Author Topic: ETFs v. Mutual Funds  (Read 6815 times)

CommonCents

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ETFs v. Mutual Funds
« on: August 19, 2013, 12:45:37 PM »
Can you recommend a site/book where I can learn more about ETFs?  My husband was suggesting that I invest in them instead of the (easier to invest in) mutual funds I can get through my bank, USAA.  I don't recall all he explained about them, but I believe he said the tax consequences are better, though perhaps it was just reporting to the IRS that was preferable.

I'm (sadly) sitting on a pile of cash parked under the ING mattress that I'd like to invest.  That said, I don't want to lock up the money in CDs or other similar instruments as we've been looking unsuccessfully for a new home for about a  year and once we find a place, anticipate we might need some of it for expenses/downpayment, etc.

gecko10x

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Re: ETFs v. Mutual Funds
« Reply #1 on: August 19, 2013, 12:55:32 PM »
http://www.bogleheads.org/wiki/ETFs_vs_Mutual_Funds

However, if you need the money in <5yrs, I'd recommend a high-yield savings account of some sort. I use Smarty Pig.

Kazimieras

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Re: ETFs v. Mutual Funds
« Reply #2 on: August 19, 2013, 12:58:38 PM »
I would recommend the Canadian Couch Potato (http://canadiancouchpotato.com/). He is obviously in the wrong country for you, however there is still a lot of advice that is useful for you. He does a good job at simplifying and presenting both sides and when to pick what investment vehicle.

As a translator, think of an RRSP as a 401k. Us Canadians also have what is known as a Tax free savings account (TFSA), I swear there is a US equivalent as well.

CommonCents

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Re: ETFs v. Mutual Funds
« Reply #3 on: August 19, 2013, 01:07:09 PM »
Thanks for the links.  Yes some of the money I anticipate needing in 6-12 months, but I'd like to earn better returns than the 0.75% I'm getting at ING.  Right now, I have about $20,000 to invest. 

daverobev

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Re: ETFs v. Mutual Funds
« Reply #4 on: August 19, 2013, 01:26:06 PM »
An ETF is just a mutual fund that is traded like a stock. There is no *implicit* difference (or at least, I believe that is true in Canada).

Mutual funds: at least the index tracker ones tend to carry a slightly higher MER, but no cost to buy, so you can set up a monthly/biweekly purchase. And you can have fractional units of a mutual fund, and any underlying dividends get reinvested automatically.

Basically mutual funds (decent ones) carry all of the good things that index-tracking ETFs do, but at a wee bit more expensive.

daverobev

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Re: ETFs v. Mutual Funds
« Reply #5 on: August 19, 2013, 01:29:10 PM »
Thanks for the links.  Yes some of the money I anticipate needing in 6-12 months, but I'd like to earn better returns than the 0.75% I'm getting at ING.  Right now, I have about $20,000 to invest.

Ok so figure out how much of that, roughly, you think you're going to need, and invest the rest.

You need to do an investor profile doc thing. Basically you want whole-market trackers, unhedged, ideally international as well as domestic to you, and a chunk of bonds as well probably - depending on your age or risk tolerance. Your-age-as-bonds is a rule of thumb to start with (ie, if you're 30, have 30% as a total market bond fund or ETF), with much of the rest as stocks (perhaps 2/3 of the rest US, 1/3 rest of world). The fine detail doesn't matter too much - the big thing for couch potatoes is having an allocation, having diversification, and sticking at it. No selling when the market crashes!!

gecko10x

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Re: ETFs v. Mutual Funds
« Reply #6 on: August 19, 2013, 01:31:01 PM »
If you're already getting 0.75% at ING, just leave there what you anticipate needing in 6-12mo. You can invest the rest.

Say you invest the whole $20k. Then lose $5k (on paper) 6 months from now and find the house you want, so you pull out $10k for the house. You now have $5k in the market and it must go up 100% to regain your $5k loss. You're better off "missing out" on a couple hundred by keeping that $10k for the house in ING.

Hope that made sense.

CommonCents

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Re: ETFs v. Mutual Funds
« Reply #7 on: August 19, 2013, 02:00:15 PM »
Here's a rough picture of our current assets:
ING/Checking: $22,000 (part of $20K which I'd invest)
Mutual fund: $3000 (part of $20K which I'd invest)
Stocks: $16,000 (trading)
Futures: $55,000
Roth IRA: $88,000 (trading in stocks)
401K: $28,000 (trading in stocks)
Apartment (mortgage free): $400K
2002? 2004? Honda Civic

DH also has approximately:
Retirement: $220K
Savings: $275K

Debts:
Student loans: $95K (a portion is interest free, a portion lower interest than we'd get on a rate for a house so we're not paying it off now)

Age 34/38

I don't really have any bonds in my portfolio, although DH does in his.  He has a buy-and-hold approach while I have mine actively traded.  Of the money above, beyond my $20K, DH has a LOT of money sitting on the sidelines right now in ING or similar, earmarked for a house downpayment, so we're ok if we took a $5K hit in the stock market.  I can always pull back some that's being traded if really needed, because I don't tend to hold those positions for longer than a week.  So needing is a relative term, I wouldn't "need" it in terms of putting food on the table, but might "want" it to buy some things for the house or want it if I didn't want to reduce the cash in the trading account.

daverobev

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Re: ETFs v. Mutual Funds
« Reply #8 on: August 19, 2013, 03:14:51 PM »
Just a humble biased statistically proven.. thing:

You'll be better off buying and holding (investing) rather than trading, in the long run. Unless you are very very lucky. You've probably already heard that, so I won't say any more!

CommonCents

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Re: ETFs v. Mutual Funds
« Reply #9 on: August 19, 2013, 06:05:51 PM »
Thanks daverobev.  I appreciate statistically, that might be the case, but it's worked for me and I even managed to not lose my shirt in the downturn w/no drop in my investments.  My dad has been trading for me, and with 25+ years experience and a lot of financial modeling, he's managed to consistently beat the market.  Of course, past performance is not indicative of future performance, etc. but that applies to any investment in the stock market.  I do want to diversify though (hence my question and trying to learn more so I understand), but I'm happy with trading
(I should also add that the 401k is actually partially traded, and partially invested in stock index funds, so it's a bit less than it appears above.)

livetogive

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Re: ETFs v. Mutual Funds
« Reply #10 on: August 21, 2013, 06:03:18 PM »
for most people I find if you plan on making automatic investments of relatively smaller amounts then mutual funds are the way to go; if you make huge purchases in one shot (like with savings under a mattress) then an ETF is cheaper.

The problem with an ETF is it costs the same to invest regardless of the amount you put in.  So if you deposit $500 every 2 weeks into an ETF that costs $8 to trade then you're effectively paying a 1.6% front end load.

($8 fee / $500 investment = 1.6% fee)

daverobev

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Re: ETFs v. Mutual Funds
« Reply #11 on: August 21, 2013, 07:57:02 PM »
for most people I find if you plan on making automatic investments of relatively smaller amounts then mutual funds are the way to go; if you make huge purchases in one shot (like with savings under a mattress) then an ETF is cheaper.

The problem with an ETF is it costs the same to invest regardless of the amount you put in.  So if you deposit $500 every 2 weeks into an ETF that costs $8 to trade then you're effectively paying a 1.6% front end load.

($8 fee / $500 investment = 1.6% fee)

Fortunately for me, here in Canada there is Questrade that now has commission free ETF purchases. Makes things easy (though I do have a small mutual fund biweekly thing going on too).

kyleaaa

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Re: ETFs v. Mutual Funds
« Reply #12 on: August 22, 2013, 10:20:52 PM »
I would consider investing directly through Vanguard instead. They have low-cost mutual funds and you can buy their ETFs commission-free. It is almost never a good idea to invest through a bank.

As far as ETFs vs mutual funds, ETFs tend to be slightly more tax efficient and slightly less expensive MOST of the time. This doesn't apply to Vanguard mutual funds/ETFs, though.

As for your dad beating the market for the past 25 years, that seems VERY unlikely. More likely, he's just measuring his performance relative to the market incorrectly. The vast majority of time an individual investor thinks they are beating the market, they really aren't. I know people who have worked professionally at hedge funds for a living and still fall into this trap, so it's not something financially-savvy people are immune to.
« Last Edit: August 22, 2013, 10:24:47 PM by kyleaaa »

CB

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Re: ETFs v. Mutual Funds
« Reply #13 on: August 23, 2013, 09:24:40 AM »
The problem with an ETF is it costs the same to invest regardless of the amount you put in.  So if you deposit $500 every 2 weeks into an ETF that costs $8 to trade then you're effectively paying a 1.6% front end load.

If you open a brokerage account with Vanguard you can trade their ETFs all day long with no fees.

Edit: just realized kyleaaa posted almost exactly the same thing.  Sorry for the duplication!
« Last Edit: August 23, 2013, 09:27:51 AM by CB »