ETF's or Mutual Funds?

[kork13]

I finally convinced myself and have pulled the trigger -- I'm moving my investments over to Vanguard, a decision that I've been contemplating for probably at least a year. Now I'm just trying to figure out what to do with it, particularly with regard to my regular (taxable) investments. I'm trying to decide between using ETF's or mutual funds. I'd be investing comparably in either case, basically looking at the ETF versions of the MF's I'm considering. Perhaps I'm just thinking out loud here, please forgive me if so...

Here are the relevant benefits I see between both options:
ETF's:
- Some have lower expense ratio's (I'm mostly comparing ETF's to Admiral MF's)
- More control/flexibility
- No minimum amounts for recurring buys (per my current allocation, I would want to add only $50/mo into one of the ETF's/funds, and most of the MF's have a $100 minimum contribution)
- "Room to learn"... I've never done any sort of active trading (previously only MF's), so even the concept of using limit orders is new to me. I think I would definitely learn alot over time.
MF's:
- Simplicity.
- Able to set up regular, automatic investment amounts

I like the idea of using ETF's, but I guess I just hesitate due to not quite knowing how to make it work best for me. So using MF's is the easy road, if I "chicken out" of using the ETF's right now.

Any thoughts or recommendations? Would it possibly make sense to use both? Or for me as an inexperienced ETF trader (vice being comfortable w/MF's), is going the ETF route potentially a bad choice right now?

[disneysteve]

Are you looking to trade or invest? If you want to buy and sell, then ETFs are the way to go. If you are looking for long-term investing, ETFs offer some advantages as long as they are commission-free. Tax efficiency, lower expenses and lower minimums are among those advantages.

I don't own any ETFs because they weren't really around when I started investing and until just recently, weren't commission-free so it didn't make sense to use them for a DCA investing plan. If I were starting out today, I'd probably use them.

[jpg7n16]

I wouldn't really recommend investing in something you don't know much about.

If you'd like to learn about ETFs, there are a lot of good resources out there:
ETF/ ETP Research - Fidelity Investments

https://personal.vanguard.com/us/whatweoffer/etfs

ETF Education - ETF Center - Yahoo! Finance

For a side-by-side comparison at your firm:

https://personal.vanguard.com/us/whatweoffer/etfs/mutual-fund-vs-etf

Once you learn a little more about them, there are a lot of benefits.

[kork13]

I'm looking at it generally for the mid-term, though with no specific goal or timeline in mind. Honestly, although the trading part is interesting to me, I'm truly more concerned with just being able to invest regularly. I don't follow the day-to-day gyrations of the market very closely, so that does lean me away from the trading side... Also, not being able to schedule automatic purchases seems like a bit of a hassle.

I am working to learn more about how ETF's work. I understand them in principle, just not as much specifically in the execution or strategy of trading... Again, that's partly my interest in them -- so I can start to learn about all of that. I've never actively traded (only ever used MF's), so there's a fair amount for me to learn there.

Would it be crazy of me to use MF's for my regular monthly investing, then use ETF's to dabble in trading? Or would it make more sense to just go strictly with the ETF's?

[disneysteve]

not being able to schedule automatic purchases seems like a bit of a hassle.

Would it be crazy of me to use MF's for my regular monthly investing, then use ETF's to dabble in trading? Or would it make more sense to just go strictly with the ETF's?

Does Vanguard not allow automatic investing into ETFs? If that's the case, I wouldn't personally use them for regular monthly investing. I want that to be automatic. I currently have $500/month automatically drawn by Vanguard to fund my taxable account with them. I manually fund our Roths but that isn't done monthly and I don't want or need that to be automatic.

I don't really know anything about using ETFs for trading. Perhaps someone else can answer that one.

[kv968]

I am working to learn more about how ETF's work. I understand them in principle, just not as much specifically in the execution or strategy of trading... Again, that's partly my interest in them -- so I can start to learn about all of that. I've never actively traded (only ever used MF's), so there's a fair amount for me to learn there.

Would it be crazy of me to use MF's for my regular monthly investing, then use ETF's to dabble in trading? Or would it make more sense to just go strictly with the ETF's?

ETF's are good for trading since you can execute any time during trading hours without having to wait until the end of the day like you have to with mutual funds. The major drawback when dollar cost averaging into them is that the commissions will kill you if you're not putting in a substantial amount of money each time. If you use the Vanguard no-fee ETF's, that won't be a problem. The main thing I would pay attention to with them (or anything you trade for that matter) is volume. If the average volume is very low, the bid/ask price could be quite large and you might not get a price you want.

[kork13]

I think I'm pretty much decided on using ETF's as far as occasionally doing some active trading... I like the idea of being able to make a speculation in a particular sector without having to try picking a single specific stock.

But any thoughts on using them for doing regular, recurring investments? I normally add $500-$1000/mo into my investments, so that's where the majority of my time/money would be placed. But are ETF's really practical for doing that?

From what I can tell, DS, no -- Vanguard at least does not allow us to schedule automatic trading events. I suppose this sort of makes sense, because you have to buy in whole shares, and if 50 shares today is $500, 50 shares next month might be $550. But even still, I wish I could do it

I will be exclusively using the Vanguard ETF's, so I'll be avoiding the excessive trading fees there. But kv968, what do you mean by the volume being "very low"? What would be considered "low"? For that matter, where would I even find the volume? Looking on Vanguard's ETF page, I can't find it listed.

While I'm asking questions, here's a few that I'd LOVE to understand if anyone can explain them simply for me:
1) What are "bid" and "ask", and what really matters with that? I understand that the "bid" is what some amorphous buyer is offering, and "ask" is what a seller is asking for. What should all this mean to me?
2) What is a premium/discount, and how does it work?
3) What should the "price/earning ratio" and "price/book ratio" mean to me? Is there a level in either one that is considered "good" or "bad"?
4) Everything has turnover, both in MF's and ETF's, which effectively create capital gains/tax issues over time... How much turnover is good or bad in either case (MF/ETF)?

[jpg7n16]

But any thoughts on using them for doing regular, recurring investments? I normally add $500-$1000/mo into my investments, so that's where the majority of my time/money would be placed. But are ETF's really practical for doing that?

They are just as practical as mutual funds. They're essentially the same thing, they just trade differently.

I will be exclusively using the Vanguard ETF's, so I'll be avoiding the excessive trading fees there. But kv968, what do you mean by the volume being "very low"? What would be considered "low"? For that matter, where would I even find the volume? Looking on Vanguard's ETF page, I can't find it listed.

You're only trading $500-1000 at a time - you don't need to worry about this at all.

'Low Volume' is usually used about penny stocks that rarely trade. A well-known ETF like a Vanguard ETF will trade very frequently throughout the day. Usually to the tune of a few million shares. $500 is prob less than 100 shares. 100/millions = too small to worry about

To find the volume: you just pull up a quote for the symbol. On any site really. For instance: VTI

https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT

Go to Google.com/finance , enter your symbol, hit enter, and this pops up: Vanguard Total Stock Market ETF: AMEX:VTI quotes & news - Google Finance

One of the stats says Vol/Avg - that is the total # of shares traded that day, and the average # of shares traded on any given day. This EFT averages 3.16 million shares a day (at around $63/share). There is a very liquid market for a $500 trade.

While I'm asking questions, here's a few that I'd LOVE to understand if anyone can explain them simply for me:
1) What are "bid" and "ask", and what really matters with that? I understand that the "bid" is what some amorphous buyer is offering, and "ask" is what a seller is asking for. What should all this mean to me?

There's a short video on this Vanguard site you should really watch. It's on the right side and kinda hard to spot (the link is kinda small), but it's a pretty good video. At one point, it talks about the effect of the bid/ask spread, and how that may affect you if you actively trade.

https://personal.vanguard.com/us/funds/etf

Essentially, if you enter a market order, you will always buy at the ask and sell at the bid. You'll notice that ask price is always slightly higher than the current bid. What that means to you is that the small difference in prices can eat a little into your earnings. This effect is magnified the more often you trade.

2) What is a premium/discount, and how does it work?

I assume you're familiar with the concept of NAV - since you're a mutual fund investor. Well an ETF is composed of securities - just like a MF - and has it's own NAV as well. However, although a MF always trade at NAV, EFTs trade based on supply and demand.

The premium/discount is a measure of how far away from that NAV the fund is actually trading.

On an actively traded index ETF, this premium/discount is usually always close to $0. But on other less actively traded ETFs, the difference between the two can be significant. It's pretty common to see an ETF trade 5% away from its NAV.

3) What should the "price/earning ratio" and "price/book ratio" mean to me? Is there a level in either one that is considered "good" or "bad"?

This is an age old question. Which is better: a growth stock? or a value stock?

People who believe growth stocks have higher potential for growth believe that high PEs are indications that the company's stock will continue to go up, as the company's earnings continue to go up.

People who believe value stocks are where it's at, believe that if you feel the future earnings are likely to remain stable or even grow - buying at a low PE is like buying your stocks on sale. Low PEs are a good indication that the security may be undervalued, and therefore a good investment long term.

Which is right? That depends on who you ask.

(If you ask me, you should actually evaluate the company itself and determine what multiple the stock should be trading at, based on both historical earnings and projected growth. If it is trading at a multiple less than what you think it should be, then it's a good buy. Using this method, the PE figure is relative to your analysis of the firm, not relative to itself. My point is, a PE of 25 could be too low, and a PE of 7 could be too high.)

4) Everything has turnover, both in MF's and ETF's, which effectively create capital gains/tax issues over time... How much turnover is good or bad in either case (MF/ETF)?

This again depends on who you ask. Usually, a Vanguard client tends to believe that passive index investing is the way to go. They would benefit from low turnover. Low turnover = few trades = lower costs of business = low expense ratios

Though not everyone agrees with that. Some who believe it's possible to do better than the index through active management would feel that if turnover was too low, the managers weren't doing enough trading to make sure the fund performed well.

So to answer your question, you must first answer the question: do you believe that it is better to passively match an established index? or actively manage your portfolio to attempt to outperform the index?

[snafu]

Different country, different rules and different costs BUT while an actively traded MF buys and sells stock within their pecific mandate, the ETF holds a basket of stocks in a specific, stated, market segment like gold bullion, gold stock, base metals, dividend paying stocks, REITS, Utilities...the list is huge. There are segmented Index ETFs for large cap, mid cap and small. ETFs are an excellent vehicle for out-of-country investment since you/nor most investment firms have the same depth in emerging markets, BRIC, China, India, Korea etc.

ETFs also market different types of Bonds at a lower cost than MF.

Bid/Ask: MF determine NAV at the end of trading day; ETFs are sold like stock with price fluctuations minute by minute. You can Ask to buy shares at a stated price just as you would an individual stock. You can offer to Sell all or some of your ETF at a stated price.

The danger of ETFs is the computer trading phenomenon. If the really larger traders decide they are selling "X" it can blind-side you in seconds. I've been near to fainting when they hit our banks one day but by month's end it was all back to normal in line with P/E ratios.

If there are seminars offered by MF salesmen or banks, they can explain details. There are wonderful books which you can order for your Kindle.

[kork13]

Wow, that was perfect. Thanks for the excellent answers, and that video actually was helpful (saw what you meant with "hard to spot"). Clearly alot with investing is "it depends," but understanding the how and why helps.

I think I'm going to mostly stick with the MF's for now, and use those for the majority of my investments...mostly for the ease of use. I'll trade with the segmented/sector ETF's on occasion more for speculative ventures, and I expect I'll start to learn more about the trading aspects as I go. Thanks again, I'm actually looking forward to all this... should be interesting.

[kv968]

You're only trading $500-1000 at a time - you don't need to worry about this at all.

'Low Volume' is usually used about penny stocks that rarely trade. A well-known ETF like a Vanguard ETF will trade very frequently throughout the day. Usually to the tune of a few million shares. $500 is prob less than 100 shares. 100/millions = too small to worry about.

If you're actively trading, low volume will definitely make a difference regardless of the amount you're investing. I'm not implying that a $500-$1k will move the ETF, I'm just saying that if the volume is light enough and you're actively trading, you may not be able to get a good price on the trade. Granted Vanguard's ETF's should have enough action to keep the bid/ask close but some of their ETF's don't trade all that much (i.e MGK, VAW,MGC...at around 65k/day). I doubt even those have a bid/ask discrepancy that you'd have to worry about but it's something to keep in mind.

With all of these ETF's being churned out seemingly daily, volume is one thing you always want to keep in mind. Maybe not with the Vanguard ETF's but just as a general warning, the next time you see that new ETF being rolled out in that "hot, super-hard to reach" market/sector, make sure checking its volume is part of your due diligence.

[kv968]

3) What should the "price/earning ratio" and "price/book ratio" mean to me? Is there a level in either one that is considered "good" or "bad"?

Although jpg did an excellent job of explaning things, let me just put the "P/E ratio" another way...it's basically how much people are willing to pay a company for a dollar of earnings. For example, the P/E on Microsoft is around 10. Which means that people were willing to give up $10 for every $1 of revenue Microsoft generated. Amazon on the other hand has a P/E of about 103 which in this case would clearly show that people think that Amazon has a much greater chance of growing their earnings than Microsoft.

However, as jpg eluded to, you can't just treat these numbers as if they're in a vacuum. You have to do your own research and compare the numbers to other similar companies and/or industries and use your own judgement. There is really no "good" or "bad". I mean I'd personally say a P/E of 103 is extremely bad, but if they can keep up with earnings and growth who am I to say?

And a price/book ratio is basically the price divided by what would be left if you subtracted all the liablities from the all of the assets of the company. The "rule of thumb" with this would be that the lower the number, the more "undervalued" a company. However again, this number has to be taken into consideration with a lot of other variables.

Not to discourage you or anything by any means, but there is no one "go to" number you can look at to truly value a stock. Just keep reading, asking questions and looking at stocks and you'll get a "feel" for what will be important to you.