Taxable Account - Index Mutual Fund vs ETF

[RJC]

I'm having a hard to deciding on which to put in a taxable account - a S&P 500 index mutual fund with a E/R of 0.015% or a S&P 500 ETF with a E/R of 0.04%. I've heard ETFs are more tax efficient but in this case it has a higher E/R. How does one compare?

Pretty new to all this so any help would be greatly appreciated.

[terran]

Vanguard mutual funds are just as tax efficient as their ETFs thanks to a patent they hold. Is the mutual fund you're looking at VFIAX?

My Accounts are at Fidelity, so I use iShares ETFs which trade fee free there as, unlike Vanguard, Fidelity mutual funds are sometimes forced forced to distribute capital gains.

Why S&P 500 instead of a total market fund would be my bigger question?

[RJC]

Vanguard mutual funds are just as tax efficient as their ETFs thanks to a patent they hold. Is the mutual fund you're looking at VFIAX?

My Accounts are at Fidelity, so I use iShares ETFs which trade fee free there as, unlike Vanguard, Fidelity mutual funds are sometimes forced forced to distribute capital gains.

Why S&P 500 instead of a total market fund would be my bigger question?

That is a good question. I've only had experience with the S&P 500 for my retirement accounts so I figured I would do the same. Does a total market fund have better returns?

I'm also in Fidelity because of my work accounts. I was thinking about either the iShares Core S&P500 ETF (IVV) or the Fidelity 500 Index Fund (FXAIX).

[dandarc]

Skewing towards small-cap historically has had better returns (and higher risk) - total market gets you some mid-small cap exposure, and at Vanguard at essentially the same cost. VTSAX is something like 80% S&P500, 20% extended market.

Don't let perfect get in the way of good. Pick one and run with it. Since you're looking at non-vanguard funds, you might go ETF if that would ease your mind regarding the possibility of unexpected capital gains distributions.

I know we've been drilled to think that lower ER is the most important thing, almost to the exclusion of other factors. And at 1% or 2% vs. 0.1%, ER is a pretty big deal. 0.04% to 0.015% isn't nearly as big a deal. Vanguard funds tend to slightly out-perform the competition even at slightly higher ER's because there are costs that aren't included in ER, and that patent that terran mentioned.

[terran]

Well, that's the billion dollar question isn't it? If the 500 largest companies in the country outperform all the other companies in the country then an S&P 500 fund will have higher returns. But if all those other upstart companies that aren't among the 500 largest outperform the big guys, then a total market index will have higher returns. Of course, if the little guys outperform then a mid and/or small cap index will have higher returns than either.

That's just the point though: we don't know, and no one else knows either or they'd be making all kinds of money short selling sectors, so all we can do it pick the broadest index we can and capture the average return of the market and that's where a total market index comes in. Some people who go all S&P 500 might do better than us (or they might do worse). Some people who go all small cap might do better than us (or they might do worse). Some people who bet it all on soybean futures might do better than us (buy they'll probably do worse). Going for as much diversification as you can within well regulated markets is the way to go.

Take a look at ITOT for domestic and IXUS for international. Both total market ETFs that trade free free at Fidelity. Between them you could capture the return of just about every publicly traded company in the world.

[RJC]

Skewing towards small-cap historically has had better returns (and higher risk) - total market gets you some mid-small cap exposure, and at Vanguard at essentially the same cost. VTSAX is something like 80% S&P500, 20% extended market.

Don't let perfect get in the way of good. Pick one and run with it. Since you're looking at non-vanguard funds, you might go ETF if that would ease your mind regarding the possibility of unexpected capital gains distributions.

I know we've been drilled to think that lower ER is the most important thing, almost to the exclusion of other factors. And at 1% or 2% vs. 0.1%, ER is a pretty big deal. 0.04% to 0.015% isn't nearly as big a deal. Vanguard funds tend to slightly out-perform the competition even at slightly higher ER's because there are costs that aren't included in ER, and that patent that terran mentioned.

Re: unexpected capital gains distributions - do you think that would offset the difference in E/R? It's hard to compare these things. Also, with ETFs I have heard that it is more difficult (vs mutual funds) to set up automated dividend reinvestments?

[RJC]

Well, that's the billion dollar question isn't it? If the 500 largest companies in the country outperform all the other companies in the country then an S&P 500 fund will have higher returns. But if all those other upstart companies that aren't among the 500 largest outperform the big guys, then a total market index will have higher returns. Of course, if the little guys outperform then a mid and/or small cap index will have higher returns than either.

That's just the point though: we don't know, and no one else knows either or they'd be making all kinds of money short selling sectors, so all we can do it pick the broadest index we can and capture the average return of the market and that's where a total market index comes in. Some people who go all S&P 500 might do better than us (or they might do worse). Some people who go all small cap might do better than us (or they might do worse). Some people who bet it all on soybean futures might do better than us (buy they'll probably do worse). Going for as much diversification as you can within well regulated markets is the way to go.

Take a look at ITOT for domestic and IXUS for international. Both total market ETFs that trade free free at Fidelity. Between them you could capture the return of just about every publicly traded company in the world.

I will check them out. Thank you!

[appleshampooid]

Re: unexpected capital gains distributions - do you think that would offset the difference in E/R? It's hard to compare these things. Also, with ETFs I have heard that it is more difficult (vs mutual funds) to set up automated dividend reinvestments?

I have heard this brought up a couple times recently, and I can comment on my experience at Schwab. I used to own a ton of ETFs there (all the Schwab-branded ones), and there was no problem re-investing dividends. They would re-invest the exact value of the dividend and buy fractional shares.

I haven't owned too many individual stocks in my time, and I don't think any that have paid dividends, but I think this is pretty standard. Most brokerages don't allow you to by fractional shares as part of a normal transaction, but will allow it in the case of dividend reinvestment.

Perhaps other brokerages aren't as user-friendly in this regard as Schwab, but my gut tells me it works similarly at most places.

[RJC]

Re: unexpected capital gains distributions - do you think that would offset the difference in E/R? It's hard to compare these things. Also, with ETFs I have heard that it is more difficult (vs mutual funds) to set up automated dividend reinvestments?

I have heard this brought up a couple times recently, and I can comment on my experience at Schwab. I used to own a ton of ETFs there (all the Schwab-branded ones), and there was no problem re-investing dividends. They would re-invest the exact value of the dividend and buy fractional shares.

I haven't owned too many individual stocks in my time, and I don't think any that have paid dividends, but I think this is pretty standard. Most brokerages don't allow you to by fractional shares as part of a normal transaction, but will allow it in the case of dividend reinvestment.

Perhaps other brokerages aren't as user-friendly in this regard as Schwab, but my gut tells me it works similarly at most places.

That is good to know. I will ask Fidelity if they can do the same.