Author Topic: Avoiding higher cost mutual funds by using ETFs?  (Read 2126 times)

ElMono

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Avoiding higher cost mutual funds by using ETFs?
« on: May 10, 2015, 01:06:44 PM »
Hello Ya'll,

As many of you know, investing in an ETF has a much lower Expense Ration than investing in the non-ETF version of the same fund with no minimum with the exception of at least buying 1 share. Since many Vanguard funds (and other brokerage services) also have "Admiral" level services where the expense ratio is lower. Wouldn't it be more beneficial to just invest in the ETF of most funds rather than the mutual fund?

Example Investor A: Wants to maximize their IRA contributions for the year. Investor B can put 5,500$ into their IRA (assume Investor A is using VTSMX) and pay the expense ratio of "0.17". Then once next year rolls around Investor A places enough to get "Admiral" level and thus pay less expense ratio "0.05".

Example Investor B: Wants to maximize their IRA contributions for the year. Investor B can put 5,500$ into their IRA. They decide to instead invest in VTI with an expense ratio "0.05".

The advantage I personally see is that Investor B will pay less in expense ratio over Investor A. Investor B can also contribute earlier if say they do no have $3000 on them at the moment and can start getting more money working for them much sooner. Are there any other pros/cons I am not seeing in just investing in ETFs so that I(we) can always have lower expense ratios??

forummm

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Re: Avoiding higher cost mutual funds by using ETFs?
« Reply #1 on: May 10, 2015, 01:45:26 PM »
The ER for admiral is the same as the ER for ETFs. With ETFs you will have some losses due to the bid/ask spread. You also can't buy fractional shares of ETFs, so you will have some cash sitting in your account. I don't have any ETFs and don't plan to have any except in rare circumstances. You can convert (with no expense) your fund from investor to admiral whenever you get to $10k.

a1smith

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Re: Avoiding higher cost mutual funds by using ETFs?
« Reply #2 on: May 10, 2015, 02:31:33 PM »
The bid/ask spreads on the Vanguard ETF's are usually very small, on the order of a penny.  The price you pay during the day may be higher or lower than the closing price (what you buy the fund for) so the cost differential due to spread and time delay is most likely a wash over time.

I have Admiral funds and Vanguard ETFs.  For the small amount of cash that might be left over I just deposit it in one of the Admiral funds; their minimum additional investment is $1.  The Vanguard account (funds) and Vanguard brokerage account (ETF's) are linked by Vanguard Prime Money Market Fund (VMMXX) so it is simple to do.

Another interesting piece of data - I had some Admiral funds that were > $10K and I reduced them to < $10K when I redid my asset allocation.  Vanguard left the funds as Admiral funds -- they did not convert them back to Investor class.  The lowest I went when I did this was $6.5K.

However, there are two disadvantages I have found to using ETF's:
1. you can't schedule regular investments like you can with the funds.
2. if you want to use the Financial Engines service (maybe only for Voyager (>$50K) accounts and above?) it will not give advice for ETF's and stocks, only funds.

seattlecyclone

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Re: Avoiding higher cost mutual funds by using ETFs?
« Reply #3 on: May 10, 2015, 02:50:47 PM »
Expense ratios are a big thing, but they aren't the only thing. Investor A, in your example, would pay a 0.12% higher expense ratio for the first year of their IRA. How much does that actually cost them? 0.12% * $5,500 = $6.60. Compounded over time, $6.60 per year per $5,500 invested can make a big difference, but a single $6.60 expense is insignificant when you recognize that the expenses will go down in the second year to be equal to the ETF.

Meanwhile, Investor B tries to spend $5,500 on VTI. VTI closed at $109.45 on Friday. Investor B would have been able to buy 50 shares at that price, with $27.50 left sitting in cash for the year.

I personally prefer the mutual funds most of the time because it's easier to invest exactly as much as you want to for a fair price without needing to worry about intra-day market movements, bid/ask spread, limit orders, etc.

hodedofome

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Re: Avoiding higher cost mutual funds by using ETFs?
« Reply #4 on: May 10, 2015, 04:27:55 PM »
Some brokers allow you to put in market on close orders, essentially giving you the same price as the mutual fund.


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