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FTI: If you ever wondered whether you should buy a Vanguard index mutual fund or the ETF version … well, the answer can be found in just a couple small numbers. Vanguard homepage Vanguard Index Funds vs Vanguard ETFsNamely, expense ratios and minimum initial investment amounts.
It has a 60 cent swing between high and low. You could do a little research and figure out a limit amount purchase. My experience is that you can pick up a few cents.
One advantage is no short term trading fees on etfs. In fact, Vanguard etfs at Vanguard Brokerage have no transaction fee when buying or selling.
I will say that performance can vary when comparing Vanguard's etf to their comparative managed fund (which wasn't the point of the thread...Ted referenced Vanguard Index funjds...which must be their swedish index offerings).
Just wanted to mention that VHT (etf) compared to VGHCX (managed fund) often performs very differently.
Vanguard index funds have 6 months holding period while the ETFs have none. However, there are limits of how many trading one can have in one year. My account is limited to 6. Other larger accounts may have greater flexibility. I use index funds to gain exposure to certain asset class while the ETFs are for tactical trading with <12 months holding period.
Another reason to buy a Vanguard exchange traded fund is if you are doing so from an account at Fidelity, Schwab, etc etc. At Schwab, you might pay $76 to purchase a Vanguard index fund, Admiral shares, and less than $9.00 to purchase the same exact fund in exchange traded fund format.
For small trades, the ETFs are OK. But for larger trades (say 50K or more) the mutual funds are better because there is no bid-asked spread.
@MOZART325, I'm not 100% certain that the index fund has the advantage there over the exchange traded fund. The index fund has to "pay" the bid-ask spread on every single purchase it makes. How is that fundamentally different than the bid-ask spread on the exchange traded fund?
May need to call in an expert on individual stocks. I don't have the expertise to address this issue, but I'm skeptical of the idea that exchange traded funds have an "additional" bid-ask spread to pay that a traditional index fund does not.
When the daily trading volume is light on sector or narrowly focus ETFs, the ask-bid spreads tend to be large. The converse is true for broad based ETFS with healthy daily trading volume. In addition, the market price may be trading at a premium or a discount depending on the investor sentiment. It is important to recognize the subtle differences in trading. For long term investors the differences is not likely to be as important.
@MOZART325, I'm not 100% certain that the index fund has the advantage there over the exchange traded fund. The index fund has to "pay" the bid-ask spread on every single purchase it makes. How is that fundamentally different than the bid-ask spread on the exchange traded fund?
Suppose you are buying 200K of an open-end mutual fund with 500 million in total assets. You get to buy a pro-rated portion of the 500 million in assets with a zero bid-asked spread. The mutual fund may pay a bid-asked spread when it invests your 200K, but you only pay a small fraction of the cost (200k / 500 million). In other words, all shareholders share the cost of the new purchases.
On the other hand when you invest the 200K in an etf, you pay the entire bid-asked spread which can be quite costly. Typically the cost might be 0.1% or $200 plus commission.
@MOZART325, see above, the 1, 3, 5 and 10-year total return of VTSAX vs. VTI. You don't pay the bid-ask spread as a separate fee or cost. It is reflected in the total return performance. The separate fee is the commission, less than $10 at a discount brokerage, or no commission at Vanguard or TD Ameritrade to buy VTI.
The total return of VTI suggests that the supposed negative effect of the exchange traded fund vs. the traditional index fund has not been realized.
rjb112- I would agree that for a long term buy and hold investor who doesn't trade, the ETF (VTI) is fine. But for an active trader dealing in six figure amounts or greater, the total return figures for VTI would be greatly reduced because of bid-asked "slippage" and commissions. Depends on how much trading is done. For less liquid ETFs, the slippage can be horrible when trading 100K or more.
The index fund has to "pay" the bid-ask spread on every single purchase it makes. How is that fundamentally different than the bid-ask spread on the exchange traded fund?
You guys are talking about two different things here.
1) The index will pay a spread to trade individual securities when it rebalances to its cap weight no matter what the wrapper of the fund. Both index OEFs and ETFs get hit here.
2) ETFs are themselves a listed, tradeable product. They have their own spreads between buyers and sellers, which can vary during a day, but are price controlled so you never see discounts/premiums like you do with CEFs.
You're talking about 1, Mozart 2. If you're using the ETF as a l-t buy and hold tool, the spread won't really matter, as you say. If you're using it as a trading tool, it might as Mozart suggests.
The reason I personally try not to use ETFs is that, for me, they lend themselves to trading.
@mrdarcey, question for you. This is off topic, because it does not apply to Vanguard ETFs vs. Vanguard Traditional Index Funds. Vanguard has a patented, unique structure so that their ETFs are simply a different share class of the identical traditional index fund.
But for non-Vanguard ETFs vs. index funds, the financial press used to be very big on saying that ETFs would have lower taxable distributions than even traditional index funds in the event that a lot of shareholders sold, say in a bear market.
The press would always say that traditional index funds were very tax efficient, but in the event of a lot of selling, say in a bear market, the previously unrealized capital gains would become realized capital gains and affect all shareholders to some extent. Realized capital gains would be distributed to all shareholders of the traditional index funds, including those that did not sell.
But this would not take place in an ETF, because shareholder selling in a bear market would not cause unrealized capital gains to become realized for those in the ETF that did not sell.
I haven't heard this talked about much lately, but it used to be very common.
It's similar to an actively managed fund. If the managers sell a lot of individual stock at a gain [assuming it's not balanced out by other losses], those capital gains get distributed to all shareholders, who have to pay capital gains taxes on them, even though they didn't sell any shares of their mutual fund.
So if you have an S&P 500 traditional index fund, a bad bear market comes and tons of shareholders sell. The "managers" have to sell stocks to generate redemption proceeds. Supposedly that will cause a capital gains distribution to hit even those shareholders that didn't sell.
Comments
https://www.google.com/search?q=VTI&rlz=1C1AVSA_enUS454US460&oq=VTI&aqs=chrome..69i57&sourceid=chrome&es_sm=122&ie=UTF-8
It has a 60 cent swing between high and low. You could do a little research and figure out a limit amount purchase. My experience is that you can pick up a few cents.
You can do the same when you want to sell.
I will say that performance can vary when comparing Vanguard's etf to their comparative managed fund (which wasn't the point of the thread...Ted referenced Vanguard Index funjds...which must be their swedish index offerings).
Just wanted to mention that VHT (etf) compared to VGHCX (managed fund) often performs very differently.
May need to call in an expert on individual stocks. I don't have the expertise to address this issue, but I'm skeptical of the idea that exchange traded funds have an "additional" bid-ask spread to pay that a traditional index fund does not.
Their performance is almost identical.
That tells us a lot.
@MOZART325, I'm not 100% certain that the index fund has the advantage there over the exchange traded fund. The index fund has to "pay" the bid-ask spread on every single purchase it makes. How is that fundamentally different than the bid-ask spread on the exchange traded fund?
Suppose you are buying 200K of an open-end mutual fund with 500 million in total assets. You get to buy a pro-rated portion of the 500 million in assets with a zero bid-asked spread. The mutual fund may pay a bid-asked spread when it invests your 200K, but you only pay a small fraction of the cost (200k / 500 million). In other words, all shareholders share the cost of the new purchases.
On the other hand when you invest the 200K in an etf, you pay the entire bid-asked spread which can be quite costly. Typically the cost might be 0.1% or $200 plus commission.
You don't pay the bid-ask spread as a separate fee or cost. It is reflected in the total return performance. The separate fee is the commission, less than $10 at a discount brokerage, or no commission at Vanguard or TD Ameritrade to buy VTI.
The total return of VTI suggests that the supposed negative effect of the exchange traded fund vs. the traditional index fund has not been realized.
1) The index will pay a spread to trade individual securities when it rebalances to its cap weight no matter what the wrapper of the fund. Both index OEFs and ETFs get hit here.
2) ETFs are themselves a listed, tradeable product. They have their own spreads between buyers and sellers, which can vary during a day, but are price controlled so you never see discounts/premiums like you do with CEFs.
You're talking about 1, Mozart 2. If you're using the ETF as a l-t buy and hold tool, the spread won't really matter, as you say. If you're using it as a trading tool, it might as Mozart suggests.
The reason I personally try not to use ETFs is that, for me, they lend themselves to trading.
@mrdarcey, question for you. This is off topic, because it does not apply to Vanguard ETFs vs. Vanguard Traditional Index Funds. Vanguard has a patented, unique structure so that their ETFs are simply a different share class of the identical traditional index fund.
But for non-Vanguard ETFs vs. index funds, the financial press used to be very big on saying that ETFs would have lower taxable distributions than even traditional index funds in the event that a lot of shareholders sold, say in a bear market.
The press would always say that traditional index funds were very tax efficient, but in the event of a lot of selling, say in a bear market, the previously unrealized capital gains would become realized capital gains and affect all shareholders to some extent. Realized capital gains would be distributed to all shareholders of the traditional index funds, including those that did not sell.
But this would not take place in an ETF, because shareholder selling in a bear market would not cause unrealized capital gains to become realized for those in the ETF that did not sell.
I haven't heard this talked about much lately, but it used to be very common.
It's similar to an actively managed fund. If the managers sell a lot of individual stock at a gain [assuming it's not balanced out by other losses], those capital gains get distributed to all shareholders, who have to pay capital gains taxes on them, even though they didn't sell any shares of their mutual fund.
So if you have an S&P 500 traditional index fund, a bad bear market comes and tons of shareholders sell. The "managers" have to sell stocks to generate redemption proceeds. Supposedly that will cause a capital gains distribution to hit even those shareholders that didn't sell.