Author Topic: Help - Index Funds/EFTs?  (Read 870 times)

BethMI

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Help - Index Funds/EFTs?
« on: November 07, 2019, 10:14:03 AM »
Hello -
I am just getting started with this whole process and decided I want to open a taxable account with Vanguard that I can start putting a large chunk of my income into every month and start pulling dividend income from in 10 years (I already have a SEP, Roth and Trad IRA).
In all the MMM it says to just invest in index funds....how do I know which ones to pick?
Even after a lot of research online I'm having a hard time distinguishing between Index Funds and EFTs - are they the same thing? A lot the Vanguard funds that I thought were Index Funds seem to be EFTs....

I just want to know what funds to put the money into so I can get going!
Any help is greatly appreciated!

BECABECA

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Re: Help - Index Funds/EFTs?
« Reply #1 on: November 07, 2019, 10:32:23 AM »
Index funds are funds that seek to perform the same as an entire index of stocks. Itís just saying you want to invest in a big basket of stock, not individual stocks. Itís also saying that you want to invest in a fund that seeks to move with the indexed market, since the market does well, as opposed to investing in a fund that does risky things to try to beat the market, since this almost always performs worse than the market.

Vanguard sells lots of index funds. The most popular around here is VTSAX, which is basically the entire U.S. stock market. VTSAX is the mutual fund version of the total U.S. stock market index. VTI is the equivalent Exchange Traded Fund (ETF) version of the total U.S. stock market index. This Mutual Fund and this ETF are nearly the same, they just are purchased differently.

I would very highly recommend reading The Simple Path to Wealth by JL Collins, since it really explains all these concepts well for people who are very new to all the investing terms.
« Last Edit: November 07, 2019, 10:35:53 AM by BECABECA »

Tyler

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Re: Help - Index Funds/EFTs?
« Reply #2 on: November 07, 2019, 10:33:32 AM »
Welcome!

There are two types of index funds: mutual funds and ETFs.  The difference is mostly how they're structured and traded, where mutual funds act kinda like a savings account (where you can contribute any amount) and ETF shares trade on the open market like stocks. But a mutual fund and an ETF following the same underlying index and charging the same expense ratio should have virtually the same returns.

As for what index funds to pick, if you're just getting started I'd probably choose a total US stock market fund like VTI.  Then as you save more and learn more about investing, you can think about diversifying into a few different types of index funds if you like. 

This may also help you get your bearings: https://portfoliocharts.com/how-to-manage-your-own-portfolio/

Great job getting started!

Bernard

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Re: Help - Index Funds/EFTs?
« Reply #3 on: November 07, 2019, 10:04:32 PM »
For all practical purposes, mutual funds and exchange traded funds are the same. The primary fund for the overwhelming majority of MMMs and Bogleheads is VTSAX (mutual fund) which is equal to VTI (ETF). You could have ALL OF YOUR MONEY in this, and you'd be fine.

VTSAX and VTI are the entire stock market. Every bit of it. Thousands of companies. You'd be moving with the market.
VOO is the S&P 500, meaning the top 500 companies only. I have VTI and VTO, and a few others, but the difference is so minor that it really doesn't matter which one you choose.

Andy R

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Re: Help - Index Funds/EFTs?
« Reply #4 on: November 07, 2019, 10:26:06 PM »
You're mixing up 2 separate dimensions

1. Stock selection style (index-tracking vs actively managed)
2. Investment vehicle that can hold a basket of underlying shares and offer them to be purchased as a single unit (managed fund vs ETF)

You can have

1. Index-tracking ETF
2. Index-tracking managed fund

3. Actively managed ETF
4. Actively managed fund

Unless you can pick which active fund manager will be able to out perform the index into the future (80% fail to do so), then I would stick with index-tracking funds. That is your main decision.

The decision between index-tracking ETF and index-tracking managed fund is almost insignificant relative to the choice of index-tracking vs actively managed.

As for which index, pick one of these and you shouldn't need to do anything else other than save your money each month until you have enough to retire.

Global = VTWAX/VT (first = managed fund, second = ETF, but same underlying fund).
US only = VTSAX/VTI

MDM

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Re: Help - Index Funds/EFTs?
« Reply #5 on: November 08, 2019, 12:10:35 AM »
In all the MMM it says to just invest in index funds....how do I know which ones to pick?
Even after a lot of research online I'm having a hard time distinguishing between Index Funds and EFTs - are they the same thing? A lot the Vanguard funds that I thought were Index Funds seem to be EFTs....
A few references worth reading:
ETFs vs mutual funds
Getting started - Bogleheads
Three-fund portfolio

MustacheAndaHalf

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Re: Help - Index Funds/EFTs?
« Reply #6 on: November 12, 2019, 11:10:17 AM »
The ETF / mutual fund decision matters less than starting.

Over half the value of publicly traded companies is in the U.S.  You can peek at a world fund, and it will show over 50% allocated to U.S.  So starting with a total U.S. stock market investing is probably safe.  it's familiar - it's every company you already know (Microsoft, Amazon, Apple, Google, Facebook, ...) and many you don't.  So I'd start there.

I personally favor ETFs.  A downside of mutual funds is that when you sell, you get the price at the end of the day - not now.  With ETFs, you get the stock price from right now.  With mutual funds, you can invest every last dollar.. you can have fractional shares - you can't with an ETF.  If you buy VTI, that means whatever can't buy $150/share sits idle.. up to $149 or so.  Over time that matters less.

Let's say you put $1,000 in today.  One possibility is the stock market goes up 1% in 2 months.  If you decide to switch investments, you would sell it at $1,010.  Then you buy something else.  At tax time, your $10 profit would be taxable, so you'd pay 22% (median tax bracket) or $2.20 in taxes.  As an aside, if you hold investments for over a year, your tax rate drops to 15% (most people), or just $1.50 in taxes.  So once you buy something, you can sell it later and take a loss or gain - the IRS shares in it, either way.

Good luck - hope you start investing.