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Schwab Pulls Trigger On Commission-Free ETF Price War–And Fidelity Fires Back
Fidelity Investments has expanded its platform to let loose a new volley of more than 500 commission-free ETFs and as of February 28, 2019, additional iShares ETFs.
Can anyone explain why they use managed mutual funds that cost you 1-2% to own when the same or likely better returns can be had with these no commission index funds? The selection is huge. I own managed funds but I often wonder why.
There are many here that collect 30, 40, 50+ mutual funds. That just has to dilute any manager affect. Wouldn't it? Why do we continue to believe we get better returns from a collection of higher cost investment vehicles when most all data suggests otherwise?
In saying that, I argued for a long time managers could "steer the ship" for a smoother, higher return ride. I don't believe it anymore. I have not totally jumped on the ETF band wagon myself but I may. I still believe for very specific funds a manager or formula can add value, for example I wouldn't give up the management at PRWCX just yet or the secret ingredient in the CAPE fund DSENX. But other than that I think I have to break away from this paradigm in believing managers can beat these no cost ETFs.
What do others think? What are the reasons to use managed funds over free ETFs?
MikeM, I believe in investing only in 4-7 funds using indexes + managed funds. Generally, for stocks, I prefer indexes but I prefer managed bond funds with great managers. There are only several managed funds I would own over stocks indexes and it's not a surprise that you mentioned 2 of them PRWCX+DSEEX.
@FD1000, what managed bond funds do you use? Right now I hold 2 bond mutual funds, IOFAX and MAINX. I've pulled out of bonds quite a bid in the last 6 months and put that money into 1-2 year CDs. The rise in CD rates has stalled and now I think CD rates aren't going to catch fire for a while. Some of my cash has made it's way to a gold ETF play also.
@Mike - You asked "What do others think? What are the reasons to use managed funds over free ETFs?"
If I had to guess I think it's because folks like being 'sold' something. It's gotta be worth something or a better deal if you pay for it right? Bottom line - I dunno.
You're starting with a number of questionable assumptions: - that ETFs are all passively managed index funds - that my managed funds cost over 1% - that mutual funds (as compared with ETFs) are actively managed, or even that they cost more than ETFs
I've said before that all else (or at least ERs and transaction costs) being equal, I'll take the mutual fund format over the ETF format because I don't risk tracking error (i.e. the part of tracking error from market price not matching NAV) and I'm not charged SEC Section 31 fees.
So I'll rewrite your question as: What are the reasons to use managed funds over index funds?
Almost none of the funds I own cost over 1%. I own a number of actively managed Vanguard funds that cost around ⅓% or less. My two largest Vanguard holdings (which I've had for several years if not decades) continue to outperform; my newest (held for a couple of years) is still subject to reconsideration.
What would you suggest for small cap int'l? That's where I've had the most difficulty finding good, inexpensive funds. There's always VFSAX if one wants an index fund (or its ETF share class VSS if one insists), but one ought to be able to do better in this category. VINEX doesn't exactly excite, and ACINX has not done well for years. There are DFA funds (available through VAs, HSAs, etc.), but they're hard to get.
If one is willing to go up a bit in price, the stalwart PRIDX continues to roll along. Do you feel that index funds will do better than this?
What index fund do you feel would do a better job than RPHYX as a cash alternative? (Despite the high cost of RPHYX.)
Lots of reasons to hold managed funds - low cost ones can do well, some categories are not amenable to indexing, some funds are unique.
Still, I agree that it's getting harder to beat index funds, and over the next decade or two I'll likely shift more investments into index funds.
Lots of reasons to hold managed funds - low cost ones can do well, some categories are not amenable to indexing, some funds are unique.
@msf, thanks for the input. I agree with 2 of your points, "some categories are not amenable to indexing, some funds are unique". FD1000 mentioned that bond funds are a category that needs a good manager. You, bring-up SmallCap International as not being amenable to Indexing. I mentioned a great balanced fund like PRWCX and a unique fund like DSENX that continues to outperform the S&P 500. I think we are on the same page.
But I contend, the vast majority of funds talked about here, especially Domestic equity funds would probably best be held in zero cost index funds. Do you agree with that?
And a secondary point I was trying to make... holding a collection of funds in the same category is no different than holding a very high cost index fund. I tried to be subtle, but that's what I believe.
Taken to its extreme, the argument that owning multiple funds in a category is no different than buying an index fund (albeit at higher cost) leads one to say that a fund with multiple managers is like an index fund.
Okay, that's a little harsh because funds can be run where managers must agree on investments, thus there are not multiple "portfolios" at work in these funds. But in many cases, team managers may run separate portfolios. For example, Capital Group (American Funds) teams "Divid[e] each fund into independently run sleeves ..." https://www.americanfunds.com/individual/our-company/capital-system.html
Other funds are explicitly run by multiple management companies (with their own sleeves) for the purpose of providing different approaches. For example, VWILX is run by two management companies, Schroders with a GARP approach and Balllie Gifford which is more growth oriented.
Investing in complementary styles doesn't mean buying everything. Different managers have different skills and may add value in different parts of the market (e.g. large cap and small cap). Likewise, multiple managers may add value even within what one might consider the same part of the market, as with VWILX.
That said, someone who collects lots of funds in one section of the market simply because they are good funds is likely to be getting close to buying that whole section of the market. I agree that looks a lot like buying a high priced index fund. I try to keep the number of funds I use in any part of the market down to a couple. I don't feel that constitutes a "collection".
I fundamentally disagree with the premise that zero cost index funds are better than low cost index funds. When I buy index funds, I look at how the index is constructed and how well the management company executes. I feel these factors are much more significant than a few basis points.
To be blunt, IMHO zero cost is more sizzle than steak. The zero cost index funds that are offered for retail purchase are untested and proprietary, making examination of their construction virtually impossible.
M* shows 22 zero cost index funds: the four Fidelity ZERO funds (FZROX has underperformed FSKAX by 66 basis points over the past three months ending Feb 13); seven Fidelity Flex or Series funds (not available to retail investors); three class W TIAA funds (not available to retail investors except via non-zero ER shares), and a slew of Wells Fargo factor based funds (available only through managed advisory programs).
So it looks like we're talking about just four funds (or three if we restrict to domestic equities). I prefer to think outside this (extremely small) box.
Comments
Above is the no cost ETFs from Schwab.
Can anyone explain why they use managed mutual funds that cost you 1-2% to own when the same or likely better returns can be had with these no commission index funds? The selection is huge. I own managed funds but I often wonder why.
There are many here that collect 30, 40, 50+ mutual funds. That just has to dilute any manager affect. Wouldn't it? Why do we continue to believe we get better returns from a collection of higher cost investment vehicles when most all data suggests otherwise?
In saying that, I argued for a long time managers could "steer the ship" for a smoother, higher return ride. I don't believe it anymore. I have not totally jumped on the ETF band wagon myself but I may. I still believe for very specific funds a manager or formula can add value, for example I wouldn't give up the management at PRWCX just yet or the secret ingredient in the CAPE fund DSENX. But other than that I think I have to break away from this paradigm in believing managers can beat these no cost ETFs.
What do others think? What are the reasons to use managed funds over free ETFs?
If I had to guess I think it's because folks like being 'sold' something. It's gotta be worth something or a better deal if you pay for it right? Bottom line - I dunno.
- that ETFs are all passively managed index funds
- that my managed funds cost over 1%
- that mutual funds (as compared with ETFs) are actively managed, or even that they cost more than ETFs
I've said before that all else (or at least ERs and transaction costs) being equal, I'll take the mutual fund format over the ETF format because I don't risk tracking error (i.e. the part of tracking error from market price not matching NAV) and I'm not charged SEC Section 31 fees.
So I'll rewrite your question as: What are the reasons to use managed funds over index funds?
Almost none of the funds I own cost over 1%. I own a number of actively managed Vanguard funds that cost around ⅓% or less. My two largest Vanguard holdings (which I've had for several years if not decades) continue to outperform; my newest (held for a couple of years) is still subject to reconsideration.
What would you suggest for small cap int'l? That's where I've had the most difficulty finding good, inexpensive funds. There's always VFSAX if one wants an index fund (or its ETF share class VSS if one insists), but one ought to be able to do better in this category. VINEX doesn't exactly excite, and ACINX has not done well for years. There are DFA funds (available through VAs, HSAs, etc.), but they're hard to get.
If one is willing to go up a bit in price, the stalwart PRIDX continues to roll along. Do you feel that index funds will do better than this?
What index fund do you feel would do a better job than RPHYX as a cash alternative? (Despite the high cost of RPHYX.)
Lots of reasons to hold managed funds - low cost ones can do well, some categories are not amenable to indexing, some funds are unique.
Still, I agree that it's getting harder to beat index funds, and over the next decade or two I'll likely shift more investments into index funds.
But I contend, the vast majority of funds talked about here, especially Domestic equity funds would probably best be held in zero cost index funds. Do you agree with that?
And a secondary point I was trying to make... holding a collection of funds in the same category is no different than holding a very high cost index fund. I tried to be subtle, but that's what I believe.
Okay, that's a little harsh because funds can be run where managers must agree on investments, thus there are not multiple "portfolios" at work in these funds. But in many cases, team managers may run separate portfolios. For example, Capital Group (American Funds) teams "Divid[e] each fund into independently run sleeves ..."
https://www.americanfunds.com/individual/our-company/capital-system.html
Other funds are explicitly run by multiple management companies (with their own sleeves) for the purpose of providing different approaches. For example, VWILX is run by two management companies, Schroders with a GARP approach and Balllie Gifford which is more growth oriented.
Investing in complementary styles doesn't mean buying everything. Different managers have different skills and may add value in different parts of the market (e.g. large cap and small cap). Likewise, multiple managers may add value even within what one might consider the same part of the market, as with VWILX.
That said, someone who collects lots of funds in one section of the market simply because they are good funds is likely to be getting close to buying that whole section of the market. I agree that looks a lot like buying a high priced index fund. I try to keep the number of funds I use in any part of the market down to a couple. I don't feel that constitutes a "collection".
I fundamentally disagree with the premise that zero cost index funds are better than low cost index funds. When I buy index funds, I look at how the index is constructed and how well the management company executes. I feel these factors are much more significant than a few basis points.
To be blunt, IMHO zero cost is more sizzle than steak. The zero cost index funds that are offered for retail purchase are untested and proprietary, making examination of their construction virtually impossible.
M* shows 22 zero cost index funds: the four Fidelity ZERO funds (FZROX has underperformed FSKAX by 66 basis points over the past three months ending Feb 13); seven Fidelity Flex or Series funds (not available to retail investors); three class W TIAA funds (not available to retail investors except via non-zero ER shares), and a slew of Wells Fargo factor based funds (available only through managed advisory programs).
So it looks like we're talking about just four funds (or three if we restrict to domestic equities). I prefer to think outside this (extremely small) box.
Zero Cost ETFs is a right. We needed them so badly.
Coming next. Free asset allocation advice on how to use those Zero Cost ETFs.