Author Topic: ETFs vs Mutual Funds and some asset allocation advice please  (Read 2719 times)

caracarn

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ETFs vs Mutual Funds and some asset allocation advice please
« on: February 01, 2017, 03:26:09 PM »
I'm sorry if this was already discussed as part of another thread, but I wanted to get a clear answer to this topic and not search and maybe find partial information.

I have been using Betterment for a couple years to try it out switching from previously using Vanguard and Fidelity.  With the fee change yesterday I am reconsidering the "need" and have decided to move back to Vanguard.

I've seen some discussions about the tax benefits etc of ETF mentioned in threads, but I am trying to understand once I make this transfer is is best to put my money back into the ETFs I has or to use mutual funds.  What are the pros and cons?  I believe mutual funds leave no cash as I can buy fractional shares.  I make a weekly contribution into my taxable account and if I have 10 assets (mutual fund or ETF) as I did in Betterment I'm trying to understand. 

Not to muddy the discussion too much, I also have seen debates about just using 3 funds to get a similar result.  Trying to see if the effort to split into 10 is worth it or if I am just better with 10.  I prefer a 90/10 mix so the LifeStrategy Fund only lets me go 80/20 so I'd prefer to not do that, but maybe I'm deluding myself into the extra growth I will get some this difference.

Richie

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #1 on: February 01, 2017, 07:43:21 PM »
I will be following this thread, as I'm currently making the same kind of decision.  I'm especially curious about the fractional share thing.  At the moment, I can only afford to dump $50 biweekly into my IRA.  Individual shares can be expensive!  It might keep me with Betterment if I have to let that money sit idle.

caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #2 on: February 02, 2017, 10:53:22 AM »
Wow!  I thought I'd come back today and see all kinds of responses.  Hoping that someone can shed some light, but I believe mutual funds allow the fractional shares and on perusing the fee structure it appears they are the same for mutual fund and ETF, but I saw there might be some kind of tax benefit on the ETF?  Hoping a knowledgeable Mustachian will respond. Please...!  :)


Gemini

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #3 on: February 02, 2017, 11:29:50 AM »
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

The boglehead wiki and forum is pretty good for this stuff.

ETFs distribute less (fewer?) capital gains than a mutual fund equivalent, UNLESS the mutual fund is a Vanguard one. They have a patented mutual fund structure that avoids that drawback.

caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #4 on: February 02, 2017, 11:36:22 AM »
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

The boglehead wiki and forum is pretty good for this stuff.

ETFs distribute less (fewer?) capital gains than a mutual fund equivalent, UNLESS the mutual fund is a Vanguard one. They have a patented mutual fund structure that avoids that drawback.

So if I'm using Vanguard, the mutual funds have the same capital gains result as their ETFs?  I'm looking to keep adding a small dollar amount (under $100/week) to my portfolio and I see I cannot set up auto investment with ETFs but can with mutual funds.

travelawyer

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #5 on: February 02, 2017, 12:33:32 PM »
This is probably way more answers than you wanted, haha, but here goes... (source: I'm a lawyer and I help create mutual funds and ETFs)

Taxes:
Because ETF shares are traded on the secondary market, rather than directly at the Fund level, the actual Fund can have less turnover in securities.  Additionally, any shares that are traded directly with the Fund (called creation units, which are large blocks of shares traded by institutions) are often traded 'in-kind' which means that the shares are traded for securities held by the Fund, rather than cash.  That means the Fund doesn't have to go out and by and sell securities as people come and go from the Fund (so another way to achieve less turnover).  Low turnover = lower capital gains. 

I'll note that you still have to pay capital gains taxes on increases in the value of the shares you own, when you sell those shares. 

Personally, I don't think this (tax benefits) is a huge enough factor to make a decision off of, but I don't have any math to prove it. 

One other note is that many Vanguard ETFs are share classes of their mutual funds, which means that the tax benefits are balanced across the whole Fund (mutual fund classes and ETF classes).  They just push out any of their low basis securities through the ETF in-kind redemption process.  So in a "share class ETF" there's no difference in the tax benefits for the ETF class vs the mutual fund class.

One MORE note.  Many fixed-income ETFs don't do redemption in-kind just because its harder for them to trade pieces of bonds with institutions, as opposed to equities which are typically more liquid and easily divided into small pieces.  I don't know off the top of my head if Vanguard's bond ETFs trade in-kind.

Mutual Funds vs ETFs:

ETFs are almost always better, but that's solely because of the lower fees.  There's no "magic" to ETFs, so if you see a mutual fund that you like and it turns out to be cheaper than a comparable ETF, by all means go with the mutual fund.  It's not a trick.  I could go into a lot of detail about why ETFs are cheaper but it boils down to how much work it is to maintain your mutual fund account, and how the industry has just evolved differently and brokers don't expect to receive as much payment for selling ETFs to their customers.

ETFs do have some disadvantages to mutual funds as far as ease of use. Particularly for people who want have a systematic deposit into their account.  ETFs are more DIY (part of why they are cheaper), so while with a mutual fund you can set up an arrangement with the mutual fund company where they take a certain amount of money from you on a set schedule and buy mutual fund shares for you, you typically have to go out and buy your own ETF shares in your brokerage account (so if you wanted to do it weekly, you would have to buy shares every week).

The fractional shares issue is actually the reason why ETF companies can't set up systematic purchases.  There is a way to get around this--the broker can buy full shares in their proprietary (like personal) account, and then credit pieces of the shares to different customers, and I understand there are brokers that do this, but I don't know which ones. 

There's also the issue of commissions.  If, you are buying the ETFs commission-free (for example Schwab's OneSource platform) then you don't have to worry about this.  But if you are paying commissions on trades and buy a few shares weekly that is really going to add up.  Don't do that.  Either find commission free ETFs or go with a mutual fund.  If you buy direct from Vanguard, that's commission free.

Personally, I think the cost savings on an ETF are worth the effort of doing your own trading.  But I only transfer money from my bank to my brokerage account every month or so when a large enough pile of money has built up. ;)  Maybe you would want to reduce the frequencies of your systematic purchases to ease the burden? I know you lose out on market exposure a bit, I'm just not that concerned about that since I look at my bank account as kind of an emergency fund (I mean, how do people decide their emergency fund should be $10k vs $11k?)

This comparison was mainly about costs vs ease of use, but I would be remiss not to note that another benefit of ETFs is the ability to trade intra-day (if you are strongly opposed to market timing, this should not matter much to you I suppose), and another benefit of mutual funds is that the price always exactly reflects what the Fund holds (ETFs are sold at market prices, so can be different form the actual value, but there are mechanisms that keep it really close, so not a big deal).




travelawyer

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #6 on: February 02, 2017, 12:42:48 PM »
One additional note, as I saw someone mentioned Betterment.  Betterment and other managed account programs are actually a little like a mutual fund in that they are adding a layer of servicing.   So if Vanguard mutual funds are cheaper for you than a Betterment account (I don't know what the prices are) and all you care about is systematic investing, and not any of the asset allocation type services that a managed account provides (maybe because you are comfortable with your own asset allocation skillz) then that might be a better way to go.  there's all sorts of levels of servicing available to investors, I would say roughly in the order of ETFs -> mutual funds -> robo advice (Betterment) - > standard managed accounts -> personal financial advisers.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #7 on: February 02, 2017, 06:11:41 PM »
*snip*
Personally, I think the cost savings on an ETF are worth the effort of doing your own trading.  But I only transfer money from my bank to my brokerage account every month or so when a large enough pile of money has built up. ;)  Maybe you would want to reduce the frequencies of your systematic purchases to ease the burden? I know you lose out on market exposure a bit, I'm just not that concerned about that since I look at my bank account as kind of an emergency fund (I mean, how do people decide their emergency fund should be $10k vs $11k?)
*snip*

I just wanted to point out that, at Vanguard, you can have the mutual fund AND the low ER.  See below.

Vanguard fund purchase options

For most of its index funds, Vanguard has three ways to buy into them.  Usually it is Investor mutual fund shares, Admiral mutual fund shares, and buying it as an ETF (which isn't quite the same, but it will be close enough for our purposes at the moment).

Using the Total Stock Market index as an example:
  • Investor shares are for small-scale just-getting-into investing.  Usual minimum for initial purchase via Vanguard is $3K.  These have the higher expense ratio, probably because small trades like this make it more expensive to run.  VTSMX has a 0.16% expense ratio.
  • Admiral shares are for when you have more saved up.  Usual minimum for initial purchase via Vanguard is $10K.  These have the lower expense ratio, probably because the larger amounts of money in each pot make it more efficient.  VTSAX has a 0.05% expense ratio.
  • ETF shares are easy to buy anywhere.  Vanguard has some special setup that other threads have explained well, but it allows them to have a very low expense ratio.  In many cases, the ETF will have the same expense ratio as the Admiral shares.  VTI has a 0.05% expense ratio.

If you had all of your money with Vanguard and had at least $10K invested in each mutual fund, Vanguard would automatically convert your Investor shares to Admiral shares, saving you money on the expense ratios.  I do not know if you can convert shares outside of Vanguard's accounts.  It looks like Fidelity also has a separate class for higher investment and lower expense ratios.

If you are going to buy Vanguard mutual funds outside of Vanguard accounts with less than $10K, you can get a better ER by purchasing the ETF version.

Inside Vanguard accounts, all Vanguard mutual funds and a few extras (other funds with which Vanguard has agreements) trade for free.  (For normal mutual funds; I'm not sure about Vanguard ETFs.)  This makes rebalancing cheap.  I am guessing Fidelity has the same deal for their own funds, but I don't have experience with it.

Originally posted with slightly different wording here:
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caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #8 on: February 03, 2017, 09:18:28 AM »
OK, so this is helping and making me less certain at the same time.  I feel I know more, but it just seems to create more questions.

So from what I've heard since I will be using Vanguard because of the low fees, it seems as if the mutual funds will give me the ability to have every cent invested but the ETF will not?

It also seems that I cannot invest in some mutual funds initially because of the initial amount.  Once everything is there I have enough for at least the Investor level, but that has a higher fee, so the ETF seems best?  If I move from the ETF when I have enough funds to the same mutual fund, will I get hit for the capital gains of selling and buying. or is there some kind of in-kind transfer?

It will take 3-4 weeks it says to get my money from Betterment to Vanguard.  In the interim I have a little over $10,000 to place in and I'd prefer to get it working over that month, but not if it causes me a problem later.  I do think it seems to make sense to simplify the portfolio in Vanguard as Investor Compound mentioned in another thread, from the 10 or so down to at most 4 and maybe 3 (I'm still debating if having both US and Foreign Bonds is that crucial given that I'm only doing 10% in bonds total).  In that case on my taxable account I'd not have enough in my taxable account to get to the $10K threshold in bonds so it seems ETF is the way to go there.

So the way Vanguard manages their mutual funds means I should basically ignore the tax issues if I just as investing long term, versus using an ETF for less of the churn?

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #9 on: February 03, 2017, 07:55:45 PM »
You are asking exactly the same questions I've been asking, so I'm in for the responses you get. Right now I have ETFs, but I have a large amount to contribute soon, so I'm looking at mutual funds.
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caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #10 on: February 04, 2017, 05:00:17 AM »
Yes, I seem to be creating confusion with my questions, but not sure how else to ask.  Hoping someone comes over with a clear response on the EFT vs. Mutual funds (Vanguard differences too) in clear language.  The lawyer's response, while appreciated, was very hard to comprehend.  Seems to indicate more of how they are actually built and function for the organization than what I as a consumer see, specifically without translating from what the company gets to what I get.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #11 on: February 04, 2017, 10:54:41 AM »
"What's the difference between these?" means "how much of a return difference might there be?" to some people. The short answer is "only a very tiny bit unless you're throwing away a ton of commission on trade activity on your ETF."

To some people, "what's the difference?" means "what are all the rules for each?" That answer is infinitely longer.

The short flowchart:

1. If you have 10k+ and you're not invested yet, go Vanguard Admiral mutual fund shares. If you already did, stay there. If not, step 2.
2. If you have any amount invested, and you have ETFs already, and you do NOT pay trade commissions, you don't have to do anything. Otherwise, step 3.
3. If you DO pay trade commissions, and have >10k invested, go Vanguard Admiral mutal fund shares immediately. Otherwise, step 4.
4. If you DO pay trade commissions, and have <10k invested, invest at least 1k at a time if you can to avoid commissions until you get to 10k, then go Vanguard Admiral mutal fund shares immediately.

There are a whole ton of footnotes about whether you could be doing market timing or using a DRIP to save some small compounding money and so on that don't really matter more than the basic above steps, because they'll all be hundreds of dollars or a couple thousand dollars over a very large span of time, or else have to do with market timing that you probably shouldn't be worrying about starting out/ever.

PizzaSteve

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #12 on: February 04, 2017, 11:36:44 AM »
Yes, I seem to be creating confusion with my questions, but not sure how else to ask.  Hoping someone comes over with a clear response on the EFT vs. Mutual funds (Vanguard differences too) in clear language.  The lawyer's response, while appreciated, was very hard to comprehend.  Seems to indicate more of how they are actually built and function for the organization than what I as a consumer see, specifically without translating from what the company gets to what I get.
You got a clear response above, but I will try to simplify it.

At Vanguard there is almost no substantive difference that would matter to you.

Buy whichever you like, but given your reponse,  i think the convenience of buying a mutual fund in dollars/cents would work better for you. Buy them with confidence that you are not missing out on a better ETF deal. As noted, once you qualify for admiral shares, buy those as fees are slighly lower.
« Last Edit: February 04, 2017, 11:39:02 AM by PizzaSteve »
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MustacheAndaHalf

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #13 on: February 05, 2017, 12:44:50 AM »
You should list the pro/con and pick one.  If you're still undecided, I pick "mutual funds" for you.  Here's pro/con at Vanguard:

Vanguard mutual fund
+) can automatically invest, like $200/month into a mutual fund
+) orders outside business hours get executed like everyone else's buy orders
+) ability to reinvest dividends
+) allows fractional shares, so you can have $0 in your settlement account
-) selling shares involves a delay before you can use the money
-) selling waits for the next close of the market
-) restrictions on buying and then selling within a 30 day window (Vanguard policy)

Vanguard ETF
-) cannot invest automatically, must be done by hand
-) orders before market opens can execute in the morning market before things are stable
+) selling ETF shares is immediately credited to you, and can be used to buy other ETF shares
+) only restrictions are rules of SEC (can't sell and then buy same shares using credit from sale)
    or IRS restrictions (wash sale rule of buying, value drops, and you sell within 30 days)
+) on average markets go up during the day.  Buying an ETF at 10am on average would be slightly better price than a mutual fund where all orders are made at 4:30pm.

But overall, just pick Vanguard mutual funds.  The reason is that you want to invest small amounts automatically and are worried about small amounts of cash not being invested.  The danger here is that your retirement isn't decided on this - but on your not buying either one.  Stalling to make the perfect choice is actually more of a problem than picking ETF or mutual fund.

(p.s. that last one was for the ETF lawyer - wanted to find one thing to add that he didn't cover.  But then again, as a lawyer, I might not make statements like "on average markets go up", so I understand. :)

travelawyer

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #14 on: February 05, 2017, 11:11:33 PM »
"On average markets go up" is a true statement, so lawyer-approved. I just don't get the obsession with having every dollar invested for every possible second, when you are making arbitrary decisions around how much to keep in your bank account anyway. But to each their own. :) I think the more important point that you covered that I didn't is the need to have a little but of understanding about when not to trade (market open, market close) for ETFs.

To OP. I think the mutual fund is clearly the right choice for you. You value the convenience and the fractional shares issue, and once you have $20 or $30 or $40k (however many funds you are buying)  you'll be paying the same fees. I didn't know that before (I don't work at vanguard, unlike everyone else on this forum, haha). Start out with the investor shares if you don't have the cash for admiral shares and convert later.. Converting from one mutual fund share class to another is tax free. Converting from mutual fund to ETF at vanguard is also tax free. Converting from ETF to mutual fund is not.

caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #15 on: February 06, 2017, 07:46:00 AM »
Thanks.  These replies helped.

To add a little detail to what is driving my "concern":
  • I will be investing between $90 - $270 per week
  • My goal is something simple like a three fund portfolio
  • With only $90 say and ETFs I would need to keep track of what fund gets money this week as the share prices are between $50-$120 for the Stock/International/Bond ETFs
  • I then felt if I could not do something like fractional shares that I'd be adding a lot of complexity versus 72/18/10 split on investing, which is appears I can handle easily with the mutual funds

At this point, I would go with the folks that suggests mutual funds as it seems to fit what I need.  In either account (taxable or non-taxable) I have over $50K so I certainly have the $3,000 minimum  if not the $10,000.  If for some reason, with the added detail, mutual funds seem to not fit the bill, I'm ready to hear more.

Thanks a lot for the advice!

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #16 on: February 08, 2017, 10:27:41 AM »
If you have not already done the transfer I would suggest doing an in-kind transfer of the ETF's you hold to Vanguard. Then you can control how much capital gains you realized in each year to minimize those taxes.  With the selling and new contributions then you can begin investing in your desired allocation while slowly removing the ETF's.  If this is in a tax advantaged account then my suggestion would be to sell all and reinvest in the mutual funds of your desired asset allocation.

caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #17 on: February 08, 2017, 10:36:39 AM »
If you have not already done the transfer I would suggest doing an in-kind transfer of the ETF's you hold to Vanguard. Then you can control how much capital gains you realized in each year to minimize those taxes.  With the selling and new contributions then you can begin investing in your desired allocation while slowly removing the ETF's.  If this is in a tax advantaged account then my suggestion would be to sell all and reinvest in the mutual funds of your desired asset allocation.

Transfer is in progress.  It is an in-kind transfer.  The taxable account was only at Betterment for less than a year, and total gains were about $5K.  I'll need to look at the difference of short term versus long term capital gains as it might be worth waiting a bit to sell.  Thanks for the advice.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #18 on: April 18, 2017, 03:29:11 AM »
I would go for mutual funds.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #19 on: April 18, 2017, 09:15:58 AM »
I'll throw my lot in with the Vanguard mutual fund group. I love the fractional shares and just specifying the dollar amount you want to invest without having to think about the price per share.  That said, I originally started with VTI ETF since I only started investing with too small an amount for admiral shares.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #20 on: April 18, 2017, 10:11:31 AM »
If you have not already done the transfer I would suggest doing an in-kind transfer of the ETF's you hold to Vanguard. Then you can control how much capital gains you realized in each year to minimize those taxes.  With the selling and new contributions then you can begin investing in your desired allocation while slowly removing the ETF's.  If this is in a tax advantaged account then my suggestion would be to sell all and reinvest in the mutual funds of your desired asset allocation.

Transfer is in progress.  It is an in-kind transfer.  The taxable account was only at Betterment for less than a year, and total gains were about $5K.  I'll need to look at the difference of short term versus long term capital gains as it might be worth waiting a bit to sell.  Thanks for the advice.

The short term capital gains are taxed at your marginal rate while the long terms have a lower rate of 15% if you're in the 25-35% tax bracket and 0% if under those brackets or 20% if over.  With gains of about $5k it would be worth it to wait until you have held them one year for the long term capital gains rates.

caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #21 on: April 19, 2017, 06:49:20 AM »
If you have not already done the transfer I would suggest doing an in-kind transfer of the ETF's you hold to Vanguard. Then you can control how much capital gains you realized in each year to minimize those taxes.  With the selling and new contributions then you can begin investing in your desired allocation while slowly removing the ETF's.  If this is in a tax advantaged account then my suggestion would be to sell all and reinvest in the mutual funds of your desired asset allocation.

Transfer is in progress.  It is an in-kind transfer.  The taxable account was only at Betterment for less than a year, and total gains were about $5K.  I'll need to look at the difference of short term versus long term capital gains as it might be worth waiting a bit to sell.  Thanks for the advice.

The short term capital gains are taxed at your marginal rate while the long terms have a lower rate of 15% if you're in the 25-35% tax bracket and 0% if under those brackets or 20% if over.  With gains of about $5k it would be worth it to wait until you have held them one year for the long term capital gains rates.

Thanks all for the feedback.  Yes, I decided to wait on the capital gains to convert because of the tax issues.  Sold the 4 ETFs that were not Vanguard and had loses (all bond ETFs) to just get hit with the commission once and bank some short term losses to offset anything I might do for the couple other non-Vanguard ETF's that I want to do the same for but that have a profit.  I'll wait until the end of the year to covert so that everything that can be moved to long term gain will have been and then the remainder should be low enough that the gains should be a wash with the losses.  Did one set of moves already as early April were first purchases and now moved to long term, and will space out the rest throughout the year to follow this strategy.

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #22 on: April 19, 2017, 11:15:13 AM »
Bogle himself favors the mutual fund option over the ETF because it reduces investor temptation to make trades on a whim or buy something random spur-of-the-moment.  It can pretty easy with a trading account to think, "Hey, maybe I'll just put a few dollars into oil because it's low," or "I have a feeling this pharmaceutical company may take off, so why not move just a little there from my bond fund?"  He's shown statistics which prove the Vanguard ETF investors (on average) don't do as well as their mutual fund counterparts.  ...However, being Mustachian, we're not prone to such irrational behaviour, right?  :)
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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #23 on: April 19, 2017, 11:42:03 AM »
Bogle himself favors the mutual fund option over the ETF because it reduces investor temptation to make trades on a whim or buy something random spur-of-the-moment.  It can pretty easy with a trading account to think, "Hey, maybe I'll just put a few dollars into oil because it's low," or "I have a feeling this pharmaceutical company may take off, so why not move just a little there from my bond fund?"  He's shown statistics which prove the Vanguard ETF investors (on average) don't do as well as their mutual fund counterparts.  ...However, being Mustachian, we're not prone to such irrational behaviour, right?  :)

I know Bogle has said this, but I fail to see the logic in it. Vanguard now offers mutuals which cater to portfolio tinkering: sectors, strategy "indices", and smart-beta type products.

Maybe the lure of growth and fee income has led Vanguard astray. ;)
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caracarn

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Re: ETFs vs Mutual Funds and some asset allocation advice please
« Reply #24 on: April 19, 2017, 12:41:55 PM »
Bogle himself favors the mutual fund option over the ETF because it reduces investor temptation to make trades on a whim or buy something random spur-of-the-moment.  It can pretty easy with a trading account to think, "Hey, maybe I'll just put a few dollars into oil because it's low," or "I have a feeling this pharmaceutical company may take off, so why not move just a little there from my bond fund?"  He's shown statistics which prove the Vanguard ETF investors (on average) don't do as well as their mutual fund counterparts.  ...However, being Mustachian, we're not prone to such irrational behaviour, right?  :)

I know Bogle has said this, but I fail to see the logic in it. Vanguard now offers mutuals which cater to portfolio tinkering: sectors, strategy "indices", and smart-beta type products.

Maybe the lure of growth and fee income has led Vanguard astray. ;)

I think like any organization they cater to the customer.  They try to educate but in the end a customer will do what they want.  If they are looking for sector funds and do not find them but do at a competitor they will leave, so Vanguard did what it needed to in competitive market.  I'd agree if you did not have the patience to stick with your strategy it "protects you from yourself" so to speak, in that a weak-willed person might be dissuaded to execute a trade knowing that it will not settle until the end of day price and between lunch time and then the market could drop 300 points, so maybe I do not need to trade after all.