ETFs?

[ScrimpAndSave]

I'm trying to learn more about investing now that I ramped up my emergency savings and have my Roth maxed. My dad is telling me to invest in ETF's if I want to begin contributions to a mutual fund for long term savings. He is suggesting "VTI (Vanguard Total Stock Market).

Anyone have any suggestions?

Thanks!

[Broken Arrow]

ETFs are close-ended mutual funds that are traded on the open market like a stock.

ETFs have their pros and cons, and among other things, their suitability for each investor depends on your contribution style and the size of your contributions.

Therefore, simply investing in ETFs in and of itself is not necessarily better or worse than traditional mutual funds. It just depends.

VTI is the ETF equivalent of VTSMX. Both will give you exposure of the broad US stock market in a single fund.

Simply having VTI may or may not be adequate diversification depending on what the rest of your portfolio looks like. Can you tell us what the rest of your portfolio looks like?

[ScrimpAndSave]

Um, I don't really have a "portfolio". I am going to put $5,000 in my roth ira at the end of the year and was just going to do a target fund (2045). Other than that, I have a pension with my work and have no idea how that is distributed.

[Broken Arrow]

Ok, no problem. In that case, I would forego VTI and just stick with Target Retirement Fund for right now. I would also find out more details regarding your work pension.

Either that, or I would buy VTI for domestic stock exposure, BND for domestic bond exposure, and something like VT for international exposure. Of course, that also means you want to slice and dice your own portfolio, that you have a specific percentage allocation in mind, and you don't mind at least 3 trading fees (or more) to buy into these funds.

Personally though, I don't know why people recommend ETFs as much as they do. I'm not saying they're bad. They have their place, but so do traditional mutual funds. The problem is that a some people recommend ETFs without considering your financial picture first. Kind of like recommending a screwdriver over a hammer before even knowing what the project looks like and what tools are best suited for the job.

[jIM_Ohio]

VTI is a good place to start.

Choosing a target fund is also good advice.

If you would prefer to build your own portfolio, then VTI or the actual mutual fund (VTSMX?) would be good moves.


I know vanguard uses the total stock market index in its target funds- it is probably the largest holding in the target fund you choose (you can verify this by examining the holdings of the target fund- any financial site should tell you this information within 5-10 mouse clicks).


Do you know what the total stock market index is?
I think its wilshire 5000 index (but check me on that by reading prospectus)

The wilshire 5000 is a group of 5700+ stocks which, when averaged together (an index is an average) represent close to 95%-99% of the "total US stock market". Hence the wilshire 5000 and any mutual fund which tracks it is usually called "total stock market".


Most mutual funds do not own 5700 stocks (there are between 5500-5700 companies represented in the wilshire 5000 index). The mutual funds will own MOST of them (so best guess is between 3000-4500 of the stocks are in the mutual fund) and the average performance of those 3500 is about the same as the average performance of the actual 5700 in the index.

If you have questions on any of this, ASK.

[kv968]

ETFs are close-ended mutual funds that are traded on the open market like a stock.

BA, ETF aren't close-ended mutual funds. ETF's can add and subtract stock holdings within themselves as needed whereas a closed end mutual fund buys shares and just leaves it alone regardless of fund activity.

[Broken Arrow]

Oops! Thanks for the correction.

[jpg7n16]

BA, ETF aren't close-ended mutual funds. ETF's can add and subtract stock holdings within themselves as needed whereas a closed end mutual fund buys shares and just leaves it alone regardless of fund activity.

You are thinking of a Unit Investment Trust: Unit Investment Trust - Wikipedia, the free encyclopedia

ETFs are closed-end funds. They raise capital through an IPO and trade on the stock market with a normal ticker symbol: Closed-End Fund


Closed or open end only refers to the method that the mutual fund can raise capital.

From the Investopedia link above:

What Does Closed-End Fund Mean?
A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Also known as a "closed-end investment" or "closed-end mutual fund."

Investopedia explains Closed-End Fund
Despite the name similarities, a closed-end fund has little in common with a conventional mutual fund, which is technically known as an open-end fund.

The former raises a prescribed amount of capital only once through an IPO by issuing a fixed amount of shares, which are purchased by investors in the closed-end fund as stock. Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of securities that is actively managed by an investment advisor and which typically concentrates on a specific industry, geographic market, or sector. The stock prices of a closed-end fund fluctuate according to market forces (supply and demand) as well as the changing values of the securities in the fund's holdings.

[jwrbike]

S&S,

The Target fund looks like a great investment to start your "portfolio".

[zetta]

So when deciding between VTI and VTSMX (essentially the same, just one is an ETF but the other is a regular mutual fund), what kind of investor is better for each one?

[jIM_Ohio]

So when deciding between VTI and VTSMX (essentially the same, just one is an ETF but the other is a regular mutual fund), what kind of investor is better for each one?

If you make frequent purchases (like 2X/mo) the mutual fund will probably be cheaper
If you make large one time purchases (like 2-4X per year), the ETF will probably be cheaper

Find the expense ratios on each
the ETF is "probably" lower

If the mutual fund has a ratio of .05 and the ETF .02 then the way to think about it is this

If you invest $5000 per year, that means an expense ratio of .05 costs you $250 this year.
If you invest that same $5000 in the ETF, that means expense ratio costs you $100 this year.

If the cost of investing the $5000 in the above example is $150 (the mutual fund purchases are usually free of expenses), then the ETF breaks even at $150 investment cost (like $10 per transaction 15 times, or $5 per transaction 30 times). Meaning if you keep brokerage fees to less than $150 per year, the ETF comes out ahead.

So the ETF will depend on who your broker is as to whether its cheaper than the fund or not.

You will also get charged for selling the ETF (if it cost $5 to purchase and $5 to sell, factor the initial cost as $10 and you have it covered).

Overall, if you are making decisions on cost of transactions, you are getting really really picky.
Its better to spend time now learning about asset allocation than transactions costs IMO.

[snafu]

I suggest some light reading 1st like Wealthy Barber or Mutual Funds for Dummies. It's a good idea to ask your Pension Mgr. the % breakdown between equities [stock], bonds [fixed interest asset issued by governments, companies, banks, and other large entities] & cash. Most are heavily weighted to Bonds to protect member's contributions.

I suggest a slow, easy access DCA [dollar cost averaging] which requires you to commit to paying a specific dollar amount each and every month to buy a mutual fund from a well known, well financed company like Vanguard who charge a modest amount in administrative fees called MER. There is some risk involved as the fund fluctuates on market conditions which are bumpy just now. In the long run, the statistics show you will increase value. Personally, I like Index Fund just now. If the unit value drops, your money will buy more units...sort of goes on sale. How long will the largest market waffle? The economy must recover eventually...tomorrow would be good lol. Given Gov't debt, I believe interest rates will go up, making the value of bonds decrease.

There is a lot of talk about Value Added Tax [VAT] Federal sales tax being implemented to pay for the war.


When you have more experience and feel more comfortable, you can cash out and buy ETF in whatever sectors feel comfortable to you.

[kv968]

You are thinking of a Unit Investment Trust: Unit Investment Trust - Wikipedia, the free encyclopedia

ETFs are closed-end funds. They raise capital through an IPO and trade on the stock market with a normal ticker symbol: Closed-End Fund


Closed or open end only refers to the method that the mutual fund can raise capital.

From the Investopedia link above:

Sorry jpg, but I am thinking of ETF's.

How ETF's Work

Read the third and fourth paragraph and you'll see how they differ from closed-ended funds.

[Tonyall]

For all their added expenses, mutual funds generally do not outperform the market anyway. I'm going with ETFs for all my new stock market investments.