Author Topic: Confused about ETFs  (Read 9685 times)

loxs

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Confused about ETFs
« on: September 05, 2013, 01:54:30 PM »
Hello Mustachians,

With your kind help I have decided. I am awaiting approval by Keytrade Bank and if all goes well, I'll be investing in these ETFs https://www.vanguard.nl/portal/site/nl/en/etf#funds_tab
Top priority are VUSA and VEUR and maybe also VJPN (as I like the companies in that portfolio). These seem to be the least expensive way to invest my money. I don't want to lose from price spread when buying USD or GBP, and these seem to be the best EUR ETFs (and cheaper than all funds available to me, that I could find).

All is good and well, but... after reading quite a lot, I am still very confused about lots of things regarding ETFs:

1. How many entities are there between me and Vanguard, making money off the price spread? Is there any possibility that this results in my money buying considerably less company stocks than if I would buy them directly?

2. When I give them EUR, how do they convert it to USD (to buy American companies in the case of VUSA) and don't they pay comissions. Don't they have USD price spread? And incredibtly, this fund is still cheaper than VEUR. How's that? What makes VEUR more expensive?

3. Is there risk out of the ETF itself being speculated with? What will happen if my ETF's price tanks just because of speculation (people buying and selling it)? And as a whole, how close is the price to the "intrinsic" value of the ETF shares? I mean, how closely does it correlate with the value of underlying companies' shares? Does this ever fluctuate? A lot?

4. (Quite like my previous question, but in a different aspect) - How does the whole thing work? When I buy ETF shares, do I buy them directly from Vanguard, or is it from some other investor selling their shares? And in general, when the ETF shares raise, does this give Vanguard more money to invest in companies? If not, isn't this a bubble? Can I lose lots of money just because of that?

5. How does Vanguard decide on when to emit new ETF shares? Is this regulated in any way? Is there any space for bad management in this regard?

6. Should I be concerned because of these being new ETFs (just several months into existence)?
« Last Edit: September 05, 2013, 02:17:32 PM by loxs »

Christof

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Re: Confused about ETFs
« Reply #1 on: September 05, 2013, 02:12:56 PM »
1) Your bank and the stock exchange are both charging transaction fees. Normally this is a one time fee based on a percentage of the price you pay. In addition the bank might charge an annual depot fee.

2) They are not converted. ETFs are traded at a stock exchange in the countries local currency. For you that would be Euro. Seller and buyer are both trading in Euros. Vanguard is not involved in this transaction.

3) The price of the ETF is usually very close to the portfolio it represents. Vanguard constantly reports the current value of each share. If the spread between the actual value of shares and the price of the ETF gets too large, investors specialized on arbitrage trades get in.

4) Vanguard sold a bunch of these ETF shares and used the money to buy shares. At the stock exhange its now one investor dealing with another. This does not change the number of shares in the portfolio or gives Vanguard any more money to invest. Since these are funds, you can always buy shares directly from Vanguard or return shares to them. If that happens Vanguard will sell or buy the appropriate amount of companies in the portfolio to make this happen.

loxs

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Re: Confused about ETFs
« Reply #2 on: September 06, 2013, 12:51:28 AM »
2) They are not converted. ETFs are traded at a stock exchange in the countries local currency. For you that would be Euro. Seller and buyer are both trading in Euros. Vanguard is not involved in this transaction.
I am not asking about the shares of the ETF itself. I am asking about the money they put into american companies, which are traded on Wallstreet in USD. So how does the EUR acquired by them when selling their ETF stocks on Amsterdam Stock Exchange, end up buying shares on Wallstreet in USD. And even then, the VUSA is cheaper than VEUR. This seems a bit weird to me.

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3) The price of the ETF is usually very close to the portfolio it represents. Vanguard constantly reports the current value of each share. If the spread between the actual value of shares and the price of the ETF gets too large, investors specialized on arbitrage trades get in.
How does this help me on not losing my money?

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4) Vanguard sold a bunch of these ETF shares and used the money to buy shares. At the stock exhange its now one investor dealing with another. This does not change the number of shares in the portfolio or gives Vanguard any more money to invest. Since these are funds, you can always buy shares directly from Vanguard or return shares to them. If that happens Vanguard will sell or buy the appropriate amount of companies in the portfolio to make this happen.
How does one do that? (return shares to Vanguard)?. Does it mean that they virtually  have a constantly fluctuating number of shares and thus they actually force the price of the shares to follow closely the value of the portfolio?

Dr. A

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Re: Confused about ETFs
« Reply #3 on: September 06, 2013, 05:22:14 AM »
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3) The price of the ETF is usually very close to the portfolio it represents. Vanguard constantly reports the current value of each share. If the spread between the actual value of shares and the price of the ETF gets too large, investors specialized on arbitrage trades get in.
How does this help me on not losing my money?

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4) Vanguard sold a bunch of these ETF shares and used the money to buy shares. At the stock exhange its now one investor dealing with another. This does not change the number of shares in the portfolio or gives Vanguard any more money to invest. Since these are funds, you can always buy shares directly from Vanguard or return shares to them. If that happens Vanguard will sell or buy the appropriate amount of companies in the portfolio to make this happen.
How does one do that? (return shares to Vanguard)?. Does it mean that they virtually  have a constantly fluctuating number of shares and thus they actually force the price of the shares to follow closely the value of the portfolio?

These are both answered by understanding the structure of the ETF. Basically, a small number of very wealthy investors have an agreement with Vanguard to be "Authorized Participants". These investors can buy new shares of the fund or return existing shares to it, but only in very large blocks (i.e. 10,000+ shares), and will do so by "paying" for the new shares with a basket of stocks that are approximately equal to the shares represented by the ETF.

Therefore, if the price of the ETF starts to exceed the intrinsic value of the underlying shares, the Authorized Participant can buy a bunch of stocks that represent the same investment as 10,000 shares of the ETF, trade them with Vanguard for newly created shares, then sell the new ETF shares to the market for slightly more than they paid for the underlying stocks. This new supply of shares puts downward pressure on the price of the ETF until it reaches the intrinsic value of Vanguard's holdings. The reverse process would happen if the ETF price fell below intrinsic value. This whole trade would likely be completed in minutes, if not seconds by computers. This money doesn't come out of nowhere, it is paid by the regular investors that buy and sell the ETF, but represents a tiny fraction of each transaction, while we see the benefit of a small, stable spread between ETF price and intrinsic value.

P.S. Anyone else should correct me if I've got any details wrong.

Christof

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Re: Confused about ETFs
« Reply #4 on: September 06, 2013, 09:10:10 AM »
I am not asking about the shares of the ETF itself. I am asking about the money they put into american companies, which are traded on Wallstreet in USD. So how does the EUR acquired by them when selling their ETF stocks on Amsterdam Stock Exchange, end up buying shares on Wallstreet in USD. And even then, the VUSA is cheaper than VEUR.

When you buy your share of an ETF there is no money that is placed into US companies. That happened long ago. Some day shares have been sold at stock exchanges in the US and Europe at the then current exchange rate at no loss for the vendor. Ever since the shares are traded independently.

Computer systems monitor the price of the ETF at each stock exchange and the current value of the portfolio in the fund. As soon as the detect differences between the places or currencies, they buy ETFs in one stock exchange and sometimes only seconds later sell it at a different stock exchange. This happens frequently and automatically by larger investment companies who do not have to pay high transaction fees and can afford the infrastructure to do so. These arbitrage trades make sure that the ETF fund costs the same at any stock exchange in the world in any currency.

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How does this help me on not losing my money?

What I'm saying is that the price of the ETF is always close to the portfolio and therefore the risk of investing in the ETF is roughly the same as buying all companies in the fund. An ETF is cheaper and easier.

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How does one do that? (return shares to Vanguard)?. Does it mean that they virtually  have a constantly fluctuating number of shares and thus they actually force the price of the shares to follow closely the value of the portfolio?

You need a certain amount of shares in order to return them to Vanguard. Usually that's 10,000 or more shares. Other fund companies accept smaller amounts but add a processing fee of up to 5%. If you have the desired number of shares you contact Vanguard and receive share of the portfolio in exchange. This is more interesting for professional investment companies, but having the possibility means that the price of the fund follows the portfolio.

Yes, the number of shares that Vanguard owns fluctuates. They don't buy shares each time someone puts $100 into a fund. Money is collected and at the next rebalancing date it's used to increase the amount of shares. Whether or not this affects the price of shares depends on the company. For larger companies Vanguard only owns a small percentage, but for some companies like those in REIT funds, Vanguard owns 10%-20% of the company.

Christof

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Re: Confused about ETFs
« Reply #5 on: September 06, 2013, 09:16:18 AM »
Forgot one thing... VUSA and VEUR are completely different funds. VUSA contains the companies of the S&P 500 index. VEUR is the FTSE Developed Europe index. Because these are entirely different companies in entirely different regions, the price for both ETFs is different. You find information on these indexes on the site of the index companies:

http://www.ftse.com/vanguard/Home/ftse-developed-euro-index
http://us.spindices.com/indices/equity/sp-500

These sites also have historical data that go further back than the Vanguard ETFs.

loxs

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Re: Confused about ETFs
« Reply #6 on: September 06, 2013, 09:26:14 AM »
So, as it seems, these posts by you also answer to my last question:

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6. Should I be concerned because of these being new ETFs (just several months into existence)?

As it seems, there is no reason to be concerned by the ETF being new.

mpbaker22

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Re: Confused about ETFs
« Reply #7 on: September 06, 2013, 10:24:08 AM »

Yes, the number of shares that Vanguard owns fluctuates. They don't buy shares each time someone puts $100 into a fund. Money is collected and at the next rebalancing date it's used to increase the amount of shares. Whether or not this affects the price of shares depends on the company. For larger companies Vanguard only owns a small percentage, but for some companies like those in REIT funds, Vanguard owns 10%-20% of the company.

I believe this is why you frequently see cash reserves creep up to x% before dropping to y%, then slowly back up to x%

loxs

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Re: Confused about ETFs
« Reply #8 on: September 06, 2013, 11:18:47 AM »
OK, one more question

7. When buying an ETF, what is your strategy... Do you just set the "limit price" to be equal to current "offer price", or do you try going closer to current price, in display at vanguard's site?

Christof

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Re: Confused about ETFs
« Reply #9 on: September 06, 2013, 12:03:30 PM »
I usually leave that selection at "market price" with my broker. I'm never buying an ETF because it does have a particular price right now, but because that fund fits my investment strategy and I just got the money to buy shares. If I'd got the money a day earlier, I'd bought them for yesterday's price.

Nords

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Re: Confused about ETFs
« Reply #10 on: September 06, 2013, 12:59:56 PM »
7. When buying an ETF, what is your strategy... Do you just set the "limit price" to be equal to current "offer price", or do you try going closer to current price, in display at vanguard's site?
You could set a limit price and save a few pennies per share, but you'd waste a lot more time repeating the order each day until it's filled. 

I set limit orders when I'm selling ETF put & call options, but that's because they're thinly traded.  When you're buying/selling ETF shares you ideally want shares that have a high volume and a narrow bid/ask spread.

loxs

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Re: Confused about ETFs
« Reply #11 on: September 06, 2013, 01:17:26 PM »
And "high volume" means "high price per share"?

mpbaker22

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Re: Confused about ETFs
« Reply #12 on: September 06, 2013, 01:27:13 PM »
And "high volume" means "high price per share"?

No.  Price per share means practically nothing in investing, other than you'll be able to buy 2x shares if the price is half and half the shares if price is 2x.  Basically, absolutely meaningless.

What high volume means is that a lot of people are buying and selling (there are a lot of trades being made).  High volume equities mean those are trading much more frequently.  Usually if something is trading frequently, the bid/ask spread is lower.  Imagine there are infinite oranges but only 2 orange selling/buying transactions occur per day.  The two transactions could have massively different prices.  But if there are a million transactions a day, they would be more likely to float around a median number.

gecko10x

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Re: Confused about ETFs
« Reply #13 on: September 06, 2013, 01:28:57 PM »
And "high volume" means "high price per share"?

No, it means lots of shares being traded. When the volume is high, the likelihood of a high bid/ask spread is low, so you generally don't have to worry too much about using limit trades.

loxs

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Re: Confused about ETFs
« Reply #14 on: September 06, 2013, 03:32:35 PM »
Now I see my broker lists "volume" for every stock. But I can't seem to find for what period that is. Is it usually displayed for a day?

Nords

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Re: Confused about ETFs
« Reply #15 on: September 06, 2013, 07:53:13 PM »
Now I see my broker lists "volume" for every stock. But I can't seem to find for what period that is. Is it usually displayed for a day?
Yes, and you may get a second number representing the daily average number of shares traded over the previous month or year.

The bid/ask spread is the price a bidder wants to pay, and the price a seller wants to get.  A narrow spread would be a couple of cents. 

You're buying Vanguard's version of ETFs, and two of them are less than six months old.  With anyone other than Vanguard I'd suggest it's a bad idea for anyone, let alone a new investor.  You're probably fine working with Vanguard products, but you'd want to educate yourself more thoroughly before you wander away from Vanguard's sandbox.  You could start here:  http://www.bogleheads.org/wiki/Orders

loxs

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Re: Confused about ETFs
« Reply #16 on: September 07, 2013, 02:21:48 AM »
Hmm, now I wonder...

https://www.vanguard.nl/portal/site/nl/en/etf#performance_tab

Although most of the ETFs are more than a year old, they are not listing performance for more than 1 month. Why is that?

Edit: It's only not displayed for the EUR version, which I was looking.
« Last Edit: September 07, 2013, 02:45:57 AM by loxs »

dodojojo

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Re: Confused about ETFs
« Reply #17 on: September 09, 2013, 09:14:00 AM »
You're buying Vanguard's version of ETFs, and two of them are less than six months old.  With anyone other than Vanguard I'd suggest it's a bad idea for anyone, let alone a new investor.  You're probably fine working with Vanguard products, but you'd want to educate yourself more thoroughly before you wander away from Vanguard's sandbox.  You could start here:  http://www.bogleheads.org/wiki/Orders

Very new on this site and just started reading Mr Money last week.  I've always been very good at modest spending and saving a good chunk of my paycheck (though not at Mr. Money level).  I have been unworthy though when it comes to investing my savings.  I've fallen off the investment wagon the last couple of years but now would like to get back on. 

My only experience though has been with retirement accounts where funds are deducted from my paycheck each month.  Is it possible to invest in the same passive manner when it comes to ETFs?  Can I just plunk down some money and set a date to invest additional funds each week/month/year?  Or is this an inefficient way to deal with ETFs?  Do I need to be more hands-on?

I know mutual funds are more my speed but the low cost and entry points of ETFs are very enticing.  For example I want to invest in Vanguard's REIT index fund but the minimum is $10,000 initially.  As far as I know the ETF version doesn't have a minimum buy-in.  And to top it off, the fee is lower.  All very attractive, but am I biting off more than I can chew?

loxs

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Re: Confused about ETFs
« Reply #18 on: September 09, 2013, 11:45:37 AM »
My only experience though has been with retirement accounts where funds are deducted from my paycheck each month.  Is it possible to invest in the same passive manner when it comes to ETFs?  Can I just plunk down some money and set a date to invest additional funds each week/month/year?  Or is this an inefficient way to deal with ETFs?  Do I need to be more hands-on?

Every time you buy ETF shares (or any shares at all), you pay broker commission. For small sums of money (like less than 5-10k USD/EUR, the commission is the same. In my case, EUR 14.95. So it's much more efficient to buy once you have saved a larger sum. I plan on buying every quarter. So I guess, the answer to your question is more of a "no" - it's not efficient to buy small quantities every month.
« Last Edit: September 10, 2013, 01:55:41 AM by loxs »

dodojojo

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Re: Confused about ETFs
« Reply #19 on: September 09, 2013, 12:32:33 PM »
Loxs,

The fee inefficiency should not be a concern as I plan to use Vanguard's brokerage which apparently allows for free ETF transactions (up to 24 per year?).  The inefficiency I'm concerned about is if using a long term hands-off approach that is compatible with mutual funds.  Would this approach be equally compatible with ETFs?  Or will I need to check every hour of the day to see how my ETF is trading so I can buy at the 'best' price?  Or is it possible to grow your money at a healthy rate by simply buying into an ETF, adding at a set interval each month/year and leaving the money alone until retirement? 

If I have to monitor an ETF at all times in order to benefit from it--then it's probably best for me to stick with mutual funds.  I'll just have to save up for the high minimums to get in the door.

Undecided

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Re: Confused about ETFs
« Reply #20 on: September 09, 2013, 01:32:04 PM »
Loxs,

The fee inefficiency should not be a concern as I plan to use Vanguard's brokerage which apparently allows for free ETF transactions (up to 24 per year?).  The inefficiency I'm concerned about is if using a long term hands-off approach that is compatible with mutual funds.  Would this approach be equally compatible with ETFs?  Or will I need to check every hour of the day to see how my ETF is trading so I can buy at the 'best' price?  Or is it possible to grow your money at a healthy rate by simply buying into an ETF, adding at a set interval each month/year and leaving the money alone until retirement? 

If I have to monitor an ETF at all times in order to benefit from it--then it's probably best for me to stick with mutual funds.  I'll just have to save up for the high minimums to get in the door.

No, there's no reason to try to time the market on an intra-day basis. Roughly speaking, from one market closing to the next, the ETF price will change by the same percentage as the equivalent mutual fund will change. There's no more reason to think you'll be able to pick the best ETF price within a day than that you could pick the best mutual fund price within a week, month or year.

mpbaker22

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Re: Confused about ETFs
« Reply #21 on: September 09, 2013, 02:07:46 PM »
My only experience though has been with retirement accounts where funds are deducted from my paycheck each month.  Is it possible to invest in the same passive manner when it comes to ETFs?  Can I just plunk down some money and set a date to invest additional funds each week/month/year?  Or is this an inefficient way to deal with ETFs?  Do I need to be more hands-on?

Every time you buy ETF shares (or any shares at all), you pay broker commission. For small sums of money (like less than 5-10k USD/EUR, the commission is the same. In my case, EUR 14.95. So it's much more efficient to buy once you have saved a larger sum. I plan on buying every quarter. So I guess, the ansewr to your question is more of a "no" - it's not efficient to buy small quantities every month.

This depends.  If I understand Vanguard's fees correctly, you can trade ETFs for free, and you can trade Mutual funds for free if you have $10K initial investment.  There is a limit of 24 trades/year (or something like that) as dodojojo pointed out.  In the case of Vanguard, broker commission is not affected by the value of your investment, unless you're going over those number of trades or buying non-vanguard funds.

scorpionking

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Re: Confused about ETFs
« Reply #22 on: September 10, 2013, 05:12:30 PM »
Loxs,

The fee inefficiency should not be a concern as I plan to use Vanguard's brokerage which apparently allows for free ETF transactions (up to 24 per year?).  The inefficiency I'm concerned about is if using a long term hands-off approach that is compatible with mutual funds.  Would this approach be equally compatible with ETFs?  Or will I need to check every hour of the day to see how my ETF is trading so I can buy at the 'best' price?  Or is it possible to grow your money at a healthy rate by simply buying into an ETF, adding at a set interval each month/year and leaving the money alone until retirement? 

If I have to monitor an ETF at all times in order to benefit from it--then it's probably best for me to stick with mutual funds.  I'll just have to save up for the high minimums to get in the door.

If you want the hands off approach will less risk, Vanguard index funds are more of a logical choice.  Example, the target date funds invest in 4 areas (Total Stock Mkt, Intl Stock Mkt, Total Bond II, & MM).  It has low expense ratios and covers large asset classes for you with minimal work.  Just estimate the date you would like to withdrawal or the date with the appropriate asset class mix.

ETFs offer more risk, but give you access to more diversified investments.  ETFs try are a mix between a mutual fund and a stock exchange.  Your "shares" in the ETF are quotes based upon the trading activity in that ETF.  As explained, the ETF buys tons of shares in the marketplace, then creates a mini market that allows investors the ability to move in and out of the ETF during trading hours.  In a mutual fund, your "shares" are the market value of the fund divided by the number of shares owned and you can only invest once a day.  ETFs are for investors that want the ability to get in or out of a fund type environment more quickly than a mutual fund.  This is why they are in between owning stocks/bonds and a mutual fund. 

Do you have to watch ETFs like a traditional stock?  No.  However, understand ETFs' main goals are to give investors access to various asset classes, commodities, ect.  I wouldn't buy an ETF unless I did some research on how they work.  Vanguard is a great place for them.  They have a patent that runs out in 2 years that makes their ETFs an actual share class.  This gives them a competitive advantage. 

Understand wherever you go, ETFs are not the same as a mutual fund and you take on more risk investing in an ETF than a traditional index fund due to the "market" aspects.  I would say unless you have a burning desire to get access to diverse areas (commodities, European stocks, BRIC holdings), I would stick with index funds. 

Undecided

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Re: Confused about ETFs
« Reply #23 on: September 10, 2013, 06:48:51 PM »
ETFs offer more risk, but give you access to more diversified investments. 

Over any meaningful period of time an ETF tied to a particular index will have the same performance as a fund tied to the same index. If the traded value of an ETF differs meaningfully from the net value of the component securities, arbitrageurs will make sure that balance is restored.

I have no idea what your claim is regarding diversified investments. They are both just structure types.

scorpionking

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Re: Confused about ETFs
« Reply #24 on: September 11, 2013, 07:50:45 AM »
ETFs offer more risk, but give you access to more diversified investments. 

Over any meaningful period of time an ETF tied to a particular index will have the same performance as a fund tied to the same index. If the traded value of an ETF differs meaningfully from the net value of the component securities, arbitrageurs will make sure that balance is restored.

I have no idea what your claim is regarding diversified investments. They are both just structure types.

Both are not simply structure types.  The fundamental difference between the two is with the mutual fund portfolio, you as the investor interact directly with the portfolio; that is, you buy and sell from the fund. It might be through an intermediary like a financial advisor, but ultimately the interaction is at the fund level.

With an ETF, you are in an open market trading a brokerage or an exchange, and so it is another person buying and selling shares. So you don't interact directly with the fund. And as such, then you have other considerations around trading. There are some tax issues, and there might be some cost issues that arise from commissions where there can be some little differences.

Overall, I like  ETFs.  However, I do see too many people jump into ETFs b/c the ERs are low and they hear they can trade b/c it's the same as an index fund.  As the OP asked about key differences, I thought I would point those out. 

Lastly, yes, you can get ETFs tied to an index.  However, the majority of ETFs try to give investors access to more exotic sectors and asset classes.  Investors need to look at the prospectus to understand what the fund actually holds as the underlying investments.  Each ETF can be vastly different and many times people buy in without understanding the investments backing their ETF.

dodojojo

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Re: Confused about ETFs
« Reply #25 on: September 11, 2013, 10:52:40 AM »
Thank you all for your replies.  I have to move quickly to get my 401K money in the year.  Due to being capped at 50% of my gross pay and with only about 6 pay periods left, I won't max out the 17.5K for the year.  But my Fidelity plans doesn't offer ETFs, so that won't be an issue.  I'll go with their indexes. 

Outside of retirement investing, I'll hold onto my cash for a bit and do some reading.  It's probably best not to jump into ETFs for now.  I am ignorant of them.  I guess the fear is that it's market is going up and up and I don't want to buy in too high...so I feel I need to invest in haste.  I will moderate this concern...

Christof

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Re: Confused about ETFs
« Reply #26 on: September 12, 2013, 12:17:34 AM »
Both are not simply structure types.  The fundamental difference between the two is with the mutual fund portfolio, you as the investor interact directly with the portfolio; that is, you buy and sell from the fund. It might be through an intermediary like a financial advisor, but ultimately the interaction is at the fund level.

With an ETF, you are in an open market trading a brokerage or an exchange, and so it is another person buying and selling shares. So you don't interact directly with the fund. And as such, then you have other considerations around trading. There are some tax issues, and there might be some cost issues that arise from commissions where there can be some little differences.

Weird how perspective changes with the country... In Germany mutual funds either charge fees of 1-5% for every transaction and extra fees for managing the account, or like Vanguard they make it really difficult to invest into funds that are quite expensive (most Vanguard funds here are around 0.5%).

Brokers, on the other hand, offer free accounts, free trades, free tax statements, easy online access and extra security by being a registered German bank instead of a company in Ireland like Vanguard.

To me the only advantage of a mutual fund is that you can buy fractional shares.

Undecided

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Re: Confused about ETFs
« Reply #27 on: September 12, 2013, 08:32:44 AM »
ETFs offer more risk, but give you access to more diversified investments. 

Over any meaningful period of time an ETF tied to a particular index will have the same performance as a fund tied to the same index. If the traded value of an ETF differs meaningfully from the net value of the component securities, arbitrageurs will make sure that balance is restored.

I have no idea what your claim is regarding diversified investments. They are both just structure types.

Both are not simply structure types.  The fundamental difference between the two is with the mutual fund portfolio, you as the investor interact directly with the portfolio; that is, you buy and sell from the fund. It might be through an intermediary like a financial advisor, but ultimately the interaction is at the fund level.

With an ETF, you are in an open market trading a brokerage or an exchange, and so it is another person buying and selling shares. So you don't interact directly with the fund. And as such, then you have other considerations around trading. There are some tax issues, and there might be some cost issues that arise from commissions where there can be some little differences.

Overall, I like  ETFs.  However, I do see too many people jump into ETFs b/c the ERs are low and they hear they can trade b/c it's the same as an index fund.  As the OP asked about key differences, I thought I would point those out. 

Lastly, yes, you can get ETFs tied to an index.  However, the majority of ETFs try to give investors access to more exotic sectors and asset classes.  Investors need to look at the prospectus to understand what the fund actually holds as the underlying investments.  Each ETF can be vastly different and many times people buy in without understanding the investments backing their ETF.

You can imagine whatever effective differences you want, but that's all you're doing. Because creation unit arbitrageurs hold the value of an ETF close to NAV, a market-trading ETF investor is not in a meaningfully different position than a mutual fund investor as result of the choice between the two as structures (assuming the ETF and the mutual fund hold the same assets). Depending on how one chooses to buy either, one may or may not pay a fee to buy or sell.

ETFs or mutual funds may be, or not be, tied to an index. What you've said about ETFs isn't inapplicable to funds; although people here typically talk about Vanguard or similar index-oriented fund sponsors, there's a whole world of sector or strategic, actively managed funds.

Of course, yes, they are all individual investments in some underlying asset (although for many ETFs (and especially ETNs), the asset may only be an unsecured contractual obligation), and that choice (and your individual access to one product or the other, and the cost structure you face) is far more important than any consequences implicit in the structure.