Author Topic: Vanguard ETF or Vanguard index fund?  (Read 10968 times)

Sydneystache

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Vanguard ETF or Vanguard index fund?
« on: December 21, 2013, 03:47:39 PM »
I have been mooting on buying a Vanguard index fund since I found MMM. Preferably VTS as Vanguard's strength is in its US market.

However, just wondering if anyone has bought their ETFs instead of investing in their funds?

At this stage, I am leaning towards an index fund because the Vanguard US ETF (for us Aussies) is currently trading at $106.38 (52 week range from $69-107) though the minimum amount to buy into an index fund is $5000. But of course the US markets are at a high atm and I don't fancy losing 40% on the sharemarket...so for conservative investing I suppose the index fund is the best way to go but wondering if anyone has bought into their ETFs as an alternative. Of course, if you bought it before the current boom then that was a risky strategy that paid off...

KingCoin

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Re: Vanguard ETF or Vanguard index fund?
« Reply #1 on: December 21, 2013, 05:07:25 PM »
This question seems sort of muddled. You might separate it into two questions:

1q) Is it better to invest in the US equity market via an index ETF or an index fund?

2q) Is now a good time to invest in US equities?

1a) The return characteristics of an S&P500 ETF and S&P500 mutual fund will basically be the same. The ETF will give you a little more trading flexibility and might offer a lower minimum, but you'll also rack up more broker fees. You can find a more detailed discussion here, and a google search on the subject will give you plenty of reading material:
http://www.investopedia.com/articles/mutualfund/05/etfindexfund.asp

2a) It's impossible to time the market. No one knows the answer to this question. JP Morgan thinks we see a 20% rally next year, many others think valuations are stretched. Your best bet is to figure out how you want US equities to figure into your portfolio as a whole and stick to an asset allocation strategy.

Sydneystache

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Re: Vanguard ETF or Vanguard index fund?
« Reply #2 on: December 21, 2013, 05:26:34 PM »
Thanks KC for clarifying some of the queries I have and the article. I am currently not exposed to US equities hence I thought buying into Vanguard would be the most conservative way. I have also been looking at State Street ETFs by way of comparison.

wtjbatman

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Re: Vanguard ETF or Vanguard index fund?
« Reply #3 on: December 21, 2013, 06:37:18 PM »
I'm a fan of ETFs. They're tax efficient, have great flexibility, low fees, and best of all there's no minimum purchase. I can carry a basket of ETFs in my account and make sure I have good diversification, without having to worry about a $3000 or $10000 minimum.

Pinball

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Re: Vanguard ETF or Vanguard index fund?
« Reply #4 on: December 21, 2013, 06:52:33 PM »
Vanguard Australia doesn't have a US index available in their managed funds.  Unless I'm missing something on their web site.

So if you want a US equities index, then I think the Vanguard ETF (VTS) is your best option.  I'm in Vanguard ETFs myself.  Their ERs are significantly less for their ETFs (0.15% vs 0.75% on the Australian Shares index VAS.AU).

My only concern is the lack of depth in the ETF market.  Here's how it was trading on Friday:

Vanguard US Total Market (VTS.AU)
5 Buyers 15,368 Shares
4 Sellers 14,997 Shares

Average volume last six months approx 7000.  Can anyone give a run down on possible issues arising from owning low volume, low depth ETFs?
« Last Edit: December 21, 2013, 06:54:14 PM by Pinball »

Sydneystache

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Re: Vanguard ETF or Vanguard index fund?
« Reply #5 on: December 21, 2013, 07:37:18 PM »
You're right PB, they have the International Shares fund

https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailISF.jsp

Which covers the top 22 developed exchanges. But not a US-only fund.

Yeah, the lack of volume is a major liquidity issue. I did buy WDIV.AU last week and it was a buyer's market. I can imagine substantial discounts happening and you are left with a huge loss.

The unit price for the above Vanguard fund is only $1.13 and psychologically I can handle a -20% drop to that unit price because I know my units would be re-invested at that lower price...but a -20% drop on the VTS.AU closing price of $106 takes some sucking up to do and I would think about the opportunity cost of investing in another parcel of less volatile shares...

KingCoin

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Re: Vanguard ETF or Vanguard index fund?
« Reply #6 on: December 21, 2013, 09:23:25 PM »
ETF's will rarely deviate significantly from NAV because the difference can be monetized by arbitrage traders (the process by which this happens probably isn't worth going into). Low liquidity is primarily problematic in that you may have to pay a large bid-offer spread when trading. You can mitigate or even capitalize on this issue by using limit orders rather than market orders (which you should always do when trading illiquid securities).

eyePod

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Re: Vanguard ETF or Vanguard index fund?
« Reply #7 on: December 22, 2013, 07:01:51 AM »
For me, I like investing in nice round numbers so I don't deal with the ETFs.

aj_yooper

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Re: Vanguard ETF or Vanguard index fund?
« Reply #8 on: December 22, 2013, 08:28:06 AM »
ETFs are quick to buy, but they take about 3 days to settle(after a sale) unlike a Vanguard fund where you can sell a fund on one day and be in another fund the same day. 

KingCoin

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Re: Vanguard ETF or Vanguard index fund?
« Reply #9 on: December 22, 2013, 09:16:26 AM »
ETFs are quick to buy, but they take about 3 days to settle(after a sale) unlike a Vanguard fund where you can sell a fund on one day and be in another fund the same day.

I've never dealt with a broker that won't let you buy with anticipated proceeds from a sale.

CB

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Re: Vanguard ETF or Vanguard index fund?
« Reply #10 on: December 22, 2013, 09:22:33 AM »
ETFs are quick to buy, but they take about 3 days to settle(after a sale) unlike a Vanguard fund where you can sell a fund on one day and be in another fund the same day.

This hasn't been true for me.  As long as I'm making the sale/purchase within my Vanguard brokerage account the proceeds of an ETF sale are available as soon as the transaction completes (within seconds for a market trade).  If you want to sell an ETF and then use the proceeds to purchase a mutual fund you may have wait until the settlement date.

aj_yooper

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Re: Vanguard ETF or Vanguard index fund?
« Reply #11 on: December 22, 2013, 09:59:59 AM »
ETFs are quick to buy, but they take about 3 days to settle(after a sale) unlike a Vanguard fund where you can sell a fund on one day and be in another fund the same day.

I've never dealt with a broker that won't let you buy with anticipated proceeds from a sale.

Not allowed at Vanguard in a tax deferred account.

Edit:  Forbes article on ETFs:  http://www.forbes.com/sites/feeonlyplanner/2011/05/16/an-etf-quirk-that-could-hurt-your-portfolio/
And, Rick Ferri's comments:  http://www.rickferri.com/blog/investments/how-well-do-you-know-etfs/
« Last Edit: December 22, 2013, 11:31:04 AM by aj_yooper »

Sydneystache

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Re: Vanguard ETF or Vanguard index fund?
« Reply #12 on: January 03, 2014, 05:51:26 AM »
Just to bookend this thread, I have gone for the Vanguard International Shares Fund instead of their ETF. Given my luck the fund will probably lose 20% in the first year but I hope it is not as costly as when I invested in an HSBC China managed fund a decade ago. The investment horizon is 7 years so we'll see how it goes. Hope the Vanguard fund has some good exposure to UK equities...