comment on generalities. Did they substantiate that claim in any way?
Dave
Is there a trend to convert from MF to ETFs? Fidelity launched their ZERO funds instead of launching a S&P 500 or Total Stock ETFs.
Re: Are ETFs Just Plain Superior To Mutual Funds?
I used to live without a smartphone as well.StrangePenguin wrote: ↑Wed Mar 29, 2023 10:00 pmYou rebalance based on real-time prices during trading hours?
Given that rebalancing is a fairly rough tactic anyway -- just trying to keep your asset allocation from getting way too far out of whack -- I don't see the problem with figuring one's asset allocation in the off hours and trading mutual funds at the end of the next trading day. (I own both ETFs and mutual funds.)
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Re: Are ETFs Just Plain Superior To Mutual Funds?
I was referring to the retail market as investments outside the investments in retirement accounts. Mutual funds will continue to dominate investments in retirement accounts due to legal issues related to pension fund assets. Obviously, retirement accounts will dominate the portfolios of most investors. The companies that offered load funds through investment advisors during my time are now starting to develop actively managed ETFs for the taxable accounts of individual investors. I don’t know how advisors will be paid for using them; however, I’m betting that they will charge a percentage of assets under management similar to Vanguard’s PAS program. An independent advisory group in my area charges a 1.8% management fee for $250,000 accounts. The fee drops to 1% for $2,000,000 accounts. I’m not predicting the doom of mutual funds or advocating ETFs over mutual funds; I’m predicting that ETFs will be funds of choice for taxable assets of many investors in the future. My evidence is the posts on this board.nisiprius wrote: ↑Wed Mar 29, 2023 6:18 pmMutual funds are the present.
They have a staggering way to go.Dead Man Walking wrote: ↑Wed Mar 29, 2023 2:05 pmThe amount of money invested in ETFs is growing at a staggering rate.
"Staggering." How much is that in numbers?
At their present rates of growth, it will take about ten years, not to supersede mutual funds, but just to draw even.
At the rate Wang Laboratories was growing in the 1970s, it would have been bigger than IBM by the 1990s.
In 1883 Mark Twain observed that at the rate the Mississippi River was shortening in length, it will would be be one-and-three-quarter miles long by 2625.
DMW
Re: Are ETFs Just Plain Superior To Mutual Funds?
The posts on this board tell us nothing about the overall market because this board is not representative.Dead Man Walking wrote: ↑Thu Mar 30, 2023 12:11 amI was referring to the retail market as investments outside the investments in retirement accounts. Mutual funds will continue to dominate investments in retirement accounts due to legal issues related to pension fund assets. Obviously, retirement accounts will dominate the portfolios of most investors. The companies that offered load funds through investment advisors during my time are now starting to develop actively managed ETFs for the taxable accounts of individual investors. I don’t know how advisors will be paid for using them; however, I’m betting that they will charge a percentage of assets under management similar to Vanguard’s PAS program. An independent advisory group in my area charges a 1.8% management fee for $250,000 accounts. The fee drops to 1% for $2,000,000 accounts. I’m not predicting the doom of mutual funds or advocating ETFs over mutual funds; I’m predicting that ETFs will be funds of choice for taxable assets of many investors in the future. My evidence is the posts on this board.nisiprius wrote: ↑Wed Mar 29, 2023 6:18 pmMutual funds are the present.
They have a staggering way to go.Dead Man Walking wrote: ↑Wed Mar 29, 2023 2:05 pmThe amount of money invested in ETFs is growing at a staggering rate.
"Staggering." How much is that in numbers?
At their present rates of growth, it will take about ten years, not to supersede mutual funds, but just to draw even.
At the rate Wang Laboratories was growing in the 1970s, it would have been bigger than IBM by the 1990s.
In 1883 Mark Twain observed that at the rate the Mississippi River was shortening in length, it will would be be one-and-three-quarter miles long by 2625.
DMW
When I first started investing, I read that load mutual funds were soon to go extinct because the load contributed nothing to investment performance and just paid the salesperson selling the fund. That was 35 years ago and load funds still exist. In fact, some funds that started as no-load funds have, in recent year, instituted load share classes.
I see no reason to believe, therefore, that mutual funds are going away any time soon (i.e., decades).
Re: Are ETFs Just Plain Superior To Mutual Funds?
You can't readily convert MFs to ETFs. Vanguard was allowed to do this and patented the notion. While their patent expires/expired this year, in the intervening 17 years, the SEC has indicated that they would not be likely to approve of such a move again.
Fidelity's Zero funds are OK, but they're more a marketing gimmick as well as a tool to "trap" people are Fidelity. The funds can't be transferred to another brokerage. If you want out of Fidelity, you need to cash out. If you're in a taxable account, that could generate a bunch of unnecessary taxes. People have been well-trained that "ER matters". While that's true, the ER doesn't actually reflect all of a fund's costs. ER mattered when a typical fund charged a 5% load and a 1% ER. The difference between an ER of 0.03 and 0.00 can be overwhelmed by those other costs and tracking error.
I have heard that Fidelity has an agreement with large ETF provider to not offer their own ETFs.
Edit re ^: apparently they do offer some ETFs now. I was relaying information I had read but not vetted.
Last edited by exodusNH on Thu Mar 30, 2023 8:41 am, edited 1 time in total.
- nisiprius
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Re: Are ETFs Just Plain Superior To Mutual Funds?
If so, apparently someone didn't get the memo.
FDIG, Fidelity Crypto Industry and Digital Payments ETF, inception 4/19/2022. Only down -29% since inception, not so bad.
FMET, Fidelity Metaverse ETF, inception 4/19/2022
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Are ETFs Just Plain Superior To Mutual Funds?
Ah, ok. There was a post here, within the past three years, that mentioned it.
Re: Are ETFs Just Plain Superior To Mutual Funds?
Any chance you made a typo and meant to type ETF?nisiprius wrote: ↑Wed Mar 29, 2023 12:55 pm First of all, you introduce a distraction with "assuming similar holdings characteristics when comparing an ETF and a MF," because one of the obvious issues both ways is with mutual funds that have no close ETF equivalent and ETFs that have no close mutual fund equivalent. I would guess that you are using DFA mutual funds, and that the DFA funds you are using probably have no truly close mutual fund equivalents, for example. Most target-date funds, including Vanguard's and DFAs, have no truly close mutual fund equivalents. But let's accept your restriction.
There are lots of target-date mutual funds. Fidelity Freedom Index funds, state street, etc? Most of the ones I've looked at were reasonable and cheap.
Apologies if I missed your point.
Re: Are ETFs Just Plain Superior To Mutual Funds?
This advantage may not be exclusive to Vanguard for long. Vanguard's patent on this structure expires in May of this year (2023).exodusNH wrote: ↑Wed Mar 29, 2023 12:34 pmETFs can generally avoid paying out capital gains at the end of the year.Random Walker wrote: ↑Wed Mar 29, 2023 12:23 pm The main reason I ask the question is I have someone telling me that ETFs are far superior with regard to taxes. Any comments from a tax perspective?
Dave
However, Vanguard mutual funds that have an ETF class are able to use the ETF to flush out capital gains. E.g., VTSAX and VTI. In this case, use whatever you prefer.