Talk:Investing FAQ for the Bogleheads® forum

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Should this be FAQs from the Bogleheads Forum? Also, I think we should split the answer to each question into its own article. Some questions may require a long answer.

A hearty welcome aboard, tfb. This post originated over at the test wiki, as primary author grabiner used the medium to present a working draft model for a FAQ post to be stickied on the forum. This accounts for the title. The best option for handling answers that require elaboration beyond a summary answer is to create a page for the article and link it into the summary. This is likely to prove the near optimal solution since it retains easy readability and easier navigation. Blbarnitz 13:36, 28 May 2008 (EDT)
Barry's idea corresponds to my own vision of the page as well. Questions in this FAQ should have a reasonable answer in about two paragraphs, so that the FAQ itself can be available where posters will see it, and doesn't get too long. (In particular, general questions about asset allocation cannot be answered in two paragraphs, so they do not appear in the FAQ.) Many of the FAQ questions already have links to full pages with more detailed answers, and some have been split to put their longer answers on separate pages already; I did this with Paying down loans versus investing and may do it with the decision of whether to keep a taxable fund. Grabiner 21:19, 28 May 2008 (EDT)
Got it. I like the "short answer plus long answer when necessary" approach. Thanks. Tfb 22:15, 28 May 2008 (EDT)

I would like to add a new section on ETFs. My suggested questions:

  • Should I use ETFs or mutual funds? (can't answer easily, but can discuss considerations)
  • Do ETFs have a tax advantage?
  • How should I place orders to buy and sell ETFs? (link to Orders)
  • Any other suggestions?

Grabiner 04:07, 14 June 2010 (UTC)

ETFs vs. Mutual Funds potential answers:

  • ETFs approach the cost of Vanguard's Admiral funds. If your mutual fund is near that limit, there's no advantage to convert.
  • ETFs have no impact on investing philosophy. The advantage is their lower operating costs, not that trading occurs during the day (mutual funds trade at the end of the day). Additional trading will quickly negate any advantage of an ETF (it's also market timing).

--LadyGeek 01:22, 15 June 2010 (UTC)

--LadyGeek 22:38, 15 June 2010 (UTC)

Employer plans can provide access to ETFs if:
  1. They have a brokerage platform inside the plan;
  2. They use a fiduciary that provides ETFS.--Blbarnitz 23:30, 15 June 2010 (UTC)


Some statements are unclear to me. I may have some incorrect questions because I had difficulty understanding the FAQ (as written).

What is an ETF?

...Vanguard's ETFs are a share class of the index funds.

  • Do you mean that Vanguard ETFs have the same share class as the equivalent mutual fund (not necessarily an index fund)?
    • Why is this important - is it for tax considerations, as stated below?
  • Are there any difference between Vanguard ETFs and non-Vanguard ETF offerings?

...Vanguard also allows you to convert the mutual fund shares to ETF shares.

  • Rather than allowing a conversion, suggest that conversion is the recommended method to avoid tax implications.

The ETFs are a share class of the mutual funds, so they hold exactly the same securities.

I will clarify the conversion issue, as the tax issue is important Grabiner 01:19, 18 June 2010 (UTC)

Do ETFs have a tax advantage?

All ETFs have a potential tax advantage, but Vanguard's ETFs are share classes of its index funds, and thus the Vanguard mutual funds with ETF classes have the same advantage.

...Thus ETFs can often reduce the capital gains they must distribute; most of the Vanguard stock ETFs (and the corresponding mutual funds once the ETF opened) have never distributed a gain.

  • "Most" stock ETFs is vague and needs supporting data. It should also be compared to non-Vanguard stock ETFs. Is this restricted to stock ETFs?

--LadyGeek 02:23, 17 June 2010 (UTC)

Here, the point is that all ETFs tend to be tax efficient. Since Vanguard's ETFs are a share class of the mutual fund, the fund has the same tax efficiency.

The reason for mentioning stock ETFs is that Extended Duration Treasury had a huge capital gain last year. I will list the only two Vanguard stock ETFs to distribute a gain. Most non-Vanguard ETFs have also avoided gains, but a lot of small-cap ETFs have distributed gains in their early years (and VSS did the same).

---
The link to Vanguard ETF/fund ratios (with the subsequent link to Learn More About Vanguard ETFs) answered my questions. The point I totally missed is that Vanguard ETFs are share classes of index funds exclusively.

  • However, Vanguard gets the same tax advantage for its mutual funds with ETF shares, because the ETF is a share class of the index fund.

The implication above is that non-Vanguard ETFs don't have this tax advantage. Is this correct? Perhaps this level of detail should be added to the ETF vs. Mutual funds section (ETF page), as it refers to the VIPER patent. This topic is discussed in the forum here: Gus Sauter comments on Vanguard ETF structure - the tax advantages may not be as significant as claimed.

--LadyGeek 02:20, 19 June 2010 (UTC)

My implication is the other way around; all ETFs have a potential tax advantage, but Vanguard shares the ETF tax advantage with its mutual funds. A non-Vanguard index fund, without an ETF class, is more likely to realize capital gains when the index changes. I will clarify the wording.Grabiner 14:03, 20 June 2010 (UTC)

The clarification helped considerably to put things in perspective, as it explained a few concepts that I didn't understand. The added Taxes section to the ETF page also helped fill in missing details. All OK now.
  • When an investor converts shares of an ETF to stock, the ETF provider can give away the shares of stock with the lowest purchase price; these are the shares which would have the highest gain if sold.

When you say convert shares, do you mean instead to sell shares? As an investor, I only buy or sell shares of a fund. The internal process of how an ETF or mutual fund works is transparent to me. Would it be helpful to clarify this in the FAQ (similar statement in the ETF page)? I don't own any ETF funds, so this is new material for me. Similarly, a new investor may have the same confusion. --LadyGeek 16:08, 20 June 2010 (UTC)

I clarified this by adding "institutional"; you can't convert ETF shares, but an investment bank could choose to convert ETF shares to stock and then sell the stock rather than selling the ETF. The conversion process is outlined in the "What is an ETF?" section of the FAQ (because it is the process that keeps an ETF's price close to its NAV), and in the introduction on the ETF page.Grabiner 22:38, 20 June 2010 (UTC)

Interesting, another difference of perspective. The FAQ is now clear to me (all OK). I added a customized citation link at the bottom of the page so you can point to this section directly from the forum. --LadyGeek 23:40, 20 June 2010 (UTC)

--

Suggest a link to the ETF page, Exchange Traded Funds#Taxes.

  • For example, only three Vanguard stock ETFs have ever distributed a capital gain, and only one (REIT Index) distributed a gain after its first year.

However, I count a total of 3: REIT Index, FTSE, and Consumer Staples on the ETF page. Above implies 4 (3 stock + 1 REIT). Did you mean:

In the ETF page, suggest citation reference to the forum post Are Non-Vanguard ETFs More Tax Efficient Than Vanguard ETFs? for background info. --LadyGeek 02:49, 21 June 2010 (UTC)

  • I count REIT as a stock fund. Only three have ever distributed a gain, and one of those three distributed a gain after its first year. The wording will be clarified.Grabiner 04:39, 21 June 2010 (UTC)