ETF vs. Index MF

[kork13]

So I'm planning to use the majority of our taxable investments to buy our next house either in cash, or hopefully set us up to pay it off very quickly. While I'm basically emptying our taxable account anyway, I'm looking at potentially rejiggering how we manage our taxable investments. The bottom line question is basically "ETF vs. Index MF."

I'm trying to decide if I should transition our taxable investments from index mutual funds into comparable ETFs instead. We're in a good place on the retirement side (could stop saving in retirement accounts today and do just fine), but we need to build up some bridge investments over the next 15-20 yrs to enable us to retire early, basically whenever we want.

What I'm considering are already pretty low-cost, fairly tax-efficient options, regardless of ETF vs. Index MF -- VOO/VO/VB/VXUS/VNQ and their associated index MF's (VFIAX/VIMAX/VSMAX/VTIAX/VGSLX)

ETF Pros:
- More tax-efficient (low-to-zero taxable capital gains)
- Slightly lower ER costs (1-4 bp's)
- Trade as stocks (limit orders give slightly more control over buy/sale price & timing...minimal concern for me)

ETF Cons:
- No auto-investment option (more hands-on)
- No round-dollar investing (mostly just bothers the OCD side of my brain)
- No fractional shares, so money can be left sitting around in cash

Not necessarily cons, but the other two things that I'm trying to wrap my head around that make me slightly hesitant to go full-bore into ETFs is that I don't fully understand the impact of the 'bid-ask spread' between seller/buyer, and 'discount/premium' between share price & NAV.

So who does regular investing with ETFs? Is having to go in & manually buy all of your shares every few weeks worth the tax efficiency & slightly lower ER's offered by the ETFs? Or just an unnecessary pain?

[Jluke]

I’ve been adding to VTI in a taxable account for the past two years.

i just look at it as buying whole number shares and what that costs.

I use limit orders to get a price “I like” and invest as many dollars as possible.

I don’t worry about the bid/ask spread but maybe I’m not as savvy as an investor as the folks on bogleheads who make a big deal about it.

I wouldn’t hesitate to invest in ETFs.

but I would limit it to one (or two of you want international) funds

[disneysteve]

So who does regular investing with ETFs? Is having to go in & manually buy all of your shares every few weeks worth the tax efficiency & slightly lower ER's offered by the ETFs? Or just an unnecessary pain?

I put money into a Vanguard ETF every month. It's pretty simple. I log in, do a transfer from our checking account to the settlement fund, and then do the purchase order for the ETF. The whole process takes maybe 2-3 minutes.

You are correct that you can't do fractional shares. What I do is transfer the same amount in every month ($1,600) and then use the share calculator to buy as many shares as I can. Any money left over sits in the settlement fund until the next time.

I've been doing this for a little over a year. It's very quick and easy.

[cypher1]

You are correct that you can't do fractional shares. What I do is transfer the same amount in every month ($1,600) and then use the share calculator to buy as many shares as I can. Any money left over sits in the settlement fund until the next time.

I've been doing this for a little over a year. It's very quick and easy.

I like that setup. I'm pretty content with MFs and prefer the auto-invest option, fractional shares and dollar-round investing with it. But if I was just starting out, and with what I know now, I'd probably have gone the route of ETFs as well.

[kork13]

.but I would limit it to one (or two of you want international) funds

Curious of your thoughts on this... Why restrict the ETFs to just one or two, vs. replacing the entire portfolio with them?

[Jluke]

Curious of your thoughts on this... Why restrict the ETFs to just one or two, vs. replacing the entire portfolio with them?

simply In-line with the Bogle philosophy of the three fund portfolio. Total US, Total International, and a Bond fund.

also would be less work with transactions and deciding which fund the money will go to.

Note: tax efficient placement would not include bonds in a taxable account. I think there are tax managed bond funds though.

[Petunia 100]

simply In-line with the Bogle philosophy of the three fund portfolio. Total US, Total International, and a Bond fund.

also would be less work with transactions and deciding which fund the money will go to.

Note: tax efficient placement would not include bonds in a taxable account. I think there are tax managed bond funds though.

But that would take 3 ETFs, not just 1 or 2.

[Jluke]

But that would take 3 ETFs, not just 1 or 2.

He was asking about the Taxable account only so no bonds in that account.

bonds would be in the 401k or similar.

[Like2Plan]

Not necessarily cons, but the other two things that I'm trying to wrap my head around that make me slightly hesitant to go full-bore into ETFs is that I don't fully understand the impact of the 'bid-ask spread' between seller/buyer, and 'discount/premium' between share price & NAV.

I'm glad you asked this question. I have been wondering about this as well (and don't really understand). Is it possible to order more shares than you can pay for in your settlement account if the price is fluid?

[kork13]

simply In-line with the Bogle philosophy of the three fund portfolio. Total US, Total International, and a Bond fund.

also would be less work with transactions and deciding which fund the money will go to.

Note: tax efficient placement would not include bonds in a taxable account. I think there are tax managed bond funds though.

That makes sense. I'm basically thinking to work loosely off of the 3-fund portfolio, but modifying it to slant more toward the mid-/small-cap stocks (understanding and accepting the somewhat higher risk profile), as well as adding REITs to the mix. Last, as you point out, saving bonds for non-taxable accounts, though I may look into the idea of a tax-managed bond fund... (okay, very loosely)

But you're right, the added work of handling multiple ETFs is alot of my concern.

[kork13]

I'm glad you asked this question. I have been wondering about this as well (and don't really understand). Is it possible to order more shares than you can pay for in your settlement account if the price is fluid?

Two ways about it that I'm aware of... If you have a margin account (not sure if Vanguard even does those), you can definitely buy shares that you don't have money for in your settlement account. However, I believe that if you make a market order at the very top of what's in your settlement account, then the market price goes up slightly before the order executes, it is possible to have a deficit. I think how it works then is that you have the 3 days until the trade settles to move the money into your settlement account.

I do know that Vanguard won't let you make a limit order, or even a market order, that your settlement can't cover (based on the limit price or quoted price at the time of your order), but including any pending incoming transfers initiated on Vanguard's site.

[disneysteve]

I'm glad you asked this question. I have been wondering about this as well (and don't really understand). Is it possible to order more shares than you can pay for in your settlement account if the price is fluid?

I'm not sure this exactly answers your question but I do spend more than is in my settlement fund at the moment of the transaction.

I initiate the transfer of money into my settlement fund and immediately place the buy order for the ETF even though the money isn't actually in the settlement fund yet. The transfer takes a day to happen but that doesn't stop or delay the purchase order from being processed.

[Like2Plan]

I'm not sure this exactly answers your question but I do spend more than is in my settlement fund at the moment of the transaction.

I initiate the transfer of money into my settlement fund and immediately place the buy order for the ETF even though the money isn't actually in the settlement fund yet. The transfer takes a day to happen but that doesn't stop or delay the purchase order from being processed.

At what point do you know how much the shares are going to cost--when you put the buy order in or at some time in the future?

[disneysteve]

At what point do you know how much the shares are going to cost--when you put the buy order in or at some time in the future?

ETF shares trade the same as stocks. You put in your order and if it's a market order, you get the price at the moment the trade goes through. You can also place a limit order to specify a max price. Personally, I always do market orders with my ETF purchases. I don't know the exact price until I get the confirmation.

[kork13]

It's been about a year now of me buying ETFs vs. MFs, and I find myself re-evaluating if this is really of benefit to me, and if I should just transition back to the MFs, or at least modify my purchase strategy somehow.

In general, I've really liked the degree of control over purchase price for my ETF shares, but I'm finding it's less than entirely effective due to the relatively consistent market growth. My purchase strategy has basically been to set twice-monthly limit orders on the 5x ETFs I'm buying, using a limit price of roughly the trailing 5-day low mark of the ETF. The idea has been that if the market has been that low within the last 5 days, it's not unreasonable to expect that it will return to that level given normal volatility in order to give me a mild discount on the shares. Most of the time, that has been .25%-.5% of the ETF value. However, what I'm finding is that only 50-60% of those limit orders are executing, so I've ended up with ~5 months' worth of contributions ($10k) sitting untouched in my brokerage account earning beans, and the limit orders expiring.

I'm trying to decide on the best way to go. I really do like the idea of using ETFs + limit orders, to moderate my risk of buying in on a sudden spike, but it obviously doesn't do us any good if the orders don't execute. Should I just adjust my purchase strategy to a 3-day trail? 1-day trail? I don't want to go straight 'market order,' because I've heard horror stories of getting bitten by sudden price spikes. Or should I give up entirely on the ETFs and just go back to the easy option of MFs, which I can set up for regular automatic purchases at end-of-day?