Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

funds and their ETF twins

edited December 2013 in Fund Discussions
Started managing my some family member's retirement accounts in April after just passively letting target date funds do all the heavy lifting for several years. My fiancé is looking at putting some (40%) of her general cash holdings into the market and was looking at two different indexes. SWTSX and SCHB the Schwab (her brokerage) total market mutual fund and it's etf twin. It's a taxable account that she doesn't plan on dipping into for many years and I'm trying to figure out why one would invest in one or the other and the tax implications.

Comments

  • Welcome to MFO jlev,
    You will likely receive an answer regarding tax implications between the funds you noted; I can not provide a worthy statement about this.
    I will ask as to whether your fiancé has a Roth IRA into which this money could be placed? This takes care of the tax situation, as you noted her not needing access to the cash for many years.
    The scenario may be different if the cash investment may be required for other purposes, prior to a retirement period.
    Does she have any retirement accounts with ongoing contributions?

    Regards,
    Catch
  • Thank you for the welcome. Excited to participate after listening for many months. She started a Roth this year after some recent prompting and has maxed out her yearly contribution. There are other retirement accounts with ongoing contributions which were also just set up, but her rainy day fund is substantial and could be better used.
  • These two funds track different indexes. It seems to me the first question is which index are you interested in - a DJ index of all US stocks that have readily available prices, or and index that takes "just" the largest 2500 of these. It's sort of like asking do you prefer an S&P 500 index fund or a total US market index fund.

    For a discussion of that particular comparison, see this M* article. The article's bottom line: "It comes down to whether you're willing to accept a small step up in volatility with a total market index fund for a potential small step up in performance."

    Given that you're talking about the largest 2500 stocks, not just 500 of the largest, the difference between the two indexes' performance and risk should be smaller. Likewise, one can see why there might be slight differences in tax efficiency, but hardly worth worrying about. Total market indexes don't add or drop stocks generally except for companies going public or going bust, unlike a list of the largest 2500 stocks, which can change simply because a company grew or shrank in size. So a total market index should have lower turnover.

    On the other hand, an ETF is theoretically slightly more tax efficient than an equivalent open end fund, lessening the impact of SCHB's slightly higher turnover (5% vs 3% per prospectuses).

    To be clear - these two funds are not twins. They track different indexes. The additional equities in the larger index (total market) are tracked via sampling, not full replication. I'm assuming that since both indexes come from the same indexer their methodology is the same, so index construction isn't an issue.

    If you like the ETF format or the fact that the ETF does less sampling (i.e. comes closer to full replication), or it is slightly lower cost, then pick that one. If you like the open end fund format or the fact that the index it tracks includes every last stock (even if the fund doesn't), or that this should make the fund slightly more tax efficient, pick that one.
  • Reply to @catch22: Congratulation on becoming MFO's official greeter.
    Regards,
    Ted
  • Thank you all. That clarifies things a bit. I'll need to investigate how they work their sampling magic. But this is a start.
Sign In or Register to comment.