ETF vs. Mutual Fund

[kork13]

I've used everyone here on the forums for bouncing various ideas off of quite a few times, and I'm gonna do it again, so any input is always appreciated...

Background: Looking over my long-term planning (and a related, months-old thread on here ), I realized that I've stockpiled about $15k in cash more than I "should" have. The 'how' is a bit involved, but long story short, I want to trim back my cash holdings and put them into investments, where I probably should have been putting it all along. So I'm trying to figure out where and how to invest it.

I've got a small investment account with Schwab, and a much larger (~12x) account with USAA. Currently everything is in mutual funds of varying flavors, with the goals of a) being a home downpayment down the road; and b) general "investing-because-I-don't-want-to-spend-it" funds. One option I'm looking at with this money is to get into Schwab's index-based ETF's. If I do, I would make the ETF's my primary investment vehicles, diverting all future funds to them instead of to my USAA MF's. Eventually, I might even move the money over from the MF's to the ETF's. The upsides I see: No trading fees for Schwab's in-house ETFs (no net gain here, but it's a benefit compared to other ETF options), lower expenses, and they're different/specific enough that I can tailor them to my preferred allocation fairly accurately.

Each of these has a downside/consideration too, though... Would I be able to set up automatic buys that would operate the same way as my MF's currently do? Is the difference of .1%-.5% in expenses really worth worrying about (the ETF's average ~.15%, the MF's are .25%-.7%)? And I would buy into 9 of the ETF's, as compared to only 3 MF's at USAA, so managing the ETF's would be more complex. So my roundabout question is basically, "Is switching to ETF's worth the trouble?"

Also, regardless of if I do ETF's or MF's with this money, should I go through the trouble of DCA-ing the money, or just lump-sum it all at once? The markets are still depressed enough that I'm considering doing it in a lump-sum. While it's entirely possible the market will go down and I could reduce my losses there by doing DCA, the money is currently making between .5%-2% in a few various savings accounts, so if I DCA, it's really just sitting around doing very little for me in the meantime.

[disneysteve]

I'll address your last question first. I think DCA is often overrated. I totally understand the theory and I DCA my own money into my investments, but that is primarily because I don't have a lump sum to invest all at once.

DCA is also misunderstood. People think it means putting money in once a month. It could just as well mean putting money in once a year. Over 25 or 35 years, you will have gotten a similar benefit.

Since you say that you would be continuing to add to the ETFs in the future, I see nothing at all wrong with starting out with a lump sum purchase. That is not unlike someone who opens a Vanguard account with the $3,000 minimum deposit and then adds $100/month after that. Even if you invested a lump sum and never added another penny, if this money will be sitting there for 20+ years, it really won't matter that you put it all in at once.

[richrf]

There was an article recently that I blogged (I don't want to link it here because I think it is against the rules) that suggested KISS (keep it simple) is the best long term strategy. 50% stocks, 50% bonds and re-balance one a year. BTW, I think having lots of cash available is a good strategy since it allows you the flexibility of pouncing on great opportunities that suddenly materialize but often go away as quickly as they materialize.

I prefer ETF because of intra-day liquidity and they allow me to invest in both directions. Vanguard is just now releasing a new set of index ETFs.

Rich

[gambler2075]

...If I do, I would make the ETF's my primary investment vehicles, diverting all future funds to them instead of to my USAA MF's. Eventually, I might even move the money over from the MF's to the ETF's.

Which ETF's are you thinking of trading? of course it goes without saying that buying and holding the Direxion leveraged ETF's are a bad idea, due to the decay you get. Just google 'leveraged ETF decay' and you will see...

I've traded FAS, FAZ, TNA and TZA before... fun when you are on the right side of the trade, when you are not... not so much. VXX is another interesting one. Even more insane is that I knew someone who bought options on a triple inverse ETF (FAZ)...lol

Of course after they implemented the 75K rule, that prevented the mom and pop investor from essentially gambling on those leveraged ETF's that helped a bit.

I don't personally play leveraged ETF's, except for rare circumstances.

ETF DAILY NEWS » New Margin Rule Plays A Role In The Popular Direxion Financial ETFs (FAZ, FAS)

g

[jIM_Ohio]

which funds you are in will matter little, the .5% difference in expense ratio is good, but its not significant...

so make a decision, then don't look back.

[gambler2075]

...Just an additional note... doing chart analysis on a triple leveraged ETF is very misleading... for example, you look at FAZ and you would think "oh, 13 is double bottom, based on the action at the beginning of August... time to buy!!!" whereas due to the decay factor, "13" on Aug 1 is not the same as "13" now... you will find that support is much weaker, due to the intrinsic decay of the price... however, it seems that overhead resistance is stronger, as there is the decay factor, combined with overhead resistance pushing the stock back down.

Direxion Daily Financial Bear 3 ETF Chart - Yahoo! Finance

g

[disneysteve]

Which ETF's are you thinking of trading?

I think OP is talking about investing, not trading.

I know you are a trader but I think you'll find that the vast majority of folks on this board are investors.

[gambler2075]

I think OP is talking about investing, not trading.

I know you are a trader but I think you'll find that the vast majority of folks on this board are investors.

That's a good point... I wanted to point out that I have seen many investors think

"Hey, if I think the market is going up, then why buy a boring ETF? I should buy a triple ETF... that way I can get triple the returns!"

whereas leveraged ETF's lose over time. Actually upon reading his OP I see that he is talking about buying non-leveraged ETF's, which makes my post somewhat irrelevant. My bad.

I also hold a somewhat unusual viewpoint in that I believe that trying to time the broader markets is probably a bad idea, for the vast majority of people (including myself). I do extend that to intraday timing attempts, for the most part. I do believe that there are consistently profitable intraday traders (weeklyTA, johnwelsh) but the vast, vast majority of people who try to trade intraday (including myself) are fighting a losing battle.

However, I do believe that swing trading into certain catalysts with tight money management can beat the overall markets, and that is why I am focusing on that.

g

[gambler2075]

I know you are a trader but I think you'll find that the vast majority of folks on this board are investors.

I would also like to add that I came onto this board for a couple of reasons... first, I feel that, as has been pointed out to me before, I have lost the concept of the value of money in a way... when you make or lose thousands, or tens of thousands of dollars in a day, while trading, it skews your perception of the value of a dollar. I feel financially wasteful in certain areas of my life, and as trading is not a guaranteed profession, I wanted to develop better overall money management skills in case I ever involuntarily left trading

That being said, I also came here because I feel that there is a perception that everyone who daytrades are some sort of degenerate gambler... which is completely not true... trading can be a profession, and the skills needed to get there are just like any other profession. And when I hear about the typical mom and pop investor and the way they look down on traders, it is somewhat annoying. Plus, the fact that they seem to blame daytraders for chopping their 401K's in half, when in fact, that has nothing to do with it.

This spills over into things like the 1/4% financial transaction tax that keeps getting proposed... the mom and pop investor is like "Yeah, let's punish those rich traders" because what do they (mom and pop investors) have to lose from it? practically nothing.

Yet I have pro trader friends that would be put out of business by such a tax.

IMO it's kind of like proposing the idea of eliminating tax cuts for the rich... Sure, it's easy to vote for that when your income is 50,000$ and you have no financial effect in the matter... "Tax the rich more" they say... Unfortunately, as the vote of someone who makes 10,000$ a year counts just as much as the vote of someone making 1M$ per year, and there are way more of the former, it is easy to ram past the voters.

IMO, this is kind of like saying "hey, let's just say that anyone who has glioblastoma multiforme will not get any medicaid money, if they can't pay for the chemotherapy themselves... that would save medicaid a TON of money!!!"

Sure, all the people who don't have GBM or know anyone with GBM should be for it! because it's no skin off their back, right? Why should they pay for other people to get medical care?

-but enough of my rant. Beyond this issue of the way traders are perceived, profitable traders ARE contributing to society... I pay taxes on my trading profits at the 35%+ tax bracket, and that money goes back to everyone... so before the mom and pops get in a huff about daytraders stealing their money, they should think about that. As an aside, I am also a fulltime practicing ED physician, who learned how to trade during medical school and the weird non-working hours of an ED resident. So, while I understand that I may not be the typical trader, I am contributing to society in more ways than just taxes. Unfortunately (or fortunately) since I made more money trading last year and this year than I did as an ED attending, I am getting taxed out the yinyang, and this potential repeal of the 250K$+ tax issue is probably going to really suck for me.

Just some points to think about before you (or anyone) scoffs at traders.

g

[disneysteve]

Just some points to think about before you (or anyone) scoffs at traders.

gambler, I think you may have read too much into my comment. I wasn't scoffing at traders. I was just trying to point out that OP is not one (as far as I know). Investing involves a very different mindset than trading.

I also hold a somewhat unusual viewpoint in that I believe that trying to time the broader markets is probably a bad idea

I don't think that is an unusual viewpoint at all. Virtually everyone at this site and in the financial world in general would agree that market timing doesn't work. That's why we talk about dollar cost averaging, putting your investments on automatic plans, investing over time, etc.

I am also a fulltime practicing ED physician, who learned how to trade during medical school and the weird non-working hours of an ED resident. So, while I understand that I may not be the typical trader, I am contributing to society in more ways than just taxes. Unfortunately (or fortunately) since I made more money trading last year and this year than I did as an ED attending

Very interesting. Happy to have another physician joining us here. I'm a family doc myself and I know there are a couple of other docs and medical students posting here. Welcome aboard.

[gambler2075]

Thanks Steve,
good to hear from another doc. I would say that for anyone who is a PhD, lawyer, doc, or has otherwise excelled in their specific field, they should be extremely, extremely cautious when investing. Success in another field absolutely does not translate automatically over into success as an investor, or trader... as a matter of fact, it seems to make people WORSE investors or traders, as they come in overconfident, and sure of themselves, and worse yet, remain so sure of themselves that they refuse to take a loss until they are annihilated.

Certainly, a medical/bio background can make the DD (due diligence for those non-investors) aspect much faster, but I also believe that new investors underestimate how much DD the people with money really do... Yeah, you may have done more DD than 99% of the other investors, but with the stock market, of course, people do not get an equal vote... that remaining 1% may represent a massive proportion of the actual dollar value in a stock, and guess what, they have already done better DD than you have (and bought before you).

Anyway, as far as overconfidence goes, every few months, when I start getting overconfident with my DD and my next 'sure thing' I watch this video by Peter Kolchinsky of RA Capital management, which was annihilated in the SQNM "data mishandling" incident earlier this year... and that brings me back to earth.

News Headlines

Here's more about why I think not all doctors make bad traders
(gratuitous pump for ER docs follows)

...but more of that may have to do with the fact that ER docs actually had more time to work on their trading as they don't work typical 9-5 schedules...

Inside the Mind of the Turtles: How ... - Google Books

and finally one more post about trading from a trader I really respect, talking about how overconfidence and that desire to always be right can make for a terrible trader

The Four Stages of Learning Charts Gone Wild

"Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated."

good luck to all.... Don't risk more than you can afford to lose, if you plan on playing around in the markets.

g

[kork13]

As to what ETF's I'd be using, it would be 9 (out of 11 or 12 total that they offer) of Charles Schwab's in-house ETF's: US Equity ETF's (SCHG, SCHV, SCHA); International Equity ETF's (SCHF, SCHC, SCHE); and US Treasury ETF's (SCHP, SCH0, SCHR). I'm looking at all 9 in order to be able to tweak my allocation as desired.

However, I was looking closer into how I would go about buying into them, and I could easily be mistaken, but I couldn't find a way to invest a given dollar amount every couple weeks as I can with my current MF's... Also, it all seems to be based on number of shares, for which the dollar value changes day-to-day (let alone the 2x/mo that I'm looking for), so it would be all but impossible to make those buys automatic. And so, it seems that my only option would be to send my investing money to their sweep fund, then individually buy each ETF -- almost no automation involved. Am I mistaken in this? Or is there a way to automatically make buys based on dollar amount? If not, it may just be simpler to stick with my current set up with MF's, even though they doesn't currently offer the broad allocation options the ETF's do...

[gambler2075]

I don't think that is an unusual viewpoint at all. Virtually everyone at this site and in the financial world in general would agree that market timing doesn't work.

I guess I should clarify... when I say it is 'unusual' I think it would be somewhat strange that someone who believes he can swingtrade (myself, in certain circumstances), believes that trying to time the broader market is not a good idea. I do agree that the majority of people feel that trying to time the markets in general is a bad idea.

g

[ConquerWithTruth]

The dreaded inflation will come. The degree of inflation will match the size of bailouts, stimulus package, and universal health care plan. You will do well if you invest the fund into the market now instead of dollar cost averaging.

[jpg7n16]

And I would buy into 9 of the ETF's, as compared to only 3 MF's at USAA, so managing the ETF's would be more complex. So my roundabout question is basically, "Is switching to ETF's worth the trouble?"

Why do you need 9 different ETF's? Why not stick with 3?

Also, regardless of if I do ETF's or MF's with this money, should I go through the trouble of DCA-ing the money, or just lump-sum it all at once? The markets are still depressed enough that I'm considering doing it in a lump-sum. While it's entirely possible the market will go down and I could reduce my losses there by doing DCA, the money is currently making between .5%-2% in a few various savings accounts, so if I DCA, it's really just sitting around doing very little for me in the meantime.

The question you need to ask yourself is, where do I think the prices will be in 20 years?

If prices today are say 100 - and you think in 20 years, they will be 300, then there is little benefit from attempting to DCA your cost down to say 97. DCA could even raise your cost, so it's not guaranteed, but it is a bit of variance reduction.

If you like the price today as compared to where you expect it to be in 20 years, then just buy today and hold for 20 years. The main benefit is from the good price, not the DCA strategy.