Mutual Funds vs. ETFs
Dec. 1st, 2018 08:17 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
livingdebMy retirement savings are mostly in index mutual funds in a Roth IRA at Vanguard. However, since I started that IRA, exchange traded funds (ETFs) have been invented. All the cool kids are using them! And there are probably ETF versions of all the mutual funds I have. So I'm wondering whether I should switch to ETFs.
I'm used to mutual funds and I'm used to stocks and I think ETFs are sort of like both, but how exactly? All I really know about ETFs is that instead of trading at whatever price they end up being at the end of the day like mutual funds, they trade in real time, like stocks. I don't really care about that. (I used to prefer real-time trading, but it's kind of freeing just letting go and letting the price be whatever it is.)
So I did some online research on the differences.
Commissions: yes (ETF) vs. no (funds). Except both are commission-free at Vanguard.
Minimums: 1 share (ETF) vs. a dollar amount ($3K for most Vanguard mutual funds).
Price timing: real time (ETF) vs. end-of-day (funds)
Pricing: There's a bid/ask spread for ETFs, but I guess not for funds.
Availability of automatic investments or withdrawals: no (ETF) vs. yes (funds)
Turnover: lower for ETFs, leading to lower taxes (except mine are not taxed)
Expense ratios: lower on average for ETFs--I thought there weren't any, like with stocks. [For the one index I looked up, the expenses were 0.11% (ETF) vs. 0.13 (fund).]
Here's what I do with my funds:
1) Have all dividends automatically reinvested (into fund they came from).
2) Occasionally sell part of some to buy more of others in order to rebalance.
3) Occasionally change which indexes I'm going for or what the proportions are.
4) Occasionally (now that I'm retired) deposit more money (woo, I have "earned income" this year!) or withdraw money (hello, visiting Norway and Spain in the same year).
Here's what I'm still wondering:
1) Dividends - do you get them trickling in as they happen with ETFs or still all at once at the end of the quarter? Hmm, investopedia says quarterly.
2) Costs - how does losing out on the bid ask spread (ETFs) compare to losing out on higher fees (funds)? (Obviously this is highly variable; I don't make many purchases though, and I do currently have a fair amount on which to pay fees.)
3) Shares - Can you buy partial shares of ETFs so that all your money is working for you, or do you have to only buy whole number amounts of shares?
4) Does automatic reinvesting of dividends count as one of the automatic payments or deposits that isn't allowed with ETFs but is allowed with mutual funds? Investopedia says "ETF issuers are required to pay out dividends collected from securities held in their funds. The proceeds from these dividends may be in the form of either a cash distribution or a reinvestment in additional shares (fractional) of the ETF." So, it's possible in some ETFs, but I don't know if it's possible in Vanguard ETFs.
My current feeling is that the differences don't amount to much, so I may as well stick with what I'm doing.
What do y'all use and why?
I'm used to mutual funds and I'm used to stocks and I think ETFs are sort of like both, but how exactly? All I really know about ETFs is that instead of trading at whatever price they end up being at the end of the day like mutual funds, they trade in real time, like stocks. I don't really care about that. (I used to prefer real-time trading, but it's kind of freeing just letting go and letting the price be whatever it is.)
So I did some online research on the differences.
Commissions: yes (ETF) vs. no (funds). Except both are commission-free at Vanguard.
Minimums: 1 share (ETF) vs. a dollar amount ($3K for most Vanguard mutual funds).
Price timing: real time (ETF) vs. end-of-day (funds)
Pricing: There's a bid/ask spread for ETFs, but I guess not for funds.
Availability of automatic investments or withdrawals: no (ETF) vs. yes (funds)
Turnover: lower for ETFs, leading to lower taxes (except mine are not taxed)
Expense ratios: lower on average for ETFs--I thought there weren't any, like with stocks. [For the one index I looked up, the expenses were 0.11% (ETF) vs. 0.13 (fund).]
Here's what I do with my funds:
1) Have all dividends automatically reinvested (into fund they came from).
2) Occasionally sell part of some to buy more of others in order to rebalance.
3) Occasionally change which indexes I'm going for or what the proportions are.
4) Occasionally (now that I'm retired) deposit more money (woo, I have "earned income" this year!) or withdraw money (hello, visiting Norway and Spain in the same year).
Here's what I'm still wondering:
1) Dividends - do you get them trickling in as they happen with ETFs or still all at once at the end of the quarter? Hmm, investopedia says quarterly.
2) Costs - how does losing out on the bid ask spread (ETFs) compare to losing out on higher fees (funds)? (Obviously this is highly variable; I don't make many purchases though, and I do currently have a fair amount on which to pay fees.)
3) Shares - Can you buy partial shares of ETFs so that all your money is working for you, or do you have to only buy whole number amounts of shares?
4) Does automatic reinvesting of dividends count as one of the automatic payments or deposits that isn't allowed with ETFs but is allowed with mutual funds? Investopedia says "ETF issuers are required to pay out dividends collected from securities held in their funds. The proceeds from these dividends may be in the form of either a cash distribution or a reinvestment in additional shares (fractional) of the ETF." So, it's possible in some ETFs, but I don't know if it's possible in Vanguard ETFs.
My current feeling is that the differences don't amount to much, so I may as well stick with what I'm doing.
What do y'all use and why?