What is the point of an ETF version of a total stock index fund?

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Ron Scott
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What is the point of an ETF version of a total stock index fund?

Post by Ron Scott » Sun Oct 29, 2017 2:43 pm

The best answer I can come up with is giving the option for someone who is using their stock holdings a couple time a year for retirement spending purposes or asset rebalancing and wants the option of selling at some price in the middle of the day.

Is that it? Is that even necessary?

I wouldn't imagine they'd be good instruments to actually trade with...

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nedsaid
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Re: What is the point of an ETF version of a total stock index fund?

Post by nedsaid » Sun Oct 29, 2017 2:46 pm

Well, I own three Vanguard funds in ETF form. I own Total Bond Market Index, REIT Index, and Small Cap Value Index. I do not have a Vanguard account. These ETFs were purchased for my IRA Brokerage Account.
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steve roy
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Re: What is the point of an ETF version of a total stock index fund?

Post by steve roy » Sun Oct 29, 2017 2:55 pm

Because if you only have enough money for Vanguard Investor shares, then buying the ETF version gets you in at the lower Admiral cost.

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Taylor Larimore
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ETFs vs. Mutual Funds?

Post by Taylor Larimore » Sun Oct 29, 2017 2:57 pm

Ron Scott wrote:
Sun Oct 29, 2017 2:43 pm
The best answer I can come up with is giving the option for someone who is using their stock holdings a couple time a year for retirement spending purposes or asset rebalancing and wants the option of selling at some price in the middle of the day.

Is that it? Is that even necessary?

I wouldn't imagine they'd be good instruments to actually trade with...
Ron Scott:

There are only small differences between ETFs (especially Vanguard ETFs) and traditional mutual funds.

This wiki link will help you decide: ETFs or Mutual Funds?

My suggestion with Vanguard is that you start with their mutual funds. The tax consequences are the same. You can later change to ETFs without cost--but you cannot change back.

Best wishes.
Taylor
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Geologist
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Re: What is the point of an ETF version of a total stock index fund?

Post by Geologist » Sun Oct 29, 2017 3:00 pm

steve roy wrote:
Sun Oct 29, 2017 2:55 pm
Because if you only have enough money for Vanguard Investor shares, then buying the ETF version gets you in at the lower Admiral cost.
While this is true, the dollar amount of the savings in expenses is not material (about $9-10/year for a $9000 account). Some people, however, find it more convenient to deal in ETF's than mutual fund shares for their holdings.

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Re: What is the point of an ETF version of a total stock index fund?

Post by lack_ey » Sun Oct 29, 2017 3:05 pm

Generally ETFs are available like all stocks at all brokerage platforms, while mutual funds are not necessarily, and frequently trade with significantly higher commissions. There are specific agreements that are done between the platforms and fund companies for access, and not all mutual funds are widely available. Many investment advisors and retail investors like using ETFs from multiple different providers at the brokerage platform of their choice. These span a range of trading activity from dedicated buy&hold to dedicated market timers with aggressive changes.

There's a lot of interest in trading the US stock market. The futures market alone typically does daily volume around 1.5 million e-mini S&P 500 contracts, never mind the non-e-mini and other similar products. That is about $200 billion notional, with each e-mini corresponding to $50 x the S&P 500 index value. In ETF land, SPY (yes, it's a unit investment trust and not an ETF in the strictest sense) does over $10 billion volume daily. For VTI we're looking at a couple hundred million a day. Spreads are $0.01 so it's not bad at all a trading tool, if that is what one is using it for.

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Re: What is the point of an ETF version of a total stock index fund?

Post by Iridium » Sun Oct 29, 2017 3:14 pm

1. Access - With funds, brokers work with each fund sponsor directly. Whereas ETFs are transacted through exchanges that the broker already has a relationship with. As a result, an ETF is automatically available through every broker at the low 'stock trade' commission, while funds have to have agreements with the brokers that offer their funds, and without providing a marketing kickback to the broker, their funds would typically have commission rates of $25-$75.

2. Efficiency - When a fund is purchased or redeemed, the fund has to go out and buy/sell the underlying securities. While the fund can net out the purchases and redemptions, there is still a definite overhead to these transactions. To the degree that you can divert short-term traders away from your fund and into your ETF, that can help reduce the amount of trading your fund has to do, as purchases/sales of ETFs do not impact the ETF at all.

3. Taxes - When ETFs are redeemed by institutional investors, the ETF gives the lowest basis shares to the institutional investor. With Vanguard's structure of ETF as a share class of the mutual fund, the tax benefit also helps investors in the fund. Index funds with this structure are more likely to be able to avoid distributing capital gains.

4. Speculators - I believe I read somewhere that S&P500 futures have more volume than every stock in the S&P 500 combined. While not applicable to normal retirement investors, there is a substantial amount of money and volume controlled by speculators. They are going to be far more interested in ETFs, which they can trade intraday, rather than index funds. Another knock-on effect is I believe that ETFs can be used as collateral for margin investing, while funds cannot, which is another benefit for speculators that is useless for retirement investors. Even though, philosophically, the fund sponsor's heart might be with the buy-and-hold investor, speculator cash can help the fund with economies of scale just as well as any other investor's.
Ron Scott wrote:
Sun Oct 29, 2017 2:43 pm
I wouldn't imagine they'd be good instruments to actually trade with...
I do not see any issue. If you are a speculator who wants to put a bet on, say, the latest jobs report, it is a liquid way to make a bet on the direction of the market as a whole, without having to know which companies, specifically, will do well (there are always dogs in an upmarket, and vice versa). They trade cheaply, have minuscule carrying cost, and many of them are highly liquid, with plenty of market markers and arbitragers ensuring that the spread is thin and the price stays close to the underlying asset. Futures are more popular among speculators, for good reason, but they are not as good for making bets over a year long or for smaller speculators (as they trade in units of ~$125K of exposure).
Last edited by Iridium on Sun Oct 29, 2017 3:20 pm, edited 1 time in total.

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Re: What is the point of an ETF version of a total stock index fund?

Post by triceratop » Sun Oct 29, 2017 3:18 pm

I can buy ETFs from any index fund provider at my brokerage with no commissions. Currently I own index funds from Vanguard, Blackrock, and Schwab. My expenses are limited to fund expense ratios and transaction fees; since I do not really trade but instead buy and hold these transaction fees are not significant (sub 1bp over my holding period).

If I were at Vanguard I could only purchase Vanguard index funds. Vanguard doesn't always have the best index funds, so that is one point. Another point is that Vanguard has short-term trading restrictions; I prefer to not have to worry about that if I'm tax loss harvesting or doing pretty much anything. It gives me head space to think about more important matters. A final point of the ETF version is they are often more tax efficient.
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Re: What is the point of an ETF version of a total stock index fund?

Post by dbr » Sun Oct 29, 2017 3:26 pm

And a point about the any broker thing is that the investor may not have a choice. I can use ETFs in my 401K brokerage link at much lower transaction cost than that for mutual funds.

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Re: What is the point of an ETF version of a total stock index fund?

Post by CABob » Mon Oct 30, 2017 2:05 pm

Why are you asking about total stock market funds specifically? The same question could be asked about any index fund that has both traditional mutual fund and ETF available. So this gets you back to the often asked and answered question about ETF and traditional fund. There is no one answer that applies to all and forever.
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Re: What is the point of an ETF version of a total stock index fund?

Post by CnC » Mon Oct 30, 2017 2:11 pm

The only answer I have found is so that you can watch your money rise and fall in real time rather than wait till the end of day.

Otherwise I have no real answer.

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Re: What is the point of an ETF version of a total stock index fund?

Post by hicabob » Mon Oct 30, 2017 2:19 pm

Many of us only buy or sell using limits in an attempt to squeeze a few more points out. Etf's work for that, funds don't.

DrGoogle2017
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Re: What is the point of an ETF version of a total stock index fund?

Post by DrGoogle2017 » Mon Oct 30, 2017 2:45 pm

You can squeeze out more points by selling call and put options.

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Re: What is the point of an ETF version of a total stock index fund?

Post by InvestorNewb » Mon Oct 30, 2017 2:48 pm

The ETF is offered in Canada but the mutual fund is not. I am thankful for this.
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Re: What is the point of an ETF version of a total stock index fund?

Post by nisiprius » Mon Oct 30, 2017 3:00 pm

What is the point of any ETF? Whatever is the point of ETFs, that is the point of an ETF version of a total stock index fund.

After all, the very first ETF ever introduced was SPY, which is an S&P 500 ETF and thus a very broad ETF covering most of the total market. And it was introduced even though an S&P 500 mutual fund had been available for sixteen years, so someone must have thought there was some point to it.

To point out one obvious detail, if you want to buy a total stock index mutual fund without paying a $35, $50, $75 transaction fee, you are limited in where you can buy it. Typically, you can only do it buy opening an account directly with the company offering that mutual fund. If you want to buy a total stock index ETF you can do it at almost any brokerage at about a tenth the cost, and in many cases you can find a group of "no-fee" ETFs, and in many other cases you get a certain number of no-cost trades every year which you can use with the ETF.

They are perfectly good investments to trade with. I dislike ETFs myself, but I don't see why they wouldn't be just as good as mutual funds if you choose to use them the way people use mutual funds. If you read this forum much, you'll find that some people think they are better, but let's not go down that rabbit hole.
Last edited by nisiprius on Mon Oct 30, 2017 3:02 pm, edited 1 time in total.
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Re: What is the point of an ETF version of a total stock index fund?

Post by ThrustVectoring » Mon Oct 30, 2017 3:02 pm

When money flows into or out of a mutual fund, the trading is done by the mutual fund and the costs of it are borne proportionally by all investors.

When money flows into or out of an ETF, the trading is done by market participants who earn a small arbitrage profit. The costs of this trading are born by the investors who put money into or out of the fund.

For buy-and-hold investors, ETFs have a fundamental cost advantage. It's not large, but it's there.

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