Are ETFs Just Plain Superior To Mutual Funds?

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Northern Flicker
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Northern Flicker »

billaster wrote:
Is there evidence that ETFs caused mutual funds to reduce their fees? I don't think so. There may be correlation with growth in ETFs but I see no mechanism for cause. Mutual funds have reduced their fees because there are lots of competing low cost mutual funds. I don't think ETFs have anything to do with it.
iShares and State Street are major sources of that competition with ETFs. I don't think that the organization that morphed into iShares was even in the retail fund market before they started offering exchange-traded products.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by alex_686 »

Northern Flicker wrote: Fri Mar 31, 2023 3:35 pm
billaster wrote:
Is there evidence that ETFs caused mutual funds to reduce their fees? I don't think so. There may be correlation with growth in ETFs but I see no mechanism for cause. Mutual funds have reduced their fees because there are lots of competing low cost mutual funds. I don't think ETFs have anything to do with it.
iShares and State Street are major sources of that competition with ETFs. I don't think that the organization that morphed into iShares was even in the retail fund market before they started offering exchange-traded products.
You can make the argument that BlackRock - which manages iShares - launched the 1st index fund - prior to Bogle launching Vanguard's index funds. It was a private pension fund for Samsonite, not a public fund, but still.

Look, for the most part the people driving the process don't care about the wrapper. That it is a mutual fund or a ETF really is secondary. Does it get the job done? Liquidity, costs, tracking error, etc. I mean, it helps that ETFs have better tax treatment for capital gains, options for flexibility, better redemption options, portability, etc.

The entire industry has gotten massively more competitive over the past 30 years. Has Vanguard done their fair share? Sure, maybe even more than their fair share. But there are enough highly competitive firms out there to drive the costs down.
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GreenLawn
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by GreenLawn »

I like to be able to set the price I buy or sell using ETF limits. Most of the time this may not make a practical difference, but peace of mind knowing if I place a trade in the morning, the market moving down in the afternoon won't provide an unpleasant surprise, like it might with a mutual fund.

When I trade mutual funds, which isn't often, I usually place the order after 3:30 pm. With ETFs, sometimes I'll try to use intraday volatility to make a few extra dollars, but that's more for entertainment than any real bonus. If I'm planning on buying or selling some ETFs anyway, why not set a limit at what I'm guessing will be the intraday high or low and have a little fun!
sc9182
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by sc9182 »

billaster wrote: Fri Mar 31, 2023 1:58 pm
alex_686 wrote: Fri Mar 31, 2023 1:22 pm Next, people tend to use 2 different measuring sticks to measure the performance of VTI/VTSAX. NAV for the fund, end-of-day pricing for the ETF. Now the EOD pricing for ETFs is subtle wrong. Comparing these 2 values is a little like saying that 1gk equals 2.2lbs. Google tells you it is true but it is not. Grames measure mass, pounds measure weight (force). Put a blowing ball in a moving elevator and try measuring its mass and weight. Because it is measuring the same object the two measured values will always circle around each other because they are referencing the same object but you are never going to reconcile one to the other because neither is wrong.
This is a bunch of obfuscation to deny the fact that there is no evidence that ETFs provide higher returns to investors than mutual funds. Who cares what the day to day difference is between NAV and end of day ETF pricing? Over long holding periods, months or years, those daily discrepancies are meaningless.
5.5% (up)front-load Munder Funds during its Halcion days (https://www.forbes.com/forbes/2004/0202 ... 35ba8e59b5)
Not even including 1% to 2% annual expenses being charged ..

Our VOO charges 0.01% expense ratio; if you ask google "average mutual fund expense ratio" it shows 0.5% to 1% ..
Last time I checked - 1% expense ratio is 100 times 0.01% of one VOO (ETF) .. don't find this faulty ..

We understand that this is not true always - but you get the idea ..
Northern Flicker
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Northern Flicker »

alex_686 wrote: You can make the argument that BlackRock - which manages iShares - launched the 1st index fund - prior to Bogle launching Vanguard's index funds. It was a private pension fund for Samsonite, not a public fund, but still.
Blackrock had nothing to do with that. That was Wells Fargo. Wells Fargo Investment Advisors (WFIA) was a subsidiary of the Wells Fargo holding company, and a pioneer of index fund management alongside Vanguard. WFIA was positioned in the institutional investor market. There was a merger of ownership with Nikko Securities, but Wells Fargo and Nikko subsequently sold the unit to Barclays Bank and it became Barclays Global Investors. I believe it was part of Barclays when the iShares trademark was created. It was through ETFs that they moved aggressively into the retail investor market. Barclays subsequently sold the unit to Blackrock.
Last edited by Northern Flicker on Sat Apr 01, 2023 1:41 am, edited 1 time in total.
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nisiprius
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nisiprius »

alex_686 wrote: You can make the argument that BlackRock - which manages iShares - launched the 1st index fund - prior to Bogle launching Vanguard's index funds. It was a private pension fund for Samsonite, not a public fund, but still.
The rivalry for credit for "inventing the index fund," between John C. Bogle and others (McQuown, Ellis, Malkiel,) is told in detail in Trillions, by Robin Wigglesworth. The book convinced me that Bogle was being disingenuous when he claimed that he got the idea straight from Paul Samuelson, and didn't owe anything to the "quants."

But it has nothing to do with ETFs, BlackRock, or iShares.

And the Samsonite Luggage Fund to me is clearly in the same category as "William Friese-Greene, not Edison, invented motion pictures," "Antonio Meucci, not Bell, invented the telephone," "Samuel P. Langley, not the Wright brothers, invented the airplane." It wasn't a mutual fund, it definitely wasn't an ETF, it was fatally flawed by being equal-weighted, and it didn't directly lead to anything.
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nedsaid
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

nisiprius wrote: Fri Mar 31, 2023 9:04 am
nedsaid wrote: Fri Mar 31, 2023 7:45 am...I also wonder about a liquidity mismatch between Bond ETFs that are liquid vs. individual Bonds that aren't all that liquid.
This is a point on which I'd be curious to hear more from well-informed ETF fans.

This liquidity mismatch is definitely a problem on bond mutual funds, and it cause concerns with both the IMF and the SEC, caused the collapse of the extremely unusual, distressed-bond fund Third Avenue Focused Credit, and led to the creation of liquidity fees and redemption gates for bond funds.

The problem for bond funds is the promise of redemption at NAV, when the underlying bonds may be illiquid, or extreme situations may lead to the NAV being unrealistically optimistic because the bonds can't actually be sold at that price. This can lead to a run-on-the-bank situation where investors try to redeem quickly because they don't believe the fund is capable of redeeming everybody's shares at NAV.

It is possible that ETFs avoid this, because there is no right to redeem at NAV. So given the same portfolio with a mutual fund and an ETF, the ETF would just suffer a plunge in value, but not a run-on-the-bank situation--because the ETF can be bought and sold at what the instantaneous market thinks the ETF is worth. While the mutual fund might suffer a run-on-the-bank situation because it is committed to paying out more money than the fund portfolio is momentarily worth.

So this is a situation where mutual funds are better under small amounts of stress--because you get the NAV while ETF owners might receive price discounted from NAV. But ETFs might be better under large amounts of stress, for the same reason--they're not obligated to pay the NAV.
The other side of the story is that if you are in a mutual fund, you might be forced to take capital gains distributions that were caused by panic selling. The mutual fund owner who keeps his or her shares can get stuck with a tax bill caused by those who chose to sell and leave.

Moral of the story. Don't sell in a panic. Show patience and these temporary phenomenon will work themselves out. Short run, pretty odd things can happen.

I am not arguing for the superiority of ETFs over mutual funds. I own both mutual funds and ETFs.
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nedsaid
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

billaster wrote: Fri Mar 31, 2023 2:12 pm
nedsaid wrote: Fri Mar 31, 2023 7:31 am Wow. I thought I was old fashioned but this takes the cake. Amazing. Are you arguing that we return to the days of 8 1/2 percent loads on mutual funds and the days when trading was expensive?
I said nothing of the sort. I was talking about "financial innovations" of which ETFs are a prime example. Have ETFs significantly increased your returns in the last 20 years? There is no evidence to support that claim.

As to reduced loads, that isn't financial innovation. That simple markets competing on price, which is of course good for the investor. Competition is not innovative.

About the only "financial innovation" of significance in the last two decades to investors is decimalization of pricing, which isn't an innovation at all. It's just simple math. There was no innovation. It was just the SEC listened to the investing public and finally stopped bowing to the Wall Street traders and market makers who used their lobbying power to maintain their artificial profit margins on spreads.
You make a lot of bold claims here. Can you cite support for your assertions? I cited two mutual fund companies where you can get a cheaper version of a similar investment simply by owning the ETF version. I am comparing a Focused Dynamic Growth ETF with its mutual fund version: the same investment objective, almost identical portfolios, the same investment team except the ETF has 4 managers and the mutual fund 3. The ETF has an expense ratio of 0.45% and the mutual fund is at 0.86%. You mean to tell me that switching out the mutual fund for its ETF version doesn't save the investor money?

This isn't hard. I have two sessions of Google Chrome open comparing the ETF and the mutual fund side by side.

Alex_686 has worked in the industry, has provided detail to back his arguments, and all he gets back are rants. Granted, sometimes discussions are over nuance and small differences in the case of index funds. I have shown here how an investor can get active management at a pretty good discount, unless of course you believe that 41 basis points annually is too little to matter.

ETFs were and are a very important part of the indexing revolution. Thanks to ETFs, you can access low cost factor investments that once were available only through Financial Advisors. I would have bought DFA funds 15 years ago if I could have accessed them directly, paying an additional 1.0% Assets Under Management fee was too big of a hurdle for me.

So ETFs have provided an important service to small investors. ETFs might not save a lot on with indexed investments but they do give access to products that once were available only through Advisors and also allow access to active management at a reduced cost. At T Rowe Price, you can save 8-12 basis points. I am looking at an example where you can save 41 basis points.

ETFs also offer advantages in tax efficiency and that is an additional savings to the small investor.

So is there a difference between financial innovations and financial innovations in scare quotes? Anything that makes someone rich is bad? Competition doesn't cause innovation? The investment landscape is vastly improved over 39 years ago when I started investing. It is like the difference between the stone age and the bronze age.

I invest in mutual funds, I invest in ETFs. Each have their advantages and disadvantages. I have found that ETFs have expanded the choices available to me as a small investor. I happen to believe in competition and I like to have more choices and not less. If one wants to invest only in mutual funds, I think that is perfectly fine. I don't have to limit myself to just mutual funds. I even own individual securities, that is my choice.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Geologist »

nedsaid wrote: Fri Mar 31, 2023 8:13 pm
billaster wrote: Fri Mar 31, 2023 2:12 pm
nedsaid wrote: Fri Mar 31, 2023 7:31 am Wow. I thought I was old fashioned but this takes the cake. Amazing. Are you arguing that we return to the days of 8 1/2 percent loads on mutual funds and the days when trading was expensive?
I said nothing of the sort. I was talking about "financial innovations" of which ETFs are a prime example. Have ETFs significantly increased your returns in the last 20 years? There is no evidence to support that claim.

As to reduced loads, that isn't financial innovation. That simple markets competing on price, which is of course good for the investor. Competition is not innovative.

About the only "financial innovation" of significance in the last two decades to investors is decimalization of pricing, which isn't an innovation at all. It's just simple math. There was no innovation. It was just the SEC listened to the investing public and finally stopped bowing to the Wall Street traders and market makers who used their lobbying power to maintain their artificial profit margins on spreads.
You make a lot of bold claims here. Can you cite support for your assertions? I cited two mutual fund companies where you can get a cheaper version of a similar investment simply by owning the ETF version. I am comparing a Focused Dynamic Growth ETF with its mutual fund version: the same investment objective, almost identical portfolios, the same investment team except the ETF has 4 managers and the mutual fund 3. The ETF has an expense ratio of 0.45% and the mutual fund is at 0.86%. You mean to tell me that switching out the mutual fund for its ETF version doesn't save the investor money?

This isn't hard. I have two sessions of Google Chrome open comparing the ETF and the mutual fund side by side.

Alex_686 has worked in the industry, has provided detail to back his arguments, and all he gets back are rants. Granted, sometimes discussions are over nuance and small differences in the case of index funds. I have shown here how an investor can get active management at a pretty good discount, unless of course you believe that 41 basis points annually is too little to matter.

Alex_686 provides detail that doesn't stand up. He asserted BlackRock started the first index fund and BlackRock wasn't even founded until 1988, long after index funds started. (William Bernstein describes in the Four Pillars of Investing how it was Wells Fargo as others have said.) That can make you doubt other detail he provides.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by billaster »

nedsaid wrote: Fri Mar 31, 2023 8:13 pm Alex_686 has worked in the industry, has provided detail to back his arguments ...
No, he has not. He has only made vague assertions without any supporting facts. Absurdly, vague statements like ETFs have only 1/100 the cost of mutual funds -- based on, what, absolutely nothing. Does that sound like detail to you?
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by billaster »

nedsaid wrote: Fri Mar 31, 2023 8:13 pm I cited two mutual fund companies where you can get a cheaper version of a similar investment simply by owning the ETF version. I am comparing a Focused Dynamic Growth ETF with its mutual fund version: the same investment objective, almost identical portfolios, the same investment team except the ETF has 4 managers and the mutual fund 3. The ETF has an expense ratio of 0.45% and the mutual fund is at 0.86%. You mean to tell me that switching out the mutual fund for its ETF version doesn't save the investor money?
You say you have compared them side by side, and here it is below. Note that there is a short history for the ETF, but in three years the ETF has outperformed by only 11 basis points, $160, which is less than half the expense ratio difference. I wonder who is pocketing the difference?

Even worse, compare it to the S&P 500 and you are losing $3,400 compared to the ETF. Those financial innovators are doing you no favors. They are making the big bucks and you are getting poorer.

This is what Jack Bogle had in mind when he questioned the need for ETFs. It just makes it easier for folks to be sucked in by flashy new "products" and lose more money.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

billaster wrote: Fri Mar 31, 2023 9:15 pm
nedsaid wrote: Fri Mar 31, 2023 8:13 pm I cited two mutual fund companies where you can get a cheaper version of a similar investment simply by owning the ETF version. I am comparing a Focused Dynamic Growth ETF with its mutual fund version: the same investment objective, almost identical portfolios, the same investment team except the ETF has 4 managers and the mutual fund 3. The ETF has an expense ratio of 0.45% and the mutual fund is at 0.86%. You mean to tell me that switching out the mutual fund for its ETF version doesn't save the investor money?
You say you have compared them side by side, and here it is below. Note that there is a short history for the ETF, but in three years the ETF has outperformed by only 11 basis points, $160, which is less than half the expense ratio difference. I wonder who is pocketing the difference?

Even worse, compare it to the S&P 500 and you are losing $3,400 compared to the ETF. Those financial innovators are doing you no favors. They are making the big bucks and you are getting poorer.

This is what Jack Bogle had in mind when he questioned the need for ETFs. It just makes it easier for folks to be sucked in by flashy new "products" and lose more money.
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Wow. So you are asserting that somehow American Century is manipulating the trading of the ETF's to pocket the difference?

Sort of like the fantasy of Vanguard Executives in a roomful of the lost pennies from rounding Net Asset Value to two decimal points. Problem is, sometimes you gain a penny in rounding and sometimes you lose a penny in rounding. In similar fashion, there are differences in return when you measure it by price or measure it by NAV. Sometimes this effect is favorable to the investor and sometimes it is not. Neither Scrooge McDuck nor the Vanguard Executives are gleefully tossing those imaginary pennies in the air in an imaginary room.

It seems to me that if you have almost identical products that you would pick the one with the lower price. The difference of 41 basis points would over time, year after year, swamp temporary boosts or drag that would come from the differences in price return versus NAV return. Another way of saying it is the effects of trading even out over time.

Even in the case of the same exact Index at the same mutual fund company, the ETF would have an expense advantage over the mutual fund, the reason being is that within the ETF wrapper the recordkeeping function is largely outsourced to the brokerage. Within the mutual fund wrapper, the company has to hire people to keep track of who owns what. I am not claiming a 100 to 1 cost advantage but it is significant enough that Vanguard wants people to convert their Index Mutual Funds into ETF form.

So lets do comparison of Growth of $10,000 at Morningstar. Doing a comparison of FDG the ETF and ACFOX the mutual fund, let's set the data type to NAV Growth. From 3-31-2020 to 3-31-2023, FDG has Growth of $10,000 of $14,647.89 and ACFOX has $14,305.25. In percentage terms, that is 46.48% for the ETF compared to 43.05% for the fund.

Look at performance year by year, FDG had price return of 8.52% in 2021, -35.74% in 2022, and 12.88% YTD in 2023. By comparison ACFOX returned 7.00% in 2021, -36.32% in 2022, and 12.94% YTD in 2023.

So let's find that imaginary difference that those nefarious American Century Executives are pocketing by somehow manipulating the trading. FDG by NAV return had 8.68% return in 2021, -35.74% in 2022, and 10.73% YTD 2023. The investor had a drag from trading as NAV return beat price return in 2021. In 2022, NAV return and price return were identical, so far in 2023 trading is benefitting the shareholder as price return is beating NAV return.

Scrooge McDuck and those nefarious and evil American Century executives would have been gleeful in 2021, disappointed in 2022, and gloomy so far in 2023. Are shrewd ETF shareholders stealing money out of the pockets of those executives in 2023 after getting ripped off in 2021? I guess it took 2 3/4 years for the shareholders to wise up and turn the tables!

I went to Portfolio Visualizer, I could only go back to January 2020 but there the lower cost ETF also beat the mutual fund, albeit over a shorter time period. I can only set the comparisons by year, whereas at Morningstar one can compare performance to the day!
Last edited by nedsaid on Fri Mar 31, 2023 11:43 pm, edited 5 times in total.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Dead Man Walking »

Having read the posts in this thread, I am sticking to my assertion that ETFs are the future of retail funds. Arguments about expenses, transportability, and performance have merit; however, I’m basing my assertion on the proliferation of ETFs. It seems like every investment firm is becoming ETF provider. Not only are individual investors buying them; institutional investors are also using them as a part of their portfolios. It may take years for ETFs to match the assets of the mutual fund market.

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nedsaid
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

billaster wrote: Fri Mar 31, 2023 8:57 pm
nedsaid wrote: Fri Mar 31, 2023 8:13 pm Alex_686 has worked in the industry, has provided detail to back his arguments ...
No, he has not. He has only made vague assertions without any supporting facts. Absurdly, vague statements like ETFs have only 1/100 the cost of mutual funds -- based on, what, absolutely nothing. Does that sound like detail to you?
Actually, he has.
No, this (Separating the fund manager from the record-keeping broker that processes trades makes it easier for fund companies to spin up new fund products) is a very good thing. Not so much the new products, but the separation thing.

There is not much fat left to cut when it comes to large index mutual funds. Networking costs (explicit expenses) and trading expenses (implicit expenses).

For ETFs the costs are drastically lower, like 1/100 of a mutual fund.
I inserted the comment from Northern Flicker that Alex was referring to. The separation thing Alex is talking about is that asset managers using the ETF platform are not saddled with the recordkeeping costs of a mutual fund. It costs money to hire accountants.

The first set of parenthesis are mine, I am inserting Northern Flicker's comment. The last two sets of parenthesis are Alex's.
If you look at my original post, which you cut, I referred specifically to the custody and trading costs. So no, not "total costs". I point out these two because the work very differently between mutual funds and ETFS. Most of the other stuff works more or less the same.

You can figure out some of the custody costs by reviewing the fund's annual reports. Note, half of the stuff is on the provider side (either directly from the mutual fund platform or indirectly in a brokerage platform). So that half has to be inferred. For context I have worked the custody side of the brokerage side and the accounting side for mutual funds. I have a pretty firm grip on exactly how things are spent.

I will grant that things on the trading side are more nuanced. Trading costs are not part of the expense ratio. The trading costs of a index ETF with a small number of holdings - lets say under 1,000 positions - is exactly zero. Maybe even less than that - the APs (Authorized Participants) do pay for their privilege. This means that the tracking error from trading is zero. Mutual funds have to run a trading desk. That is sunk costs which is buried in the portfolio manager's fee. Then there is the opportunity costs of trading. e.g., the bid-ask spread. In theory a passive trader could earn money by being paid for trade flow and other optimistic situations. However this would cause some variance in the tracking error.
So he comments on custody costs, trading costs. Below, he comments on what the savings of an ETF structure compared to a mutual fund structure.
This translates into a lower expense ratio of 1 bps to 3 bps (including the implicit costs of trading) and maybe between 2 to 4 bps of lower tracking error. This may seem slight. However this slight reduction in costs can be viewed in another way. The operating costs of ETFs, ceteris paribus, is about 1/3 less than mutual funds. Thus what seems slight to you is massive to the big boys, either the fund operators or the instiutional investors.
Here he addresses the question of whether VTI or VTSAX is cheaper. He says that NAV pricing for mutual funds and end of day pricing for ETFs are not exactly the same. Not exactly certain what the differences are but he says they exist.
VTI/VTSAX are 2 different share classes in the same fund. To a certain extent the benefits and disadvantages of the ETFs spill over into the mutual fund class, and vice versa.

Next, people tend to use 2 different measuring sticks to measure the performance of VTI/VTSAX. NAV for the fund, end-of-day pricing for the ETF. Now the EOD pricing for ETFs is subtle wrong. Comparing these 2 values is a little like saying that 1gk equals 2.2lbs. Google tells you it is true but it is not. Grames measure mass, pounds measure weight (force). Put a blowing ball in a moving elevator and try measuring its mass and weight. Because it is measuring the same object the two measured values will always circle around each other because they are referencing the same object but you are never going to reconcile one to the other because neither is wrong.

I have used the analogy before of running shoes. Fancy running shoes will make a measurable difference in the times a runner runs. I mean, there is a reason why Usain Bolt wears fancy shoes. However, sticking those shoes on me won't make me Usain Bolt. We are talking about something fairly small and are hard to tell with other factors. Choice of index, size of fund, operational strength of the sponsor, etc.
Here he goes into detail regarding the differences between NAV and end-of-day pricing.
So you are saying that the only and best price I can get is at the end-of-day? When they use a special process to clear the books and settle the market? Not the continuous intra-day price? Which - and I am not trying to be snarky here - is where the majority of trading volume actually is? So the end-of-day price is probably not the price you are going to get.

And look, I get that getting the VWAP (Volume Weighted Average Price) is hard. And while this is the more correct price for a ETF you can't directly compare it to the EOD NAV price for a fund. So this is a commonly used proxy.

But you are also using PV, which only goes to 2 decimals instead of 6. And you are using the same portfolio with different share classes.

And lastly we are trying to parse out a very small difference.

All of this is granted.

But let us not say there are no differences when we mean to say that detecting differences is hard.

As I have suggested before, the ETF is solidly the better structure. Are the differences slight? To some people, sure. And I am not going to criticize anybody who choses the mutual fund platform. But I have been on both sides of the portfolio equitation. Professionally, I wouldn't go the mutual fund route due to the issues but then again I am working with a truly massive portfolio where these things matter.

Long run, the fancy shoes of ETFs will beat mutual funds. Not tomorrow. There are technical obstacles to overcome - such as 401k plans. Mutual funds are still the better choice in areas of low liquidity, like small cap value. But the trend lines are all there.
I don't know everything obviously, but this is more than just hot air. Sounds to me like he knows what he is talking about. Maybe I am fooled but I have worked in the industry twice, albeit in minor roles, but it isn't inconsistent with what I know. If he is blowing smoke, he is doing an awfully good job. Looks like a fair amount of detail to me, his comments don't seem so vague.
Look, for the most part the people driving the process don't care about the wrapper. That it is a mutual fund or a ETF really is secondary. Does it get the job done? Liquidity, costs, tracking error, etc. I mean, it helps that ETFs have better tax treatment for capital gains, options for flexibility, better redemption options, portability, etc.

The entire industry has gotten massively more competitive over the past 30 years. Has Vanguard done their fair share? Sure, maybe even more than their fair share. But there are enough highly competitive firms out there to drive the costs down.
As far as Alex's comments on Blackrock, I found this in Wikipedia.
Frederick L. A. Grauer at Wells Fargo harnessed McQuown and Booth's indexing theories, which led to Wells Fargo's pension funds managing over $69 billion in 1989[14] and over $565 billion in 1998. In 1996, Wells Fargo sold its indexing operation to Barclays Bank of London, which it operated under the name Barclays Global Investors (BGI). Blackrock, Inc. acquired BGI in 2009; the acquisition included BGI's index fund management (both its institutional funds and its iShares ETF business) and its active management.
So no, Blackrock didn't start indexing but you can see the connection of Wells Fargo-->Barclay's Bank (iShares)--->Blackrock. Wells Fargo is often credited with being one of the Pioneers of indexing. This is not a capital offense.
Northern Flicker and Nisiprius addressed this pretty well.

The thing is, I make errors too when I post. My knowledge is incomplete, my memory is very good but not perfect, and I have misspoke. If I find that I make an error, I try to correct it as soon as I can. Also I cite my sources the best I can. So no one is going to post everything 100% perfectly here. Again, the Blackrock thing is not a capital offense.
Last edited by nedsaid on Sat Apr 01, 2023 1:10 am, edited 5 times in total.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

Which brings me to another question. The income from portfolio lending, we know that Vanguard does this with their mutual funds and that it generates substantial revenue. The question is this, do ETFs also benefit from portfolio lending?

Might be a dumb question but I will ask it anyways.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by vasaver »

If you get a chance listen to Eduardo Repetto (Avantis CIO). He goes into much detail on ETF advantages over Mutual funds.

https://www.youtube.com/watch?v=0mHaPBk8LPY&t=850s

- Mutual funds need to carry cash for redemptions / or use a credit line.
- ETF purchase and redemptions happen inkind (don't need to deal in cash)
- ETF investors are protected from other shareholders while mutual fund holders are not.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Northern Flicker »

The record-keeping moves to a broker with an ETF, but the cost of doing those activities don't go away. Hopefully, the separation lowers cost. If getting to 1/100 of the cost means pretending that the record-keeping cost is gone, that is incorrect. It is transferred and hopefully lower.

Fund trading costs are lowered because the AP hands baskets of securities to the fund company to create new shares. A mutual fund has to buy the shares on the market.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by billaster »

nedsaid wrote: Fri Mar 31, 2023 11:14 pm Wow. So you are asserting that somehow American Century is manipulating the trading of the ETF's to pocket the difference?
I said nothing of the sort.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by donaldfair71 »

I feel like there are about 3 different discussions in this thread, each yelling over the others:

Are active ETFs superior to active MFs and, specifically, the types of MFs one could have gotten pre-ETF? Certainly. Unless you don’t believe that costs matter.

Are ETFs superior to MFs when controlled for costs? This is clearly more nuanced. Almost comes down to personal preference. I hold both for different reasons. I think Alex’s background on the matter being challenged is really funny. He provides great detail and insight. I can see why others who have done the same have left the forum in the past.

Who created the first ETF? Since this is a debate in the greater financial community, not surprised it has become one here.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nisiprius »

The problem is that once you get down to tiny expense ratios, what you find is that differences in performances don't have a simple relationship to differences in expense ratios. It just isn't true that difference in performance = difference in expense ratio. I pointed this out with Total Stock--VTI, VTSAX, and VTSMX--where not only the Admiral share class, but even the Investor share class, have outperformed the ETF despite having higher expense ratios.

The comparison of ETF and mutual fund with similar names--American Century Focused Dynamic Growth is interesting, and relevant, and the record is that the ETF has had a lower expense ratio and a higher performance. But the numbers don't support cause-and-effect between expense ratio and performance. Again we have a violation of the idea that difference in performance = difference in expense ratios. I feel sure that the reason here is that the ETF is not a clone of the mutual fund, and that the only place where you really have a clean comparison between ETF and mutual fund is in Vanguard's fund where they are share classes of the same fund.

There's another ETF/mutual fund pair that is interesting, and a case where shenanigans actually were involved in the ETF, so it's not a completely impossible idea. That's the PIMCO Total Return Fund, PTTRX (red) and an ETF that was originally named the PIMCO Total Return ETF, BOND (blue). It has been renamed PIMCO Active Bond ETF.

Let me be clear. I think (sure hope) that PIMCO's shenanigans were an outlier. The lesson I want to draw from this is not "ETFs are full of shenanigans," but just that "ETFs and mutual funds are hard to compare."

The raw numbers are amazing. Since inception:

Source

PTTRX, expense ratio 0.46%, average return 1.89%
BOND, expense ratio 0.56%, average return 2.49%

But the growth charts are even more amazing:

Image

Let's artificially start the time period at 2015:

Image

The ETF had a lower expense ratio, and consistently and steadily kept pulling ahead of the mutual fund by an amount equal to the expense ratio? No. Whatever happened, it wasn't that.

To recall the context: a popular storyline of the era was that Bill Gross, "the Bond King," was an active managing genius, able to create alpha in the PIMCO Total Return fund. That fund was very actively managed, and made substantial use of derivatives. My understanding is that what they were doing in the fund would have been impossible to duplicate in an ETF, so when the BOND ETF was launched I complained in the forum that I thought the name was deceptive. It was being billed and treated as if it were an ETF version of the fund. PIMCO's marketing materials danced around this issue, emphasizing that it was the "same team" and "same strategy." I pointed out the dissimilarity in performance as proof that the ETF was not equivalent to the fund, and should not have been given the same name--and got laughed at for suggesting that outperformance could be a problem.

So what was happening?

Yes, shenanigans.

The complicated story is told in Mary Child's The Bond King, and I hope I can cut it down and still have it make sense. Basically, they were intentionally buying odd lots at a discount, but reporting a NAV based on round-lot pricing. I think.
When Pimco’s brand-new must-succeed mom-and-pop Bond ETF was rolling out in 2012, and Bill Gross was going to have his derivative-trading hand tied behind his back, he was in the market for good ideas. If their usual magic tricks were muted, they would find other loopholes....

Most investors think these little fragments are more trouble than they’re worth, so they trade at a discount. Pimco saw a game it could play. It had to report the value of the portfolio to customers and the market every day. Unlike stocks, which trade on the stock exchange and have an official closing price each day, many bonds, particularly mortgage-backed securities, trade infrequently and don’t have an easily available market price. So, asset managers rely on outside pricing services to estimate the value of each bond each day, using a mixture of things like old trading prices, hypothetical prices at which banks say they’d transact, and comparisons to similar bonds. The prices generated by these services are what firms like Pimco report to their customers. But pricing services generally account only for round lots. This meant that a clever bond expert could buy a bunch of “odd lots” for cheap, slot them into the pricing system, and watch as they were rounded up to the full-size lot price. Instant profit. It wasn’t illegal, though it was maybe not something to advertise....

On March 2, Gross sent a handwritten note to the trading desks... “Today—ASAP—within the next 2 hours—find 1–2 million bonds in your area that are 2 points or more cheap to how they would be marked by pricing services at close tonight.” The desks did as they were told. On March 9, Pimco bought an odd lot at $64.9999 and plopped it into the system, where it was valued at $82.7459. A tidy instant gain of 27 percent, for zero work. The ETF’s “net asset value” (the cumulative value of everything it held) jumped by almost $0.02 per share in one day, thanks to that trade alone. And that was one odd lot, among many.

They kept up the strategy: in the ETF’s first four months, Pimco bought $37 million worth of odd lots, more than 150 bundles in total. This would be a drop in the bucket for the Total Return Fund, or for Pimco as a whole, but in the still-small ETF, it made all the difference. By the end of June, the divergence was gaping: the Bond ETF had generated 6.3 percent since its birth, while the Total Return mutual fund it was supposed to track had managed to generate just 2.8 percent. Internally, there was no problem. The compliance department... was aware... Externally, no one knew about the pricing fluke or Pimco’s exploitation of it, which meant that the growing gap with the mutual fund was becoming awkward, difficult to explain to clients and the press....

The “value” they were “adding” looked suspiciously like buying bonds at one price and then reporting them at a higher price....
Eventually in 2016:PIMCO Settles Charges of Misleading Investors About ETF Performance
The Securities and Exchange Commission today announced that investment management firm Pacific Investment Management Company (PIMCO) agreed to retain an independent compliance consultant and pay nearly $20 million to settle charges that it misled investors about the performance of one its first actively managed exchange-traded funds (ETFs) and failed to accurately value certain fund securities....

“PIMCO overstated its NAV almost every day for four months because its policies and procedures were not reasonably designed to properly address issues concerning odd lot pricing,” Mr. Ceresney said.
What's the point? Do I think American Century is cheating? No, I don't, I assume and hope that what PIMCO did was an outlier.

My point is that ETFs and mutual funds are hard to compare. "Because ETFs have lower expenses than similar mutual funds, then return more by the amount of the difference in expenses" sounds plausible, but it isn't so.

Most important, I think what PIMCO did was possible only in an ETF, because ETFs are priced by the market. So PIMCO was able to get away with reporting an exaggerated NAV, because it had no direct responsibility to pay that NAV itself. It left that up to the market. It reported that the bonds in the fund were worth thus-and-such, and the market believed it and was willing to pay it based on that report. Anyone who owned the ETF in those early days, and sold it, would really have reaped the outperformance. But it was because PIMCO was deceiving the market.

If they had done it in a mutual fund--they would have been directly responsible themselves for paying out that reported NAV.

You could argue that PIMCO was making money legitimately by buying up odd lots and reassembling them into more valuable round lots, a source of actual profit--but feasible only when the ETF was still tiny. But even if you don't agree with my use of the word "shenanigans," the point here is that the superior performance of BOND is not an illustration of general ETF superiority--certainly not ETF superiority as a direct result of lower costs. It's the result of one particular sophisticated maneuver in one particular ETF.
Last edited by nisiprius on Sat Apr 01, 2023 8:52 am, edited 2 times in total.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by LadyGeek »

The discussion is getting contentious. Please state your concerns in a civil, factual, manner.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by NYCaviator »

The single biggest advantage of ETFs is portability. I Iike Vanguard funds, but I don’t like the Vanguard brokerage. ETFs allow me to buy and sell Vanguard funds at nearly any brokerage, for free. All things considered, that’s a HUGE advantage.

I do really miss the ability to auto invest and being able to purchase any $ amount (Schwab still won’t do fractional ETF shares), but that’s not enough to keep me at the mess that is Vanguard brokerage just so I can use mutual funds. I’ll take my ETFs to whatever brokerage will treat me the best.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by EFF_fan81 »

I purchase admiral shares of passive mutual funds in large part because I can just hit send in two minutes at night after work.

I have too much work to deal with trading and esp. limit orders during market hours and that dedication and focus to my day job has allowed me to increase my income substantially over time, which gives me more $$ to invest.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by southernlucky »

Hi OP,
I see more all in one balanced mutual fund choices vs comparable ETFs. Not sure why that is. I personally prefer the hands off, set it and forget it solution of such balanced funds so choose mutual funds. At least today they are even cheaper than the few ETF alternatives like iShares AOx funds too.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by PersonalFinanceJam »

billaster wrote: Fri Mar 31, 2023 9:15 pm
nedsaid wrote: Fri Mar 31, 2023 8:13 pm I cited two mutual fund companies where you can get a cheaper version of a similar investment simply by owning the ETF version. I am comparing a Focused Dynamic Growth ETF with its mutual fund version: the same investment objective, almost identical portfolios, the same investment team except the ETF has 4 managers and the mutual fund 3. The ETF has an expense ratio of 0.45% and the mutual fund is at 0.86%. You mean to tell me that switching out the mutual fund for its ETF version doesn't save the investor money?
You say you have compared them side by side, and here it is below. Note that there is a short history for the ETF, but in three years the ETF has outperformed by only 11 basis points, $160, which is less than half the expense ratio difference. I wonder who is pocketing the difference?

Even worse, compare it to the S&P 500 and you are losing $3,400 compared to the ETF. Those financial innovators are doing you no favors. They are making the big bucks and you are getting poorer.

This is what Jack Bogle had in mind when he questioned the need for ETFs. It just makes it easier for folks to be sucked in by flashy new "products" and lose more money.
*snip*
I thought this Morningstar article was pertinent. Basically, at this point in history what Bogle feared from ETFs has not materialized. Sure there are crazy ETFs out there but by and large retail investors are not using them. Also, mutual funds are not gaining (in aggregate) dollars, so with due respect to the chart on page one of this thread, they are not the present just because of a large shrinking installed base.

The automation stuff will sort itself out. just like Bogle’s first index fund carried a load and eventually dropped it, it will take some time before it’s pervasive.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by alex_686 »

Nedsaid, thank you for your kind words and the work you have done to synthesize my arguments down.
nedsaid wrote: Sat Apr 01, 2023 12:26 am As far as Alex's comments on Blackrock, I found this in Wikipedia.
Frederick L. A. Grauer at Wells Fargo harnessed McQuown and Booth's indexing theories, which led to Wells Fargo's pension funds managing over $69 billion in 1989[14] and over $565 billion in 1998. In 1996, Wells Fargo sold its indexing operation to Barclays Bank of London, which it operated under the name Barclays Global Investors (BGI). Blackrock, Inc. acquired BGI in 2009; the acquisition included BGI's index fund management (both its institutional funds and its iShares ETF business) and its active management.
So no, Blackrock didn't start indexing but you can see the connection of Wells Fargo-->Barclay's Bank (iShares)--->Blackrock. Wells Fargo is often credited with being one of the Pioneers of indexing. This is not a capital offense.
Northern Flicker and Nisiprius addressed this pretty well.

The thing is, I make errors too when I post. My knowledge is incomplete, my memory is very good but not perfect, and I have misspoke. If I find that I make an error, I try to correct it as soon as I can. Also I cite my sources the best I can. So no one is going to post everything 100% perfectly here. Again, the Blackrock thing is not a capital offense.
On BlackRock, I was hoping that the phrase "one could argue" would be a hint that this was a bit of a joke with a nugget of truth. Sadly, humor does not always come through on the internet.
nisiprius wrote: Fri Mar 31, 2023 6:41 pm And the Samsonite Luggage Fund to me is clearly in the same category as "William Friese-Greene, not Edison, invented motion pictures," "Antonio Meucci, not Bell, invented the telephone," "Samuel P. Langley, not the Wright brothers, invented the airplane." It wasn't a mutual fund, it definitely wasn't an ETF, it was fatally flawed by being equal-weighted, and it didn't directly lead to anything.
So let me tackle that nugget of truth. The guys who pitched Samsonite on index investing were grad students of Fama. They built the theory of passive investing on his Efficient Market Hypothesis. And while Wells Fargo may only have had a modest impact, it did spawn a whole cadre of portfolio managers who pushed passive investing.

And as long as we are talking about Edison, Edison reminds me of Mr. Bogle. Edison was not a first-class scientist. That he favored DC over AC is suggestive that he was not a master of theory. On the other hand, he did revolutionize the industry. A visionary and practical man who pushed things along.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by alex_686 »

nisiprius wrote: Sat Apr 01, 2023 7:07 am Most important, I think what PIMCO did was possible only in an ETF, because ETFs are priced by the market. So PIMCO was able to get away with reporting an exaggerated NAV, because it had no direct responsibility to pay that NAV itself. It left that up to the market. It reported that the bonds in the fund were worth thus-and-such, and the market believed it and was willing to pay it based on that report. Anyone who owned the ETF in those early days, and sold it, would really have reaped the outperformance. But it was because PIMCO was deceiving the market.

If they had done it in a mutual fund--they would have been directly responsible themselves for paying out that reported NAV.

You could argue that PIMCO was making money legitimately by buying up odd lots and reassembling them into more valuable round lots, a source of actual profit--but feasible only when the ETF was still tiny. But even if you don't agree with my use of the word "shenanigans," the point here is that the superior performance of BOND is not an illustration of general ETF superiority--certainly not ETF superiority as a direct result of lower costs. It's the result of one particular sophisticated maneuver in one particular ETF.
I will modestly disagree.

The first step in this fraud was that the accountants who estimated the NAV gammed the system. Accountants certain can, and have, gammed the NAV of mutual funds.

Now, as I have said before, I do think that both methods of pricing are of high quality but have different strengths and weaknesses. As such, for every failure of ETF pricing you can throw out I can throw out a dozen examples of where mutual funds fail. And I can do that because there are more of, and a longer history of, small actively managed funds trading in illiquid assets.

As for the funds having to directly pay out the overage - well, they have - both mutuals and ETFs. There is such a incentive for young funds to hustle their performance numbers to grow fast.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Northern Flicker »

alex_686 wrote: So let me tackle that nugget of truth. The guys who pitched Samsonite on index investing were grad students of Fama. They built the theory of passive investing on his Efficient Market Hypothesis. And while Wells Fargo may only have had a modest impact, it did spawn a whole cadre of portfolio managers who pushed passive investing.
Wells Fargo did not have a modest impact. The Samsonite fund may have had a modest impact, but Wells Fargo was the king of indexing for a good many years. It is difficult to find timeline info to confirm, but I believe they had a total stock market index fund (Wilshire 5000 index), total bond market index fund (Shearson-Lehman index), and US small cap index fund (Russell 2000 index) before Vanguard had any of those. But these were institutional funds, so not as visible to retail investors.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

alex_686 wrote: Sat Apr 01, 2023 11:32 am Nedsaid, thank you for your kind words and the work you have done to synthesize my arguments down.
nedsaid wrote: Sat Apr 01, 2023 12:26 am As far as Alex's comments on Blackrock, I found this in Wikipedia.
Frederick L. A. Grauer at Wells Fargo harnessed McQuown and Booth's indexing theories, which led to Wells Fargo's pension funds managing over $69 billion in 1989[14] and over $565 billion in 1998. In 1996, Wells Fargo sold its indexing operation to Barclays Bank of London, which it operated under the name Barclays Global Investors (BGI). Blackrock, Inc. acquired BGI in 2009; the acquisition included BGI's index fund management (both its institutional funds and its iShares ETF business) and its active management.
So no, Blackrock didn't start indexing but you can see the connection of Wells Fargo-->Barclay's Bank (iShares)--->Blackrock. Wells Fargo is often credited with being one of the Pioneers of indexing. This is not a capital offense.
Northern Flicker and Nisiprius addressed this pretty well.

The thing is, I make errors too when I post. My knowledge is incomplete, my memory is very good but not perfect, and I have misspoke. If I find that I make an error, I try to correct it as soon as I can. Also I cite my sources the best I can. So no one is going to post everything 100% perfectly here. Again, the Blackrock thing is not a capital offense.
On BlackRock, I was hoping that the phrase "one could argue" would be a hint that this was a bit of a joke with a nugget of truth. Sadly, humor does not always come through on the internet.
nisiprius wrote: Fri Mar 31, 2023 6:41 pm And the Samsonite Luggage Fund to me is clearly in the same category as "William Friese-Greene, not Edison, invented motion pictures," "Antonio Meucci, not Bell, invented the telephone," "Samuel P. Langley, not the Wright brothers, invented the airplane." It wasn't a mutual fund, it definitely wasn't an ETF, it was fatally flawed by being equal-weighted, and it didn't directly lead to anything.
So let me tackle that nugget of truth. The guys who pitched Samsonite on index investing were grad students of Fama. They built the theory of passive investing on his Efficient Market Hypothesis. And while Wells Fargo may only have had a modest impact, it did spawn a whole cadre of portfolio managers who pushed passive investing.

And as long as we are talking about Edison, Edison reminds me of Mr. Bogle. Edison was not a first-class scientist. That he favored DC over AC is suggestive that he was not a master of theory. On the other hand, he did revolutionize the industry. A visionary and practical man who pushed things along.
Thank you Alex. I know it takes time, thought, and effort to compose posts. It is particularly hard to discuss what are very nuanced points. Whenever I think I understand things, I find out there is even more to know. One area of interest to me is the trading and how trading costs have declined over the years. Trading is a complex topic and libraries could be filled with books on that topic alone.

Nedsaid is not much of a trader, I don't even like to rebalance my portfolio. I did make moves late in 2022 and early in 2023, partly because of dire warnings from Bill Bernstein. Like a sinner sitting in the back of the Church, I was squirming in my seat being warned of the evils of inflation. Something like heckfire and brimstone to get me motivated. Other than that, my portfolio is pretty stable.

An example of the nuances of trading is that Vanguard has to run a big trading operation in order to manage its Total Stock Market Index Fund. I shouldn't have been surprised, somehow I envisioned two Vanguard employees desperately trying to look busy while their basset hound mascot looks bored with it all. A phone call comes in, the employees get excited over executing one trade and they feel like they have a purpose in life after all. The reality is that it takes a sophisticated trading operation and something like 48 traders to keep it all going. My guess is the activity at this one trading desk is more than some small country's stock exchange.

Nisiprius, as usual rides to the rescue and shows that indeed shenanigans have indeed happened with ETF trading. So if the Vanguard Executives are gleeful over "lost pennies" and if American Century Executives are just rolling in the dough over manipulated trading, I suppose they are being very quiet about it. For the record, I believe both firms to be honest and reputable, I am having a bit of fun with this. I just love the mental picture of Scrooge McDuck throwing coins in the air with glee. I am sure the reality is different than Nedsaid's fertile imagination.

So Nisiprius has shown that Nedsaid is naive to the ways of the world. I am shocked, just shocked that gambling is going on in there. So thanks to Nisiprius for his informative and insightful posts. The investment world isn't as pristine and pure as Ivory Soap, much to my disappointment. Instead of being 99 44/100 percent pure, it is much less than that. PIMCO got busted.

By the way, humor is hard to do on Bogleheads. It is sort of like being in a Public Library, the librarian will come along and shush you. We can have a little fun here but too much fun is definitely verboten around here. :wink:
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by placeholder »

EFF_fan81 wrote: Sat Apr 01, 2023 8:27 am I purchase admiral shares of passive mutual funds in large part because I can just hit send in two minutes at night after work.

I have too much work to deal with trading and esp. limit orders during market hours and that dedication and focus to my day job has allowed me to increase my income substantially over time, which gives me more $$ to invest.
You're acting like the time difference is hours versus minutes when it's minutes versus minutes and it's a bit hard to believe you have no free time during the day to put in an order.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nedsaid »

I thought I would make some concluding comments on this topic. Do I believe ETFs are better than mutual funds? The answer is maybe. I own both and will continue to own both. If someone chooses to be a mutual funds only investor, I have no quarrel with that. For an index fund, the fund in ETF form might be a tad bit cheaper and a bit more tax efficient than its mutual fund cousin, but most people would be hard pressed to notice a difference. My point wasn't do dump on mutual funds but to say that if you want active management, you can definitely get it cheaper in ETF form, 8 to 12 basis points at T Rowe Price and 41 basis points at American Century.

I think that companies that run actively managed funds are seeing the handwriting on the wall. Investors are getting more price conscious and will be less and less likely to pay 1.0% a year for active management. They might be willing to pay for active management at a discount. I can foresee the day when the fees for active management will drop to a range of 20 to 40 basis points. The ETF form eliminates customer accounts, keeping track of trades, and keeping track of who owns what, outsourcing those functions to the brokerage firms. So the move to ETFs might be more dramatic with active management than with passive indexing.

Mutual funds are not going away, I do think that ETFs will continue to gain market share. There will always be investors who prefer the mutual fund wrapper to the ETF wrapper. If I hold mutual funds, I still have some sort of relationship with the firm who actually manages the money, with ETFs that relationship is severed. Perhaps folks will care less and less about that relationship aspect in the future.

Investment companies didn't start the ETF concept out of the goodness of their heart or out of a desire to save customers money. They were created with trading strategies and with the big institutions in mind. Yes, they were designed to be traded and to be traded a lot. But we as individual investors don't have to play that game. I have not sold a single share of any ETF that I have purchased myself, there has been activity in a managed account where American Century has bought and sold ETF shares on my behalf but that was mostly with rebalancing in mind. I am even reinvesting the dividends from my ETFs held at Fidelity and LPL Financial automatically. I regard my ETFs as long term investments.

I will say that with ETFs that you have to exercise a bit of caution when you buy and sell. Check to see that you have decent volume when you trade and check the bid/ask spreads before you click the mouse to make the trade. Also be mindful of the NAV discount/premium, in theory NAV should always be very close to price, but as we have seen, that doesn't always happen. I can see why some folks are a bit wary of trading them.

We have also noted that investors sometimes benefit when price returns are more than NAV returns. Of course, when NAV returns are more than price returns, this will be a drag on performance. Another reason to be wary of ETFs but I am a long term investor.

Thus as Nisiprius noted, if I invest in the American Century Focused Growth ETF, I am not guaranteed to outperform the mutual fund version by 41 basis points year after year. Odd things happen in this regard and Nisiprius did us a service by pointing this out. Things are not always as straight forward as we think. One thing I have been learning is that there is a lot of nuance with ETF investing, something you don't have to bother with as a mutual fund investor. I have a long term perspective, so I am not too concerned with those nuances.

For whatever it is worth, those are my thoughts.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by StrangePenguin »

nisiprius wrote: Fri Mar 31, 2023 2:37 pm
No.

VTI has not had a higher rate of return.

In fact, and I admit to finding this surprising, since inception VTI has underperformed not only VTSAX, but even the higher-expense VTSMX investor share class.
I'm confused about this one detail -- your graphic does not show the Investor shares class outperforming VTI. VTI outperforms by 0.1% and VTSAX outperforms VTI by 0.01%. The broader point that VTI does not seem to be outperforming VTSAX by the expected 0.01% is still true (up to issues of precision with PV and the underlying data).

(Also VTSMX doesn't exist anymore, I think, so I'm not sure exactly what data is being used for this.)
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Re: Are ETFs Just Plain Superior To Mutual Funds?

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StrangePenguin wrote: Mon Apr 03, 2023 12:24 am I'm confused about this one detail -- your graphic does not show the Investor shares class outperforming VTI. VTI outperforms by 0.1% and VTSAX outperforms VTI by 0.01%. The broader point that VTI does not seem to be outperforming VTSAX by the expected 0.01% is still true (up to issues of precision with PV and the underlying data).
Playing with the morningstar charts it depends very much on what period one uses which I suspect is due to premium/discount on the etf but not by much.
(Also VTSMX doesn't exist anymore, I think, so I'm not sure exactly what data is being used for this.)
It still exists because many people hold it outside of vanguard and so have no way to convert to the the admiral shares on a tax free basis.
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by nisiprius »

StrangePenguin wrote: Mon Apr 03, 2023 12:24 am
nisiprius wrote: Fri Mar 31, 2023 2:37 pm
No.

VTI has not had a higher rate of return.

In fact, and I admit to finding this surprising, since inception VTI has underperformed not only VTSAX, but even the higher-expense VTSMX investor share class.
I'm confused about this one detail -- your graphic does not show the Investor shares class outperforming VTI. VTI outperforms by 0.1% and VTSAX outperforms VTI by 0.01%. The broader point that VTI does not seem to be outperforming VTSAX by the expected 0.01% is still true (up to issues of precision with PV and the underlying data).

(Also VTSMX doesn't exist anymore, I think, so I'm not sure exactly what data is being used for this.)
I messed up. Sorry. I was totally wrong. Misread the numbers. :oops: As for VTSMX, it is often better to use the Investor shares because they have a longer history. VTSMX is closed to new investors, but it still exists. However, Vanguard now tends to hide it on their website.
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.
dcabler
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by dcabler »

hudson wrote: Fri Mar 31, 2023 7:32 am
Ricola wrote: Thu Mar 30, 2023 10:11 am If the ETF has a lower ER than the equivalent MF, then I like the ETF.
My thoughts exactly.

TIPS ETF SCHP (ER .0004) ($400 per M per year)

TIPS mutual fund VIPSX (ER .0020) ($2000 per M per year)

TIPS mutual fund VAIPX (ER .0010) ($1000 per M per year)

Individual TIPS (ER = 0) $0 per M per year :)
I own SCHP and am still waiting for somebody (Bueller?, Bueller?) provide an alternative to LTPZ.... Till then, it's SCHP and LTPZ....
EFF_fan81
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by EFF_fan81 »

placeholder wrote: Sat Apr 01, 2023 9:42 pm
EFF_fan81 wrote: Sat Apr 01, 2023 8:27 am I purchase admiral shares of passive mutual funds in large part because I can just hit send in two minutes at night after work.

I have too much work to deal with trading and esp. limit orders during market hours and that dedication and focus to my day job has allowed me to increase my income substantially over time, which gives me more $$ to invest.
You're acting like the time difference is hours versus minutes when it's minutes versus minutes and it's a bit hard to believe you have no free time during the day to put in an order.
I spend virtually all of my working hours focused on delivering as much value as possible. There is always more work than time in the day, and that's been the case in up and down markets since I graduated.

I'm not a workaholic - I am out the door around 6pm most nights and do not wok weekends. But when I work, I am in the zone. It's worked out.
Claudia Whitten
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Claudia Whitten »

Random Walker wrote: Wed Mar 29, 2023 11:49 am is the ETF structure just plain superior to the MF structure for buy and hold investors?
No. IMO, the ETF structure is just plain superior only for brokerages that want to make more fees on trading and encourage otherwise buy-and-hold investors to trade more.
Dottie57
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by Dottie57 »

exodusNH wrote: Thu Mar 30, 2023 10:09 am
wolf359 wrote: Thu Mar 30, 2023 10:05 am
exodusNH wrote: Wed Mar 29, 2023 12:34 pm
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
ETFs can generally avoid paying out capital gains at the end of the year.

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.
This advantage may not be exclusive to Vanguard for long. Vanguard's patent on this structure expires in May of this year (2023).
That's true, but the SEC isn't likely going to approve anyone else doing the same.
Why would the SEC object?
placeholder
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by placeholder »

Claudia Whitten wrote: Mon Mar 04, 2024 2:50 pm
Random Walker wrote: Wed Mar 29, 2023 11:49 am is the ETF structure just plain superior to the MF structure for buy and hold investors?
No. IMO, the ETF structure is just plain superior only for brokerages that want to make more fees on trading and encourage otherwise buy-and-hold investors to trade more.
That really doesn't make much sense and I've certainly never had any communication from the many brokerages I have used that indicated that as I had etfs I should trade them.
alex_686
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Re: Are ETFs Just Plain Superior To Mutual Funds?

Post by alex_686 »

Dottie57 wrote: Mon Mar 04, 2024 3:04 pm Why would the SEC object?
Trading costs for ETFs are low. The implicit and explicit trading cost for a S&P 500 is basically $0 per year for the whole fund.

Trading costs are probably significantly higher for a mutual fund. There is a edge case where it might be negative in some situations. This is a complex and nuanced subject. Trading costs are not part of the expense ratio because they can’t be measured, only estimated.

However, the general consensus is that the mutual fund side would have trading costs that the ETF shareholders would have to bear. This would be unfair to the ETF shareholders.

Some people might argue that the drag from trading is a few bps (0.01%). With the explicit expense ratio being a few bps thus means a 50% reduction in costs.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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