Author Topic: Should I be afraid of ETFs?  (Read 10200 times)

FerrumB5

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Should I be afraid of ETFs?
« on: February 19, 2016, 03:11:16 PM »
My DW old employer rolled her over to Fidelity IRA. She has $1130 and all mutual funds start with 2500 minimum investment. However, I can find an ETF that is close to S&P500 and has no minimum investment.
1. No experience with ETF. Are they similar to mutual funds in terms of investment, distributions, etc?
2. Out of these - may be you own one - which one is good?
https://research2.fidelity.com/fidelity/screeners/etf/etfexposure.asp?view=Exposure&index=S%26P%20500%20INDEX

Thanks!

(P.S. we might add to her IRA this year to reach 2500, but not immediately)

johnny847

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Re: Should I be afraid of ETFs?
« Reply #1 on: February 19, 2016, 03:23:53 PM »
There's nothing inherently dangerous about ETFs. The same way that a mutual fund could hold incredibly risky or US government bonds, an ETF can too.

The major difference in ETFs vs mutual funds is that ETFs are traded like stocks during market hours. It takes a little more management because while you can place "market" orders, you really shouldn't because sometimes there are flash crashes. So you should place limit orders (ie, don't sell unless it's at least X, and conversely for buying). And because it's traded like a stock on the exchange, there is a bid/ask spread (you always pay a little more than the actual net asset value, and you always sell for a little less. For a well traded enough ETF, this is negligible).

Since the ETFs you linked are index ETFs, just go with the cheapest one, IVV, at 0.07%.

FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #2 on: February 19, 2016, 03:37:19 PM »
Thanks!
What about IVW? It's an iShares 500 S&P Growth as opposed to IVV (Core).
IVW ER is 0.18% compared to 0.07 IVV. I'm "worried" that IVV is Pharma only

mtn

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Re: Should I be afraid of ETFs?
« Reply #3 on: February 19, 2016, 03:41:25 PM »
A quick look at that list and I'd be putting it all in VOO. But that was literally a 15 second look with zero research. (I think VOO is Vanguard's SP500)

johnny847

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Re: Should I be afraid of ETFs?
« Reply #4 on: February 19, 2016, 03:44:53 PM »
A quick look at that list and I'd be putting it all in VOO. But that was literally a 15 second look with zero research. (I think VOO is Vanguard's SP500)

Oops. I missed that.

I second this recommendation.

FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #5 on: February 19, 2016, 03:49:02 PM »
Of course!!! Banging head on the wall for not seeing it as well

GGNoob

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Re: Should I be afraid of ETFs?
« Reply #6 on: February 19, 2016, 08:19:37 PM »
Here's the list of free ETFs at Fidelity: https://www.fidelity.com/etfs/ishares

I would go with ITOT (US Total Stock Market) which has an ER of 0.03%. For international stocks, you can use IXUS (Total International Stock Market) with an ER of 0.14%. Also, AGG is a great total bond fund with an ER of 0.08%. Those 3 funds will give you your 3-fund portfolio.
« Last Edit: February 19, 2016, 08:21:28 PM by GGNoob »

MustacheAndaHalf

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Re: Should I be afraid of ETFs?
« Reply #7 on: February 21, 2016, 12:29:26 AM »
The name "iShares S&P 1500 Index" ("ITOT") is misleading - it actually holds over 3800 stocks.  It's very similar to Vanguard Total Stock Market ETF ("VTI") in that regard.  The expense ratio difference between them is $14 for every $70,000 you invest.

Note both those funds have billions in assets.  That means when you issue a purchase, it's very likely someone is waiting to sell.  The bid-ask spread is often a penny, and nothing to worry about.  Where ETFs might be a concern is if you see the bid far apart from the ask.  Some ETFs have $0.20 bid-ask spreads, where you could be paying 0.5% away from the mid-point.  So look over the stock quote for the words "bid" and "ask" to see that they're close.  For ETFs with billions of assets, you won't have that problem (like ITOT, VTI, or VOO).

mrpercentage

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Re: Should I be afraid of ETFs?
« Reply #8 on: February 21, 2016, 01:04:08 AM »
Mr % recommends this one, and its not even vanguard :)
https://www.spdrs.com/product/fund.seam?ticker=SDY

FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #9 on: February 21, 2016, 10:35:58 AM »
The name "iShares S&P 1500 Index" ("ITOT") is misleading - it actually holds over 3800 stocks.  It's very similar to Vanguard Total Stock Market ETF ("VTI") in that regard.  The expense ratio difference between them is $14 for every $70,000 you invest.

Note both those funds have billions in assets.  That means when you issue a purchase, it's very likely someone is waiting to sell.  The bid-ask spread is often a penny, and nothing to worry about.  Where ETFs might be a concern is if you see the bid far apart from the ask.  Some ETFs have $0.20 bid-ask spreads, where you could be paying 0.5% away from the mid-point.  So look over the stock quote for the words "bid" and "ask" to see that they're close.  For ETFs with billions of assets, you won't have that problem (like ITOT, VTI, or VOO).

OK, I'm intrigued now. I have no idea how to buy ETFs. What would you suggest? There are limit order, market order, etc. Then another drop down to do smth else. Say, I want to buy on Monday at any price really (my DW has only $1129 there so any spread is meaningless)

What I don't like about ETFs - I just realized it - is that one must buy integer number of shares, meaning that part of your IRA money is not going to work for you.

Telecaster

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Re: Should I be afraid of ETFs?
« Reply #10 on: February 21, 2016, 10:59:17 AM »
The thing I like about the iShares ETFs at Fidelity is most of them (or maybe all of them) are commission free.   That makes it really easy to invest small amounts of money at regular intervals.  For example, if you have some dividend income you can reinvest it in something right away. 

I always just place market orders. 

FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #11 on: February 21, 2016, 11:01:26 AM »
Yes, but you have to invest in varying amounts as price per share changes. Makes it less convenient, or am I missing something and I can buy fraction of ETF just like MUTF?

johnny847

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Re: Should I be afraid of ETFs?
« Reply #12 on: February 21, 2016, 11:13:52 AM »
Yes, but you have to invest in varying amounts as price per share changes. Makes it less convenient, or am I missing something and I can buy fraction of ETF just like MUTF?

Some brokers let you do this.

OK, I'm intrigued now. I have no idea how to buy ETFs. What would you suggest? There are limit order, market order, etc. Then another drop down to do smth else. Say, I want to buy on Monday at any price really (my DW has only $1129 there so any spread is meaningless)

What I don't like about ETFs - I just realized it - is that one must buy integer number of shares, meaning that part of your IRA money is not going to work for you.

Always always always use limit orders. NEVER use a market order. Because flash crashes can occur.
For example, in 2010, the Dow Jones Industrial Average dropped 9% in a matter of minutes. But it subsequently recovered most of it's value.

If you place a market order, then it will execute at the earliest available opportunity, which may be during a flash crash. If you place a limit order, your order will only execute if the ask is at least your specified amount (or conversely, if the bid is no greater than your specified amount).

This is one reason why buying ETFs is inconvenient compared to mutual funds. In order to buy or sell, you should always use a limit order. But you need to set a limit order that is reasonable (ie, if you wish to sell at $50 but the current ask is $25, obviously you're never going to sell that). So to place a reasonable limit order you need to do place it during trading hours. Furthermore, because a limit order is never mathematically guaranteed to execute (though it usually will given enough time), you have to check on it some time later to see if it did in fact execute.

Retire-Canada

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Re: Should I be afraid of ETFs?
« Reply #13 on: February 21, 2016, 11:15:38 AM »
Yes, but you have to invest in varying amounts as price per share changes. Makes it less convenient, or am I missing something and I can buy fraction of ETF just like MUTF?

Where I trade I have to buy full shares of ETFs. Mine are all ~$30/share so across my 3 accounts it's possible I could have a maximum $87 uninvested at any given time. Typically it's more like $30.

Ultimately that's trivial for my overall portfolio and if I really cared I would just transfer a few extra $$ to those accounts and have every dollar invested.

nobodyspecial

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Re: Should I be afraid of ETFs?
« Reply #14 on: February 21, 2016, 12:20:14 PM »
Always always always use limit orders. NEVER use a market order. Because flash crashes can occur.
For example, in 2010, the Dow Jones Industrial Average dropped 9% in a matter of minutes. But it subsequently recovered most of it's value.
This of course is only important for selling, which a Mustachian rarely does.
For a highly liquid ETF (like a vanguard SP500) the only difference between that and a mutual fund is the lower fee and that you are buying in multiples of a share (typically around $30). So you might have upto $30 in cash in your account not working for you ;-)


FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #15 on: February 21, 2016, 12:23:40 PM »
VOO (Vanguard 500) is $176 per share

johnny847

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Re: Should I be afraid of ETFs?
« Reply #16 on: February 21, 2016, 12:33:23 PM »
Always always always use limit orders. NEVER use a market order. Because flash crashes can occur.
For example, in 2010, the Dow Jones Industrial Average dropped 9% in a matter of minutes. But it subsequently recovered most of it's value.
This of course is only important for selling, which a Mustachian rarely does.
For a highly liquid ETF (like a vanguard SP500) the only difference between that and a mutual fund is the lower fee and that you are buying in multiples of a share (typically around $30). So you might have upto $30 in cash in your account not working for you ;-)

There's nothing technically preventing a flash bubble. I'm pretty sure that's never happened before (to an index, not some individual stock), but hey a flash crash never happened until 2010.

Lower fees only apply if you're comparing the ETF version to the investor shares version. The admiral shares version has the same fee as the ETF version (there are a few Vanguard funds that don't have an ETF version, but these are "specialty" funds with relatively low assets).

nobodyspecial

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Re: Should I be afraid of ETFs?
« Reply #17 on: February 21, 2016, 12:53:22 PM »
In Canada we don't have admiral/investor shares, you can't buy from Vanguard directly.
So the choice is buy ETFs for free online or mutual funds from your bank for 2-3%/year

GGNoob

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Re: Should I be afraid of ETFs?
« Reply #18 on: February 21, 2016, 01:00:03 PM »
The name "iShares S&P 1500 Index" ("ITOT") is misleading - it actually holds over 3800 stocks.

ITOT is the Total US Stock Market. I'm not sure where you are getting S&P 1500 Index from.

johnny847

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Re: Should I be afraid of ETFs?
« Reply #19 on: February 21, 2016, 01:07:39 PM »
In Canada we don't have admiral/investor shares, you can't buy from Vanguard directly.
So the choice is buy ETFs for free online or mutual funds from your bank for 2-3%/year

That sucks.

Though of course the OP is in the US.

Retire-Canada

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Re: Should I be afraid of ETFs?
« Reply #20 on: February 21, 2016, 02:07:28 PM »
In Canada we don't have admiral/investor shares, you can't buy from Vanguard directly.
So the choice is buy ETFs for free online or mutual funds from your bank for 2-3%/year

That sucks.

Though of course the OP is in the US.

Well the trade off is you get to live in Canada. I'd say that's a win all things considered. ;)

MustacheAndaHalf

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Re: Should I be afraid of ETFs?
« Reply #21 on: February 22, 2016, 01:37:57 AM »
The name "iShares S&P 1500 Index" ("ITOT") is misleading - it actually holds over 3800 stocks.
ITOT is the Total US Stock Market. I'm not sure where you are getting S&P 1500 Index from.
You're right.  Looks like Google Finance gets it wrong, and also in Google's search results.
The correct name is "iShares Core S&P Total U.S. Stock Market ETF" based on the iShares website.

MustacheAndaHalf

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Re: Should I be afraid of ETFs?
« Reply #22 on: February 22, 2016, 01:51:05 AM »
OK, I'm intrigued now. I have no idea how to buy ETFs. What would you suggest? There are limit order, market order, etc
...
What I don't like about ETFs - I just realized it - is that one must buy integer number of shares, meaning that part of your IRA money is not going to work for you.
If you stick to broad index funds with billions in assets, you can use a market order - you'll pay $90.01 or $90.02 and probably don't care much.

Regarding S&P 500 or Total Stock ETFs, pick the one you like.  There are differences that matter less than doing nothing.  Similarly, trapping $50 in cash until your next ETF purchase isn't a big deal.  Why worry about it with investing, when you don't worry about having an unused $50 in your checking or savings account - or wallet?

If you're nervous about starting, pick two dates and invest half on each of those two dates.  If you have $1127, you invest $563 the first day, and weeks later invest the remaining $564.  Starting will wind up being more important than the market order, VTI vs ITOT, or how much money isn't invested.  Right now 100% of your money is not invested!

NoStacheOhio

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Re: Should I be afraid of ETFs?
« Reply #23 on: February 22, 2016, 05:47:02 AM »
The name "iShares S&P 1500 Index" ("ITOT") is misleading - it actually holds over 3800 stocks.
ITOT is the Total US Stock Market. I'm not sure where you are getting S&P 1500 Index from.
You're right.  Looks like Google Finance gets it wrong, and also in Google's search results.
The correct name is "iShares Core S&P Total U.S. Stock Market ETF" based on the iShares website.

ITOT switched indexes in 2015. It used to be S&P 1500, but now it's TSM.

Emilyngh

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Re: Should I be afraid of ETFs?
« Reply #24 on: February 23, 2016, 06:21:38 PM »

Always always always use limit orders. NEVER use a market order. Because flash crashes can occur.
For example, in 2010, the Dow Jones Industrial Average dropped 9% in a matter of minutes. But it subsequently recovered most of it's value.

If you place a market order, then it will execute at the earliest available opportunity, which may be during a flash crash. If you place a limit order, your order will only execute if the ask is at least your specified amount (or conversely, if the bid is no greater than your specified amount).


Perhaps you are thinking of a stop loss market order specifically?    These were a major problem during the flash crash b/c they are basically a standing order to sell once the price drops to a certain price.   So, having one in place resulted in ETFs being sold during the lows of the crash (exactly when you would not want to sell), and the crash was so quick that by the time the orders were executed they were actually often less than the stop loss price.    I would not keep in place a stop loss market order for an ETF; although the point's moot since I wouldn't have a standing stop loss in place anyway, since I don't time the markets.

However, I think it's entering paranoid un-mustachian territory to be concerned about using general market orders for the once in a blue moon that you're selling an ETF.   The odds that there will happen to be a flash crash during the exact rare window that you choose to sell is so very very unlikely that it's probably not worth worrying about.

johnny847

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Re: Should I be afraid of ETFs?
« Reply #25 on: February 23, 2016, 11:35:20 PM »

Always always always use limit orders. NEVER use a market order. Because flash crashes can occur.
For example, in 2010, the Dow Jones Industrial Average dropped 9% in a matter of minutes. But it subsequently recovered most of it's value.

If you place a market order, then it will execute at the earliest available opportunity, which may be during a flash crash. If you place a limit order, your order will only execute if the ask is at least your specified amount (or conversely, if the bid is no greater than your specified amount).


Perhaps you are thinking of a stop loss market order specifically?    These were a major problem during the flash crash b/c they are basically a standing order to sell once the price drops to a certain price.   So, having one in place resulted in ETFs being sold during the lows of the crash (exactly when you would not want to sell), and the crash was so quick that by the time the orders were executed they were actually often less than the stop loss price.    I would not keep in place a stop loss market order for an ETF; although the point's moot since I wouldn't have a standing stop loss in place anyway, since I don't time the markets.

However, I think it's entering paranoid un-mustachian territory to be concerned about using general market orders for the once in a blue moon that you're selling an ETF.   The odds that there will happen to be a flash crash during the exact rare window that you choose to sell is so very very unlikely that it's probably not worth worrying about.

No, I'm thinking of general limit orders. Stop loss orders are bad too. But if you were to place a market order to sell as a flash crash was happening, you'd be losing out on a bunch of money.


Yes the probability is low. But when avoiding such a problem is completely avoidable with basically no effort---by just clicking limit instead of market, and then typing in a reasonable price---I don't see the logic in saying oh well I'll just trust that this is a rare event and not worry about it.

MustacheAndaHalf

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Re: Should I be afraid of ETFs?
« Reply #26 on: February 23, 2016, 11:50:07 PM »
No, I'm thinking of general limit orders. Stop loss orders are bad too. But if you were to place a market order to sell as a flash crash was happening, you'd be losing out on a bunch of money.
...
Yes the probability is low. But when avoiding such a problem is completely avoidable with basically no effort---by just clicking limit instead of market, and then typing in a reasonable price---I don't see the logic in saying oh well I'll just trust that this is a rare event and not worry about it.
A flash crash of a few minutes has almost one in a million odds over a decade or two.

Also consider the cost of out-guessing the market with a limit order.  You sell at a limit, the market has already moved higher, and you get the limit price instead of the higher market price.  Same thing can happen with a buy order as the market falls - you offer to buy at a higher price than the market offers, then of course it will oblige and charge you extra.

I'm not perfect in this regard, either - I've issued a limit order and got the result I described above.  For ETFs like Vanguard S&P 500 or Vanguard Total Stock Market it doesn't help.  Those are Vanguard two largest ETFs by assets, and they trade constantly at a gap of only a penny.  A market order is within a half penny of the $97 or $175 share price.  If you dictate prices with a limit order, the market can take advantage of your overpriced order.

Emilyngh

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Re: Should I be afraid of ETFs?
« Reply #27 on: February 24, 2016, 06:13:51 AM »

Also consider the cost of out-guessing the market with a limit order.  You sell at a limit, the market has already moved higher, and you get the limit price instead of the higher market price.  Same thing can happen with a buy order as the market falls - you offer to buy at a higher price than the market offers, then of course it will oblige and charge you extra.

I'm not perfect in this regard, either - I've issued a limit order and got the result I described above.  For ETFs like Vanguard S&P 500 or Vanguard Total Stock Market it doesn't help.  Those are Vanguard two largest ETFs by assets, and they trade constantly at a gap of only a penny.  A market order is within a half penny of the $97 or $175 share price.  If you dictate prices with a limit order, the market can take advantage of your overpriced order.

Yup this.   The odds of a flash crash happening during the short window you place your order is so super low that it's pretty much lottery type odds.

However, limit orders are a guaranteed bad bet if the market price moves higher than your limit price, which actually has a realistic probability of occurring.   I disagree that advice to arrange to sell in a way that increases your chances of a relatively likely way to lose money in order to avoid an extremely unlikely "black swan" event that happen during the super short window you're selling is solid mustachian advice.   
« Last Edit: February 24, 2016, 06:16:23 AM by Emilyngh »

FerrumB5

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Re: Should I be afraid of ETFs?
« Reply #28 on: February 24, 2016, 06:49:00 AM »
Thanks to all for input.
So, how should I place this order to buy and hold? Spread of 2 cents does not matter. Looking to buy 6 shares of VOO as it's the closest integer

thd7t

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Re: Should I be afraid of ETFs?
« Reply #29 on: February 24, 2016, 07:10:18 AM »

index

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Re: Should I be afraid of ETFs?
« Reply #30 on: February 24, 2016, 10:10:45 AM »

Also consider the cost of out-guessing the market with a limit order.  You sell at a limit, the market has already moved higher, and you get the limit price instead of the higher market price.  Same thing can happen with a buy order as the market falls - you offer to buy at a higher price than the market offers, then of course it will oblige and charge you extra.

I'm not perfect in this regard, either - I've issued a limit order and got the result I described above.  For ETFs like Vanguard S&P 500 or Vanguard Total Stock Market it doesn't help.  Those are Vanguard two largest ETFs by assets, and they trade constantly at a gap of only a penny.  A market order is within a half penny of the $97 or $175 share price.  If you dictate prices with a limit order, the market can take advantage of your overpriced order.

Yup this.   The odds of a flash crash happening during the short window you place your order is so super low that it's pretty much lottery type odds.

However, limit orders are a guaranteed bad bet if the market price moves higher than your limit price, which actually has a realistic probability of occurring.   I disagree that advice to arrange to sell in a way that increases your chances of a relatively likely way to lose money in order to avoid an extremely unlikely "black swan" event that happen during the super short window you're selling is solid mustachian advice.   

You should ALWAYS use a limit order due to liquidity. Say you buy 1000 shares of VTI at a limit price of $95. Your broker advertises to buy 1000 shares at $95 or less. If the market price drops below the limit price the order becomes a market order; if it goes above $95 your broker buys shares as they become available at $95.

If you use a market order your broker says i want 1000 shares. He may buy 100 for the market price of $95 but then there are no more available for sale at 95 so he buys another 200 from the next guy offering them for $95.01, the next 400 for 95.03 and so on.

An erant market order was actually the reason for the flash crash several years ago. Someone fat fingered a sell order for millions of shares of an large company; I think it may have been JNJ. They sold millions of shares at market price at once. The first 100,000 shares were gobbled up at market price but there were not enough buyers at $55 so the price moved to $54 then $53 then $50 and so on. The company was a DOW component which caused a large move in the index and triggered other sell orders and all hell broke loose. 

It probably not a big deal to use market orders for a few shares of highly liquid ETFs, but it is in general considered a bad idea. Most professional trading platforms don't even give the option to enter a market order.

bacchi

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Re: Should I be afraid of ETFs?
« Reply #31 on: February 24, 2016, 12:36:12 PM »
I beat the odds and got hit with a flash crash sell. Luckily, the broker busted the trade and I was made whole.