Author Topic: Mutual fund or EFT?  (Read 1404 times)

jo552006

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Mutual fund or EFT?
« on: April 22, 2021, 10:05:40 AM »
Recently a friend pointed out to me that I could have ETF version of VTSAX (VTI) and not be tied into the end of the day price as I would with VTSAX.

His point was: if my goal is to buy and hold that I could put stop losses on VTI to ensure that I don't need to sit a whole day and watch everybody else cash out while my price goes down.  Then regardless of where the market ended buy in the next day.  It's market timing but on a small scale.

A simple way to phrase his point is: If the market drops 10% by noon, are there really any times you want to be locked in until market close to sell?

Now, as I'm not a market timer, if I look into this route, I'd go with a strategy of: My daily loss limit is x% after that I sell out and buy in the next morning.  While I do realize this is market timing, I also can't imagine a situation where we've hit circuit breakers and suddenly had a 15% gain between 2 and 4pm that I would have missed out on.

Additionally, what are the other advantages, vs. disadvantages of VTSAX vs. VTI.  My friend's view was simply that ETFs weren't available when VTSAX was created, or we'd be talking about the ETF version.

Finally, I had a question regarding VFINX vs VTSAX (or their ETF counterparts).  I looked a week or 2 ago and *thought* that I saw a couple percent difference between the 2.  Was I mistaken or are there times where the Total Stock Market and the S&P really do vary by large amounts?  I was of the belief that it was almost identical in terms of performance.

Rob_bob

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Re: Mutual fund or EFT?
« Reply #1 on: April 22, 2021, 10:26:42 AM »
What is the  difference, if any, in the ER between the two?

I use ETF because I like to know the price I'm paying, and being able to sell one fund and buy something else immediately.  I don't try to get the best price of the day, I buy/sell when I'm able to log in.

Frankies Girl

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Re: Mutual fund or EFT?
« Reply #2 on: April 22, 2021, 11:38:54 AM »
My take/opinion:


The ETF is supposedly a tiny bit more efficient.
Mutual Funds are easier.

ETFs I believe require whole share purchasing. MFs you can buy in fractions, so if you are just dumping in X amount of cash, it all goes in and no leftover because you couldn't buy a whole share of an ETF.

If you are a buy and hold investor, then the whole argument of "what if the market drops 10% in a day" is moot. You don't buy/sell based on a day's movement. You buy and hold.

But for me, I'm a lazy index investor and I do stick to the buy and hold thing. Simple for me = Mutual Funds. I don't care to learn about stops/calls and all that crap. And I'm not going to bother with even small scale market timing. That's still market timing. That's like saying you're only a little pregnant. Or he's only a tiny bit dead. Silliness.

RWD

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Re: Mutual fund or EFT?
« Reply #3 on: April 22, 2021, 12:19:14 PM »
If you are a buy and hold investor, then the whole argument of "what if the market drops 10% in a day" is moot. You don't buy/sell based on a day's movement. You buy and hold.
This^^

You shouldn't be jumping in and out of an index fund. Since its inception 20 years ago the number of times VTI has dropped more than 10% in a day has been...... just once (11.4% in March 2020). And you would have wanted to get right back in because the very next day it went back up 5%. I should also note that VTI went up 73% in the year following that 11.4% dip.

If you want to day trade (though you shouldn't) go do it with something more volatile (e.g. individual stocks).

Telecaster

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Re: Mutual fund or EFT?
« Reply #4 on: April 22, 2021, 12:59:54 PM »

A simple way to phrase his point is: If the market drops 10% by noon, are there really any times you want to be locked in until market close to sell?

Now, as I'm not a market timer, if I look into this route, I'd go with a strategy of: My daily loss limit is x% after that I sell out and buy in the next morning. 


Selling on the dips is a terrible investment strategy.   You are simply locking in your losses.   Remember also that a stop loss order becomes a market order when you hit your stop.  In times of panic selling, that's like wearing a big red neon sign that says "Kick me!"

MustacheAndaHalf

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Re: Mutual fund or EFT?
« Reply #5 on: April 23, 2021, 10:32:11 AM »
A simple way to phrase his point is: If the market drops 10% by noon, are there really any times you want to be locked in until market close to sell?
Sometimes the market opens "limit down", or 7% lower.  So even if you had a stop loss order 2% below Friday's price, Monday might involve a 7% drop.  Your stop loss order would be triggered, and then become a market order to sell after the 7% drop.  There isn't a way to avoid that - the market just suddenly trades at the new price based on new information.

I think it's easier to rebalance ETFs.  You sell one, get a credit, and use that credit to buy another - all within seconds while the market is open.  With mutual funds, you are exchanging between two funds at whatever price they have when the market closes - so there's uncertainty.  I prefer trading at a known price with ETFs while the market is open.

ETFs are also more portable.  If you move "Vanguard Total Stock Market (VTSAX)" from Vanguard to Schwab / Fidelity, you'll pay huge fees ($35 or $50 range) to buy or sell shares in that mutual fund.  ETFs can be moved intact between competing brokerages without that problem.

DadJokes

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Re: Mutual fund or EFT?
« Reply #6 on: April 23, 2021, 10:57:32 AM »
For a buy & hold investor, there are only a couple things to look at for me:

Mutual fund: can buy fractional shares and therefore invest everything, but may be limited by minimum investments
ETF: must buy whole shares, potentially leaving cash on sideline, but minimum purchase is just 1 share

If your desired fund has a low minimum (such as $3k for VTSAX), then I'd stick with mutual funds. However, some of my portfolio is in a tech index fund. The mutual fund (VITAX) has a minimum investment of $100k, so I just went with the ETF (VGT).

If you're a day trader, then you're probably in the wrong place ;)

jo552006

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Re: Mutual fund or EFT?
« Reply #7 on: April 23, 2021, 02:35:00 PM »
I've been on this train for many years and have just followed the standard advice.  VTSAX and forget it.  So far, it's worked.  I don't plan to change it.

But I do have a friend who's advice I respect and he asked me the question specifically about the ability to put stop losses on and why I'd not want to get out, at least for a really shitty day even if I jump in the next morning to ride the ride again.  I ask here as an attempt to learn more rather than give him my generic "I don't time the market answer".

The other question I had was whether VTSAX vs. VFINX actually performed differently in the last year, or they pretty much tracked the same.  I'd be more than happy to look it up myself I'm just not positive on how to do that.  I am looking at the "average annual returns" but how can i trust those numbers to compare when it's telling me VTSAX returned 62.75%.  Maybe id did, but if so, then it looks like VTSAX far outperformed VFINX...


PDXTabs

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Re: Mutual fund or EFT?
« Reply #8 on: April 23, 2021, 03:02:07 PM »
The ETF is supposedly a tiny bit more efficient.

Yes, mutual funds pass through capital gains to you when they rebalance their portfolio. This doesn't matter in an IRA/401k/etc but it does matter in a taxable account. AFAIK Vanguard is the only one that has found a way around this in mutual funds, but their patent is up in a couple of years.

Note: I'm not a tax lawyer or your accountant and I don't fully understand any of this.

EDIT - and for whatever reason all the Vanguard ETFs are a couple of basis points cheaper in fees than their mutual funds.
« Last Edit: April 23, 2021, 03:14:25 PM by PDXTabs »

MustacheAndaHalf

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Re: Mutual fund or EFT?
« Reply #9 on: April 24, 2021, 01:26:58 AM »
If your desired fund has a low minimum (such as $3k for VTSAX), then I'd stick with mutual funds. However, some of my portfolio is in a tech index fund. The mutual fund (VITAX) has a minimum investment of $100k, so I just went with the ETF (VGT).
Surprising and true.  I'm surprised Vanguard requires a $100k to start, but I double checked it.  Not only that, but their ETF "VGT" is $385/share, which isn't too friendly for investing whole shares.

EDIT - and for whatever reason all the Vanguard ETFs are a couple of basis points cheaper in fees than their mutual funds.
That's not true of their most popular funds, like VTSAX / VTI with a 0.03% expense ratio, or total international VITAX / VXUS with 0.10% expense ratios.  Their sector funds have the same expense ratios as well.

You might be thinking of several years back, when Vanguard had "investor class" shares.  They eliminated those, and now only have Admiral class (with higher minimums) that tend to have the same expense ratio as the ETFs.

PDXTabs

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Re: Mutual fund or EFT?
« Reply #10 on: April 24, 2021, 01:47:26 AM »
EDIT - and for whatever reason all the Vanguard ETFs are a couple of basis points cheaper in fees than their mutual funds.
That's not true of their most popular funds, like VTSAX / VTI with a 0.03% expense ratio, or total international VITAX / VXUS with 0.10% expense ratios.  Their sector funds have the same expense ratios as well.

You might be thinking of several years back, when Vanguard had "investor class" shares.  They eliminated those, and now only have Admiral class (with higher minimums) that tend to have the same expense ratio as the ETFs.

According to the Internet, today, VTI/VTSAX is 0.03/0.04 and VEA/VTMGX is 0.05/0.07 while VEU/VFWAX is 0.08/0.11 and VT/VTWAX is 0.08/0.10.

MustacheAndaHalf

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Re: Mutual fund or EFT?
« Reply #11 on: April 24, 2021, 01:56:04 AM »
EDIT - and for whatever reason all the Vanguard ETFs are a couple of basis points cheaper in fees than their mutual funds.
That's not true of their most popular funds, like VTSAX / VTI with a 0.03% expense ratio, or total international VITAX / VXUS with 0.10% expense ratios.  Their sector funds have the same expense ratios as well.
According to the Internet, today, VTI/VTSAX is 0.03/0.04 ...
Not sure how I missed that, but you're right.  Except for sector ETFs / funds with 0.10% expense ratios, Vanguard ETFs have a slight expense ratio advantage over equivalent mutual funds.

JetBlast

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Re: Mutual fund or EFT?
« Reply #12 on: April 24, 2021, 03:26:21 PM »
Recently a friend pointed out to me that I could have ETF version of VTSAX (VTI) and not be tied into the end of the day price as I would with VTSAX.

His point was: if my goal is to buy and hold that I could put stop losses on VTI to ensure that I don't need to sit a whole day and watch everybody else cash out while my price goes down.  Then regardless of where the market ended buy in the next day.  It's market timing but on a small scale.

A simple way to phrase his point is: If the market drops 10% by noon, are there really any times you want to be locked in until market close to sell?

For most investors I think mutual fund pricing at the end of the day instead of all the time is actually a feature, not a bug. Knowing that the price is locked in at end of day NAV likely reduces panic selling during earlier parts of the trading day.  It forces people to just sit still and see how the rest of the day unfolds, likely reducing trading and attempts to time the market, which has been proven to be a better strategy for the vast majority of investors.

The stop loss strategy doesn’t really make sense to me for long term investments.

First, it assumes that the market will keep dropping to allow you to repurchase at a lower cost. But it could just as easily reverse and climb above the price where you were stopped out. It only works if you can successfully predict when the market is going to keep dropping. I know I can’t do that.

Second, in a taxable account you may trigger considerable capital gains taxes when you sell, and a strategy where you look to quickly repurchase after being stopped out would be subject to wash sale rules so you can’t take a deduction on losses.  Either you forfeit the tax deduction or you stay on the sidelines for 30 days.

Stop loss orders are good for enforcing discipline on traders. If your stop is triggered then your trade thesis was likely wrong. Better to automate getting out than let ego and the need to be proven right keep you in a bad trade. But a stop loss for investments that you plan to hold

 

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