4 ms·

Ignorant question: Why ETFs rather than the equivalent mutual funds (which I think are usually available)? I have some sense of the differences, but I've never

by Steuard 10y ago

Ignorant question: Why ETFs rather than the equivalent mutual funds (which I think are usually available)? I have some sense of the differences, but I've never taken the time to figure out the pros and cons. (I've been investing mostly in index funds for the past 15 years or so; ETFs weren't really on my radar when I started.)

tosseraccount 10y ago
For most practical purposes, there's not much difference between ETFs and Mutual Funds. Some point out some greater risk in ETFs because they can lend their securities : http://www.etf.com/etf-education-center/21031-understanding-securities-lending.html http://www.etf.com/etf-education-center/21031-understanding-...
- whamlastxmas 10y ago
  As other person pointed out, mutual funds are much more expensive.
  - xyience 10y ago
    It depends on the mutual fund and the ETF. For Vanguard 500, the VOO ETF and the VFIAX index fund are effectively the same, they even have the same expense ratio. The latter you need $10k upfront though. (VFINX, if you only have between $3k and $10k, has a higher expense ratio.)
    - whamlastxmas 10y ago
      VFIAX is not a mutual fund, it's just the "Admiral" class of the VOO ETF. Admirals shares offer lower expense ratios in many instances, but I guess the VOO expense was already at its floor.
      - tanderson92 10y ago
        VFIAX is a mutual fund. Vanguard holds a patent which allows a dual share class, where the ETFs and mutual funds share the same pool of securities. This allows share conversions from mutual fund->ETF, interestingly. http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7de.html http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...
        whamlastxmas 10y ago
        Not exactly a good argument for mutual funds being the same cost as ETFs though. It's only technically a mutual fund from what I can tell. I see your point though.
        tanderson92 10y ago
        Vanguard's Admiral share mutual funds almost never differ in cost from their ETFs. As for it only "technically" being a mutual fund: consider that VFIAX predates VOO by 10 years. How does that square with VFIAX only "technically" being a mutual fund, when presumably it was a real, honest mutual fund in the years 2000-2010 (before VOO was introduced)
acdanger 10y ago
ETFs are generally cheaper to own in terms of their expense ratios, something like <=1% vs 1% – 3% for mutual finds. It‘s easier to get into and out of ETFs; They trade all day just as a stock does. Mutual funds you enter into at the market‘s close at a price set at that time. Also, ETFs are bit more transparent as to their capital gains taxes costs. Less surprises when you liquidate.
- soVeryTired 10y ago
  Even 1% is a very high total expense ratio.
- Steuard 10y ago
  Yikes! Are there really index funds with 1% expense ratios? I think my Vanguard funds are all under 0.2%, some way under. (I've got the impression that Vanguard's ETF expense ratios are similar or identical to the corresponding fund expense ratios.) Thanks for the overview. I'd heard about the constant trading difference before (I've tended not to think about it, since I'm a buy-and-hold-for-years type). Do you have a sense of how much cost winds up being associated with broker commissions and/or the buy-ask spread? I hadn't been aware of the simpler capital gains situation (thus far, I've just blindly copied down whatever's summarized on the year-end tax statement they provide onto my IRS forms).
  - plandis 10y ago
    Vanguards ETF expense ratios seem to be slightly lower than/on par with the admiral type funds from my experience.
    - tanderson92 10y ago
      Vanguard ETF expense ratios are almost always^* exactly equal to the corresponding admiral type funds. The reason is because Vanguard holds a patent on the dual-share class[1] idea, where the ETF and admiral share mutual fund are precisely the same fund. *: The exceptions tend to be new-ish funds which are less liquid and have purchase costs on the mutual fund side. I haven't seen more than one or two of these recently. [1]: http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7de.html http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...

by Steuard 10y ago

tosseraccount 10y ago

For most practical purposes, there's not much difference between ETFs and Mutual Funds. Some point out some greater risk in ETFs because they can lend their securities : http://www.etf.com/etf-education-center/21031-understanding-securities-lending.html http://www.etf.com/etf-education-center/21031-understanding-...

whamlastxmas 10y ago
As other person pointed out, mutual funds are much more expensive.
- xyience 10y ago
  It depends on the mutual fund and the ETF. For Vanguard 500, the VOO ETF and the VFIAX index fund are effectively the same, they even have the same expense ratio. The latter you need $10k upfront though. (VFINX, if you only have between $3k and $10k, has a higher expense ratio.)
  - whamlastxmas 10y ago
    VFIAX is not a mutual fund, it's just the "Admiral" class of the VOO ETF. Admirals shares offer lower expense ratios in many instances, but I guess the VOO expense was already at its floor.
    - tanderson92 10y ago
      VFIAX is a mutual fund. Vanguard holds a patent which allows a dual share class, where the ETFs and mutual funds share the same pool of securities. This allows share conversions from mutual fund->ETF, interestingly. http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7de.html http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...
      - whamlastxmas 10y ago
        Not exactly a good argument for mutual funds being the same cost as ETFs though. It's only technically a mutual fund from what I can tell. I see your point though.
        tanderson92 10y ago
        Vanguard's Admiral share mutual funds almost never differ in cost from their ETFs. As for it only "technically" being a mutual fund: consider that VFIAX predates VOO by 10 years. How does that square with VFIAX only "technically" being a mutual fund, when presumably it was a real, honest mutual fund in the years 2000-2010 (before VOO was introduced)

acdanger 10y ago

ETFs are generally cheaper to own in terms of their expense ratios, something like <=1% vs 1% – 3% for mutual finds. It‘s easier to get into and out of ETFs; They trade all day just as a stock does. Mutual funds you enter into at the market‘s close at a price set at that time. Also, ETFs are bit more transparent as to their capital gains taxes costs. Less surprises when you liquidate.

soVeryTired 10y ago
Even 1% is a very high total expense ratio.
Steuard 10y ago
Yikes! Are there really index funds with 1% expense ratios? I think my Vanguard funds are all under 0.2%, some way under. (I've got the impression that Vanguard's ETF expense ratios are similar or identical to the corresponding fund expense ratios.) Thanks for the overview. I'd heard about the constant trading difference before (I've tended not to think about it, since I'm a buy-and-hold-for-years type). Do you have a sense of how much cost winds up being associated with broker commissions and/or the buy-ask spread? I hadn't been aware of the simpler capital gains situation (thus far, I've just blindly copied down whatever's summarized on the year-end tax statement they provide onto my IRS forms).
- plandis 10y ago
  Vanguards ETF expense ratios seem to be slightly lower than/on par with the admiral type funds from my experience.
  - tanderson92 10y ago
    Vanguard ETF expense ratios are almost always^* exactly equal to the corresponding admiral type funds. The reason is because Vanguard holds a patent on the dual-share class[1] idea, where the ETF and admiral share mutual fund are precisely the same fund. *: The exceptions tend to be new-ish funds which are less liquid and have purchase costs on the mutual fund side. I haven't seen more than one or two of these recently. [1]: http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7de.html http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...