Author Topic: ETF vs Mutual Fund  (Read 557 times)

nsmall

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ETF vs Mutual Fund
« on: December 11, 2018, 12:00:20 AM »
So the Dow Jones Industrial Average dropped to 23,894 then closed at 24,423 today.  When I saw it down 400 points I got excited.  I was less excited when I dropped 40k into VTSAX today, yet I still made the deal happen.

Question.  Are there any major disadvantages to buying an ETF?

I was all ready to go at 400 points down (as in I was like lets go, I want to make a purchase NOW), less excited to see the market close at essentially even to last Friday.

In 2019 I will have 5k a month to buy funds for my brokerage account and I am wondering if it might be better for me to open an ETF account as when a dip comes fast, I am excited to buy vs waiting until 12:50 pacific time to pull the trigger.

Thanks in advance for any advice.  This is a serious question.  I am not an internet troll.  Just trying to learn.  Thanks again.

MustacheAndaHalf

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Re: ETF vs Mutual Fund
« Reply #1 on: December 11, 2018, 05:49:07 AM »
When prices changing rapidly during the day, buying an ETF locks in the price right now, while buying a mutual fund waits for the close of the market, and gets whatever price is current at that time.  If you're worried about the market's change in value from any given time until the next close of the market, ETFs are a better choice.  (But note I'm biased in favor of ETFs, so try and find a contrary view on why mutual funds are best).

With both mutual funds and ETFs, the cost to buy can vary.  When you try to buy Vanguard mutual funds from an account with Fidelity, it will cost a fee.  Buying Fidelity mutual funds at Fidelity doesn't incur a trade commission.  The major brokerages all have a family of ETFs which cost $0/trade, so it's worth knowing those.

Because of a change this year, at Vanguard about 1800 ETFs cost $0/trade.  You can buy Vanguard, iShares, S&P SPDR, Schwab ETFs - all $0/trade.  I'm not sure how Fidelity and Schwab will respond to that challenge, but hopefully by lowering the price they charge per ETF trade.  But until they do, Vanguard is the lowest price place to trade ETFs.

Indexer

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Re: ETF vs Mutual Fund
« Reply #2 on: December 11, 2018, 06:07:43 AM »
Quote
Are there any major disadvantages to buying an ETF?

An ETF is a mutual fund that trades during the day like a stock. The disadvantages of an ETF are that they have a spread like stocks. This means you pay slightly more to buy them and you get slightly less when you sell them. This could be pennies on hundreds of dollars. The other disadvantage is that you have to buy whole shares. This means you will likely always have a little money left in cash after your purchases and it means you can't set up automated transactions like you can with mutual funds.


Your strategy: I like that you are buying on the dip. If that helps you keep investing then keep doing it. It's technically a form of market timing, but in it's mildest form. If you want to simplify your life I would just set up automatic investments for $5,000 month. Sure you might get slightly better prices by buying intraday instead of at the end of the day, but 20 years from now do you think your balance will be remarkably different because you bought at 10 am instead of 12:50 pm on a Tuesday? Having automatic investments can remove some of the emotion from your investing habits and in investing emotions tend to be your worst enemy.



Side note: I took it as a serious question, and nothing you said made me think you were an internet troll. ;-) 

Now, about that index you are following. :) The DJIA is 30 arbitrarily picked stocks with a price weighting and the calculation isn't very intuitive. The price weighting means a small company with less shares, and thus a higher price per share, can move the index more than a larger company with more shares. It was an idiotic way of measuring performance 100 years ago. Now that we have better options it should stop being used. There was also a math error decades ago that never got fixed... the DJIA is actually over 30,000 already. It's really meaningless at this point. People on TV like it because 500 point rises and drops make for good headlines.

Saying the S&P 500 dropped X% gets the same message across, but it makes you sound like a more seasoned investor.

nsmall

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Re: ETF vs Mutual Fund
« Reply #3 on: December 11, 2018, 10:25:16 AM »
Thank you very much everyone.  So use the S&P 500?

I just sold a rental and yes I wasn't brave enough to dump all the money into the stock market in one day.

I no longer have that problem. I INVESTED ALL MY MONEY.  Its all gone!  ha ha ha ha. 

 I get paid at the end of the month and I am unfortunately very emotional.  I think it would be in my best interest to drop the $5,000 on the 1st of each month. 

Ive been reading here and other places how foolish it is to time the market.  I agree, its attractive though, but I understand if it does work out its more luck vs skill.

So as soon as I get some money to invest, buy...right?

Any other ETF fans out there? 

Thanks again, you guys have totally turned my future goals upside down in a good way.


Rob_bob

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Re: ETF vs Mutual Fund
« Reply #4 on: December 11, 2018, 03:38:10 PM »
Yes I'm an ETF fan.  I like being able to purchase, or sell, at a known price instead of whatever a mutual funds NAV price at the end of the day might be.  Now the price difference may be a little or it could be a lot depending on the days volatility. You have seen how you would like to buy the dip but by the end of the day the dip could have turned to a gain. Over the long run it won't matter much I'm sure.

OTOH mutual funds are good for automatic fixed dollar amount don't need to think about it purchases since you can by partial shares, every purchase can be for an even $500 if you want.  With an ETF your going to have to do a little math to purchase an even number of shares and you will have a little bit of cash sitting around.  However if you buy SPTM Total market ETF it is currently at $32.66 so there isn't much cash left behind.