I hold mutual funds in my 401k and etfs in my Ira and taxable. I like both for different reasons. I like mutual funds for keeping me from buying and selling too much and the extra year end capital gains payouts. In my IRA and taxable accounts I much prefer ETFs. I’m charged a large fee to buy and sell(rebalance)mutual funds, and etfs are free. Also, there’s nothing worse than not being able to get into or out of a position during the day if you wanted to.
I appreciate Rob's comparison and analysis of the differences between Mutual Funds and ETFs, but he's neglected a few considerations that strongly favor ETFs for me. First, among Vanguard ETFs, they are offered at the same (or even lower) Expense Ratio as Admiral Shares of the Mutual Fund that usually have a much higher minimum investment threshold (sometimes extraordinarily and inaccessibly high) compared to Standard Investor Shares in the same Fund. Second, I purchase all my ETFs using Limit Orders (that cost no more to execute) and set 'my price' that I'm willing to pay and I wait... for the gyrations of the market to trip past my price on a down moment. If, after a while, the order doesn't execute, then I need to reconsider 'my price' and modify my Limit Order accordingly.
My impression is ... there are nuanced differences. Personally, I don't trade stocks where the bid/ask is significant. And I'm Canadian - here the MER for all funds whether ETFs or mutual funds, have relatively high MERs - especially mutual funds. And I remember the days (too long ago) when mutual funds' minimum investment was a barrier for me. If I was a beginning investor with a limited amount to invest, then I'd definitely go the ETF route. Generally speaking, I'm not convinced that mutual funds have an edge over ETFs. Nonetheless and as as always, I appreciate hearing your opinions. Always well-researched, logical and well-explained. Thank you.
Another thing to keep in mind... if you are resident in the EU, it is much easier (or sometimes the only way) to invest in passive index-tracking funds (like Blackrock, Vanguard etc.) via ETFs, provided they are UCITS compliant.
I like to hold ETFs in a taxable account because they tend to be a bit more tax efficient (even more than an index mutual fund). Here is why : In a mutual fund, when someone sells, the fund may need to liquidate holdings in order to cover it, generating capital gains for all fund holders. In an ETF the ETF share is directly sold to someone else, so generally doesn't generate capital gain until YOU sell. I agree though that in a tax advantaged account, index mutual funds are superior.
Yeah, that was a horrible error in the video. It's the single most important reason to stick with ETFs, although it doesn't matter in the specific case of Vanguard. Also, the VFIAX vs VOO comparison was also wrong. They are not at all identical funds. They are the exact same single fund.
It is a lot easier for me to automatically invest in mutual funds which is why I go the mutual fund way. Rarely do I see that much in capital gains distributions at the end of the year in a taxable account.
Overall, I like total stock market index funds. For those wanting to know what price they are buying a total market index such as VTSAX, one can monitor the CRSP US Total Market Index during the trading day and precisely determine if it is going to be a red day or green day.
ETFs gives me more control as a brokerage customer. If Fidelity starts acting like a knucklehead, I can readily move my VOO to Schwab or Vanguard and not be stuck to Fidelity's ecosystem.
When I had initially opened up my Roth with Vanguard and learned that automatic investments were not possible with their ETFs, I knew that their mutual funds were the better option for me. I started with $1,000 in a target date fund and after it reached $3,000 (not from the returns but mostly from future investments) I sold it and bought VTSAX.
I think what you might be missing here is that a lot of ETFs will act as market makers as well, and will buy/sell shares during the day to keep the market price at the NAV. I also feel like there is value of being able to buy/sell when I want and get filled immediately, without the risk of markets moving a lot from now till the end of the day. Also in Canada a .04% MER on a mutual fund is unheard of.
My least favorite things about mutual funds are the capital gain distributions and the add-on account fees. How do ETF's handle those? I think it would also be easier to manage a brokerage account containing a variety of ETF's rather than dealing with individual mutual fund company websites.
I like this channel but this video did not justify why mutual funds are better. Only reason given was about the spread on buy and sell prices. Is there any other reason? ETF expense ratios are lower and you can sell and buy them instantly. Why would anyone go for a mutual fund? Most brokers don't charge trading fees for ETFs anymore. I recently tried to buy a vanguard mutual fund from schwab account and i was asked to pay a fee but i can buy the same fund as etf without any fees. Am i missing something here?
@@AK-ky3ou m1 finance and most robo advisors like wealthfront allows automatic investments in ETFs. But agree its not allowed at the larger brokerage firms.
I think someone could make a 20 minute video on why ETFs are better with the points you made. I would add that you are able to set a limit order on ETFs
Right and mutual fund in the long run there so much money you loose with those high fees. Imagine having 100k invested and pay 1% a year 1.000usd year in management nop thanks
Bid ask spreads are tighter than they look. Normally you can buy and sell 1 penny around mid price in a liquid ETF even if the bid spread seems larger than that. Also, Vanguard uses ETF share class to help manage capital gains in their mutual fund share classes. That tax efficiency is therefore unique to vanguard mutual funds but is actually the property of ETFs.
The only argument he makes for buying mutual funds over ETFs is that you have to pay the bid-ask spread on ETFs. However, a similar transaction fee applies to mutual funds as well. They may call it the bid-ask spread as well or a transaction fee. After all, how do the mutual fund managers cover the cost buying and selling the underlying assets when an investor buys or sells units in the mutual fund? This has to come from the expense ratio (all fund investors pay) or a transaction fee (only the investor who buys/sells pays). If anything, the total cost of managing an ETF is lower because the turnover of the underlying assets are lower because units are not created/destroyed so often. Always remember, there is no such thing as a free lunch.
The most important is that mutual funds reinvest dividends, because you can buy partial share of a mutual fund. You can invest exactly one dollar or $3.45 into a mutual fund.
I don't have a problem buying exact amounts of ETFs in my Fidelity accounts. I just bought exactly $6,000 worth of VTI in my ROTH after the first of the year.
@@danh2716 you can reinvest dividends it's called DRIP even TD Ameritrade will gives you the option on the selection. Schwab will also have the same option but only if you select it. I think by default it is dividend cash out that reinvestment. That's how it is on TD A. You can't buy partial shares but dividend reinventing is a different matter.
You can reinvest dividends in ETFs as well. I have ETF's in my taxable account, just because I only buy them when I have some extra funds laying around, but the bulk goes into Roth and my 457b accounts, which are mutual funds.
I prefer ETFs when managing my M1 Finance Roth. I have my custom 5-fund "pie" comprised of ETFs and the auto-rebalancing feature of M1 takes all of the hassle out of buying them.
Thanks Rob. I would also like to add that I set up most of my investing to be automatic. Neither Fidelity or Vanguard will by ETFs automatically like they will a mutual fund.
I don't understand why the bid/ask spread for an ETF is more significant than not knowing which price you're going to pay for a mutual fund when you buy it. The latter seems much worse to me...
Thank you i was looking for this information before making a decision. I plan to stick long term MF makes sense with price comparison if minimum investment is not a concern. Thank you for your work.
The two reasons I like mutual funds over ETFs is because I can invest every dollar I intend to save. That may not be the case with an ETF. It’s possible to have money that will just sit in the settlement fund. The second reason is the ease of doing tax loss harvesting. In an mutual fund I can simply do and exchange and it will sell and buy for me at NAV. With an ETF, I would need to manually sell and buy. I don’t want to spend the time to do that and risk a price fluctuations within that process. Mutual funds allow me to do tax loss harvesting with little effort and time.
When I sold some Vanguard Admiral shares, I got a message that I couldn't buy any shares in the same fund for 30 days. That convinced me to stick with ETFs.
For me ETF is a preference as I like to know the price when I am doing the transaction. I am curious about the comment that selling covered calls can lose one lots of money. If one is not greedy and sets a strike price outside the likely range then one could generate additional returns.
Rob, Finally thought of a video (maybe several?) that would help every level of investor find fruitful - maybe I missed it -an explanation as to how we can find out hidden costs on mutual funds that impact on returns. SEC rules seem like they are not enough. Thanks, George
TL;DR they are almost the same. ETF: bid/ask spread at the day of making a transaction, can be lower expense ratio Index mutual fund: one price, calculated at the end of the day, expense ration can be higher (but lower than actively managed mutual funds).
I really don't know that I heard anything that showed mutual funds are > ETFs except maybe the statement being repeated(clickbait?lol). You can always put in your ETF order at the EoD.
ETFs require a lot less headache when dealing with taxes. When mutual funds rebalance at the end of the year, doesn't this force u to pay taxes on the gains? You also get a tax credit on the losses but who wants to deal this major headache when u don't have to as it adds major complexity to ur life. ETFs make you life a lot more simple unless I am misunderstanding something.
I see two advantages of ETF's for ordinary people. 1. Equity ETF's don't have capital gains distributions. That's a good thing in a taxable account, especially one with long term holds. 2. Some useful ETF's don't have mutual fund counterparts. I believe that target maturity bond funds are a good example. You get diversification in an ETF versus holding individual bonds, and you still get a targeted maturity date that you would have with a bond that you plan to hold to maturity. If I'm missing something here, please let me know.
Selling cash secured puts and covered calls via the wheel seems like it's not only a low risk method of options trading, but accelerates returns compared to the historic 10% market average by a considerable amount. The only downside I can see is that we may miss out on some upside in those years where the market just crashes through the ceiling, but over the long term it looks like, even taking commissions and short term capital gains into account, selling options on even relatively safe amd low implied volatility ETFs like XLF returns way better in listless markets. As far as how options perform during a crash...that I haven't experienced yet.
I am a big fan of your channel and agree with 90% of your advice overall but this advice you give on choosing mutual funds over ETFs I do not agree with. For example on the vanguard it costs 0.04% expense fee for the mutual fund compared to the 0.03% fee for the ETF on a fund with the EXACT same holdings. And another important consideration is that if a bad news headline hits the newspapers that causes a dramatic drop in the market.....having the ETF let's you bail out in an emergency at the best price compared to a mutual fund fund that won't calculate the nav until the end of the day. There have been days that you would have lost an extra 5% or more by being trapped in a mutual fund. And I will tell you something else .... When 20% of the participants in a mutual fund decide to bail out in the same day (such as what happened when COVID was announced I march of 2020) it causes massive damage to the mutual fund and it's liquidity because the fund manager will be forced to sell assets to cover all the outflows of customers. So I my opinion it is a bad idea to invest in mutual funds when there is an ETF equivalent. Vanguard even said that the reason the ETF has a cheaper fee than it's mutual fund equivalent is because so many more people are in the ETF instead of the mutual fund version. Mutual funds are a deprecated and old fashioned instrument. They are going the way of the DoDo 🦤
I hear it said so common that "you can't time the market" and that people should sit in same fund for years without exiting it but that that is not a logical thing to do. If I am in a fund that has lost more than 10% year to date I think it would be smarter to exit the position and to buy back in after the bear market has reversed. In the interim one could also choose to sit in an inverse ETF and continue making money
One can trade an ETF like a stock and set a stop. Buy and hold is not as efficient as sitting on your hands in cash during down turns. I had to deal with mutual funds in my old 401k and got warnings when I would sell and then buy back in less than 30 days. So if one has 30+ years and is willing to ride out the down turns I'd agree that mutual funds are workable... just not my cup of tea.
You left out an important advantage mutual funds have over ETFs. Mutual funds like the Vanguard S&P500 can have funds automatically invested into them every pay period or 2 weeks etc without any effort on your behalf at all (facilitating dollar cost average investing). In contrast, ETFs do not allow that convenience. If you wish to dollar cost average into ETFs you have to log onto your account and manually buy more shares every time.
not true. Most brokerages provide automatic investment option that retrieves fund from a specified bank account and invests into the plan you set up. For instance, etrade has that feature.
@@CZcamsrkt The one's I'm familiar with only do that with Mutual funds. For instance, Vanguard provides that function for its total stock index VTSAX, but does not offer that option for its total stock index fund VTI.
I think one of the biggest things that you mentioned in passing is the purchasing of partial shares. It may not be an issue at Vanguard but at Schwab, you can't buy like that. So if you want to utilize DCA on a monthly contribution schedule, ETFs aren't an option at all. Depending upon your brokerage, that may be the deciding factor for someone.
What about buying funds of transaction fees from other houses? In this case, isn’t ETF the only way to go because many houses now charge zero trading fees on ETFs.
Buy and hold investors don't have much of a selling price risk with ETFs because they rarely sell. As for buying risk, what is so difficult for regular dollar cost averaging investors about looking at the relative prices during the day and buying when you think it will be lowest for the day? It's not a huge risk point but a potential small reward opportunity on which one can hone their performance. So, the ETFs overall have just a bit more reward opportunity and very little if any downside. With Vanguard non Admiral shares, also one basis point lower fees for the ETFs, and of course no minimum. Rob is listing all of the relevant details showing the small but real versatility and opportunity benefits of ETFs, but then coming to a conclusion which makes no sense to me. His main rationale seems to be that looking at daily price fluctuations frighten him, but index fluctuations are too small to be very scary. Rob's presentations in general are excellent.
If you have the minimum investment then mutual funds are fine for buy and hold. My Roth is made up of ETFs because I just started it and deposit $575/month. Only have a total of $3k in it. I might "transfer" to equivalent mutual funds when I have enough in each to meet the minimums. I am only considering that though because it would make automatic investing possible. Right now I just have a calendar reminder set for when the funds hit my brokerage account to remind me to go in and invest the additional funds. Also there are some I don't want to invest that much in at first. I don't pay transaction fees with Vanguard because my total value is over the threshold.
One of the reasons I chose ETFs over Mutual Funds is that I believe there is less opportunity for malfeasance regarding ETFs, like the 2003 mutual fund scandal when select customers were allowed to trade in mutual fund shares after the markets had closed, at the closing price for the day.
The perspective here is strictly American. Everyone doesn’t have access to the same mutual funds at the same cost (not counting cost of currency exchange). So in the EU for example an ucits compliant ETF for eg S&P500 will be both cheaper and be closer to the index, which makes for a massive difference
The 'problem' with index investing is the fact that most are capitalization weighted. So the top 10 holdings is really all that you are investing in. The rest are just along for the ride with largely meaningless influence. So direct investing in those top 10 is not as complicated as you make it here. Equal weighted indexes usually perform lower than a capitalized index because 'diversification' really does not give you better performance. So index investing really is not the one all answer to good investing that you've made it.
Yeah i got burned a little bit with the Vanguard ETF as a casual investor (ie kinda dumb and forgetful). I was online and on the phone with Vanguard for unrelated reason and i casually asked why i had $15k in a settlement fund. Well i normally do taxes on the weekend and also remember to contribute to IRA at that time. So i was contributing to the VOO ETF but forgot to call the next business day when actual price is determined to actually move funds from settlement fund to the index fund. Did this twice apparently. So anyways the 1 basis point not worth it for people like me who want to invest but deal with it once and be done with it, set it and forget it.
Not trying to be rude, but why did it take you over 20 minutes to simply say you preferred to pay the NAV after a trading day as opposed to during a day?
Hi Rob, is the capital gain tax on this mutual fund negligible? I know sp500 fund has very low turn over ratio but ETF such as VOO has no such a problem since it is traded like a stock. There would be no tax burden until you sell your shares.
There is a tax burden even if you buy and hold for years. VOO gives off a dividend annually that you must pay every year. It may be relatively small, but there is a dividend that will be taxed every year.
The reason that I prefer ETFs to Mutual Funds is the ability to set a limit order to buy or sell the fund. I think I save some $$ by doing that when I need to add or subtract money from my funds.
I think your advice might be a bit American specific. I went with ETFs because of the ownership model in Australia. With the CHESS system, I own the shares personally, mitigating all sorts of risks, which is more than I can say about mutual funds.
Why are the NAVs different? At this very moment VFIAX has a NAV of 408.48 and VOO has a price of 402.57. Shouldn't they be pretty close? Maybe this is a topic for another video. Enjoying your videos so far.
Q2 No their share prices do not have to be similar. Initial share price is an arbitrary number. Look at: ~ $236 = Vanguard Total Stock Market ETF (VTI) ~ $114 = Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
See M1 Finance, Fidelity and similar brokerages that allow you to buy in dollar amounts and not shares. Also vanguard allows dollar purchases for their ETFs.
@Rob B great video and detailed explanations - when i read the comments it’s funny most the questions are answered already in the video - expense ratios being the same or close , buy and hold the mutual is simple - less bells and whistles that I really don’t need great video!
Hi Rob, thanks for this informational video, as i am is not US citizen and cant buy US mutual funds also i cant afford the minimum initial investment, are its still right to hold ETF as long term investment portfolios? Im glad if you can answer my question.. Thank You
For Internarional non US investors isn’t there ETFs with no dividend ? As investors who earn dividend from US ETFs are liable to 30% withholding tax we wish to avoid given these are being held for long term ie retirement. thanks in advance
One other reason to buy ETF is if your brokerage firm is other than Vanguard and you want to purchase a Vanguard fund without paying extra fees from your current broker. Is that correct?
Institutionalists hate ETFs. A globally diversified ETF like the FTSE All World does essentially what a well diversified mutual fund does, only you save on commission big time.
Rob, Is it true that perhaps with Mutual Funds one has the ability to decide to invest based on closing price - so if you like a particular MF and its NAV have gone down a few basis point then decide to invest on that day - Kind of like market timing based on EOD pricing.
I am so confused. Sounds like you prefer mutual funds for long term, but in so many of your videos and profiles you promote EFT's??? Can you help me understand?
We Are in Unchartered Financial Waters! every day we encounter challenges that have become the new standard. Although we previously perceived it as a crisis, we now acknowledge it as the new normal and must adapt accordingly. Given the current economic difficulties that the country is experiencing in 2024, how can we enhance our earnings during this period of adjustment? I cannot let my $680,000 savings vanish after putting in so much effort to accumulate them.
This Vanguard Mutual Fund is really cheap because it tracks the S&P 500 index and does not need much for active management. Most active mutual funds that are offered by financial advisors have very high expense ratios of 2-2.5%, at least the ones that's have been offered to me in the past. In that case, ETFs are so much cheaper.
Fidelity and Vanguard have several low cost managed mutual funds. Vanguard wellington is a 60/40 stock/bond fund that has been around since 1929 and has an expense rate of just 0.16!
@@donmountford797 Wellington Management Co is one of my favorite Vanguard advisors, I am in a number of its funds and they all do well and have low fees and costs. You are correct!
@@TheSmartLawyer My wife's IRA is with Wellington. She has done very well and unlike more aggressive funds she has had fairly stable growth over the years.
If my initial investment in '98 had been in the Wilshire 7000, it would be worth more than my entire present holdings. Most of the mutual funds that existed then, and many of the fund families, have disappeared. 68% of mutual funds under perform the market; 14% lose money. When the stats get too bad, they rename a fund or fold it into another fund and get the stats started anew. There's a sales pitch 'advisors' use: time in the market, etc. That keeps investors hanging on believing success is just around the corner. `
What are you talking about? He's talking about the S&P index. It performs quite well over the long term, and something like 92% or higher, of fund managers can't beat it. If you think you're an elite trader, or you know a fund manager that can beat it, by all means. For the vast majority of the population, index funds are the preferred way to go.
I hate mutual funds. I lost $30,000 in one day. My broker said there was no safe place to put your money. I have been buying stock ever since. You have absolutely no control in what someone you never met is buying. They always profit on you rarely do. If I am going to lose money, I will pick what I invest in. Most mutual funds will put the money in stock any way.
I watched your video where you promote m1finance. I checked it out and like it. However, only ETFs can be added to the portfolio on their platform. Comments?
Elsewhere you expressed a preference for the M1 Finance platform which, as I understand it, only deals with ETFs, not the underlying index funds. [I'm thinking specifically about investing in Vanguard index funds.] Is the ease of using M1 Finance a reason to choose the ETFs to invest in?
I would say no. I would consider the services, technology, etc. of a broker first. I like the rebalancing feature of M1, particularly for those starting out. For those closer to retirement, I prefer Fidelity.
For anyone reading this in 2023, Fidelity at least now allows automatic investment in ETFs
I as as long term as their can be. ETF's for me. You can always just hold them. Much more flexible and tax efficient.
Same here and you know the price throughout the day
I would rather the NAV determine the price. Buy and hold in my Vanguard SEP. Tax efficient and reliable. Dividends reinvested. Beautiful!
I do too
Schwab index funds in the IRA and vanguard ETFs in the taxable
I hold mutual funds in my 401k and etfs in my Ira and taxable. I like both for different reasons. I like mutual funds for keeping me from buying and selling too much and the extra year end capital gains payouts. In my IRA and taxable accounts I much prefer ETFs. I’m charged a large fee to buy and sell(rebalance)mutual funds, and etfs are free. Also, there’s nothing worse than not being able to get into or out of a position during the day if you wanted to.
ETF for Roth IRA
I appreciate Rob's comparison and analysis of the differences between Mutual Funds and ETFs, but he's neglected a few considerations that strongly favor ETFs for me. First, among Vanguard ETFs, they are offered at the same (or even lower) Expense Ratio as Admiral Shares of the Mutual Fund that usually have a much higher minimum investment threshold (sometimes extraordinarily and inaccessibly high) compared to Standard Investor Shares in the same Fund. Second, I purchase all my ETFs using Limit Orders (that cost no more to execute) and set 'my price' that I'm willing to pay and I wait... for the gyrations of the market to trip past my price on a down moment. If, after a while, the order doesn't execute, then I need to reconsider 'my price' and modify my Limit Order accordingly.
My impression is ... there are nuanced differences. Personally, I don't trade stocks where the bid/ask is significant. And I'm Canadian - here the MER for all funds whether ETFs or mutual funds, have relatively high MERs - especially mutual funds. And I remember the days (too long ago) when mutual funds' minimum investment was a barrier for me. If I was a beginning investor with a limited amount to invest, then I'd definitely go the ETF route. Generally speaking, I'm not convinced that mutual funds have an edge over ETFs.
Nonetheless and as as always, I appreciate hearing your opinions. Always well-researched, logical and well-explained. Thank you.
Another thing to keep in mind... if you are resident in the EU, it is much easier (or sometimes the only way) to invest in passive index-tracking funds (like Blackrock, Vanguard etc.) via ETFs, provided they are UCITS compliant.
Or - Switzerland :) Although here we don't have to worry about UCITS...yet.
I like to hold ETFs in a taxable account because they tend to be a bit more tax efficient (even more than an index mutual fund). Here is why : In a mutual fund, when someone sells, the fund may need to liquidate holdings in order to cover it, generating capital gains for all fund holders. In an ETF the ETF share is directly sold to someone else, so generally doesn't generate capital gain until YOU sell. I agree though that in a tax advantaged account, index mutual funds are superior.
Yeah, that was a horrible error in the video. It's the single most important reason to stick with ETFs, although it doesn't matter in the specific case of Vanguard. Also, the VFIAX vs VOO comparison was also wrong. They are not at all identical funds. They are the exact same single fund.
And time of day DOES matter. Buying in the morning is statistically a higher long term return than buying at market close.
@@jwdepriest I would like to see your evidence of this.
It is a lot easier for me to automatically invest in mutual funds which is why I go the mutual fund way. Rarely do I see that much in capital gains distributions at the end of the year in a taxable account.
@@jwdepriest I would like to see evidence in this aswell. Sounds bogus.
Overall, I like total stock market index funds. For those wanting to know what price they are buying a total market index such as VTSAX, one can monitor the CRSP US Total Market Index during the trading day and precisely determine if it is going to be a red day or green day.
Easier would be to track equivalent etf, in this case VTI. The mutual fund VTSAX would perform almost identical.
Or you can skip that and just buy VTI
i have both... the point is DO IT,
ETFs gives me more control as a brokerage customer. If Fidelity starts acting like a knucklehead, I can readily move my VOO to Schwab or Vanguard and not be stuck to Fidelity's ecosystem.
When I had initially opened up my Roth with Vanguard and learned that automatic investments were not possible with their ETFs, I knew that their mutual funds were the better option for me. I started with $1,000 in a target date fund and after it reached $3,000 (not from the returns but mostly from future investments) I sold it and bought VTSAX.
That was the best comparison of ETFs and mutual funds I've heard yet!
I think what you might be missing here is that a lot of ETFs will act as market makers as well, and will buy/sell shares during the day to keep the market price at the NAV. I also feel like there is value of being able to buy/sell when I want and get filled immediately, without the risk of markets moving a lot from now till the end of the day.
Also in Canada a .04% MER on a mutual fund is unheard of.
Nobody cares about Canada.
My least favorite things about mutual funds are the capital gain distributions and the add-on account fees. How do ETF's handle those? I think it would also be easier to manage a brokerage account containing a variety of ETF's rather than dealing with individual mutual fund company websites.
It is my impression that there are tax advantages to ETFs, but you didn't address the tax issue at all.
As with most choices in finance, I like to own both-depending on the purpose.
I like this channel but this video did not justify why mutual funds are better. Only reason given was about the spread on buy and sell prices. Is there any other reason? ETF expense ratios are lower and you can sell and buy them instantly. Why would anyone go for a mutual fund? Most brokers don't charge trading fees for ETFs anymore. I recently tried to buy a vanguard mutual fund from schwab account and i was asked to pay a fee but i can buy the same fund as etf without any fees. Am i missing something here?
Same opinion here! Still dont understand how Mutual Funds could be better than ETF.
Automatic investing for one, set it and forget it. Not possible as far as I know for ETFs except for 1 brokerage.
@@AK-ky3ou m1 finance and most robo advisors like wealthfront allows automatic investments in ETFs. But agree its not allowed at the larger brokerage firms.
I think someone could make a 20 minute video on why ETFs are better with the points you made. I would add that you are able to set a limit order on ETFs
Right and mutual fund in the long run there so much money you loose with those high fees. Imagine having 100k invested and pay 1% a year 1.000usd year in management nop thanks
Bid ask spreads are tighter than they look. Normally you can buy and sell 1 penny around mid price in a liquid ETF even if the bid spread seems larger than that.
Also, Vanguard uses ETF share class to help manage capital gains in their mutual fund share classes. That tax efficiency is therefore unique to vanguard mutual funds but is actually the property of ETFs.
The only argument he makes for buying mutual funds over ETFs is that you have to pay the bid-ask spread on ETFs. However, a similar transaction fee applies to mutual funds as well. They may call it the bid-ask spread as well or a transaction fee. After all, how do the mutual fund managers cover the cost buying and selling the underlying assets when an investor buys or sells units in the mutual fund? This has to come from the expense ratio (all fund investors pay) or a transaction fee (only the investor who buys/sells pays). If anything, the total cost of managing an ETF is lower because the turnover of the underlying assets are lower because units are not created/destroyed so often. Always remember, there is no such thing as a free lunch.
The most important is that mutual funds reinvest dividends, because you can buy partial share of a mutual fund. You can invest exactly one dollar or $3.45 into a mutual fund.
I don't have a problem buying exact amounts of ETFs in my Fidelity accounts. I just bought exactly $6,000 worth of VTI in my ROTH after the first of the year.
@@danh2716 you can reinvest dividends it's called DRIP even TD Ameritrade will gives you the option on the selection. Schwab will also have the same option but only if you select it. I think by default it is dividend cash out that reinvestment. That's how it is on TD A. You can't buy partial shares but dividend reinventing is a different matter.
You can reinvest dividends in ETFs as well. I have ETF's in my taxable account, just because I only buy them when I have some extra funds laying around, but the bulk goes into Roth and my 457b accounts, which are mutual funds.
I prefer ETFs when managing my M1 Finance Roth. I have my custom 5-fund "pie" comprised of ETFs and the auto-rebalancing feature of M1 takes all of the hassle out of buying them.
Thanks Rob. I would also like to add that I set up most of my investing to be automatic. Neither Fidelity or Vanguard will by ETFs automatically like they will a mutual fund.
I don't understand why the bid/ask spread for an ETF is more significant than not knowing which price you're going to pay for a mutual fund when you buy it. The latter seems much worse to me...
Thank you i was looking for this information before making a decision. I plan to stick long term MF makes sense with price comparison if minimum investment is not a concern. Thank you for your work.
The two reasons I like mutual funds over ETFs is because I can invest every dollar I intend to save. That may not be the case with an ETF. It’s possible to have money that will just sit in the settlement fund. The second reason is the ease of doing tax loss harvesting. In an mutual fund I can simply do and exchange and it will sell and buy for me at NAV. With an ETF, I would need to manually sell and buy. I don’t want to spend the time to do that and risk a price fluctuations within that process. Mutual funds allow me to do tax loss harvesting with little effort and time.
I appreciate your simple investment approach for a novice investor like me who just want to buy and hold.
For the novice investor thirsty for knowledge the details in his content are pure gold to me.
When I sold some Vanguard Admiral shares, I got a message that I couldn't buy any shares in the same fund for 30 days. That convinced me to stick with ETFs.
That was likely a "wash sale". The same thing can happen with ETFs.
Thank you!!!! I’ve been looking for this explaination for so long.
For me ETF is a preference as I like to know the price when I am doing the transaction. I am curious about the comment that selling covered calls can lose one lots of money. If one is not greedy and sets a strike price outside the likely range then one could generate additional returns.
"If one is not greedy and sets a strike price outside the likely range then one could generate additional returns."
Until it gets called away
Older people like mutual funds because that's what they understand and trust. It's much like old people still listen to old music.
Ok Rockford files.
You're awesome, Rob. Keep it up.
The argument for Bid-ask spread is valid but isn’t great enough vs the freedom to buy and sell at limit orders , value far more than that !
How about Capital Gain Distribution of Mutual funds? Doesn't it make etf more tax efficient?
A mutual fund distributes dividends, qualified and ordinary capital gains. You pay taxes on dividends and ordinary dividends.
Don’t many Mutual funds have dual pricing that works just like a bid offer spread ?
Load funds have a spread. No loads do not. Loads represent a sales charge generally split between the mutual fund and the broker.
Thank you Uncle Rob! Learning a lot from you.
Rob, Finally thought of a video (maybe several?) that would help every level of investor find fruitful - maybe I missed it -an explanation as to how we can find out hidden costs on mutual funds that impact on returns. SEC rules seem like they are not enough. Thanks, George
Im not sure if you gave an answer to anything. so for clarification ETFs sound better to me.
TL;DR they are almost the same.
ETF: bid/ask spread at the day of making a transaction, can be lower expense ratio
Index mutual fund: one price, calculated at the end of the day, expense ration can be higher (but lower than actively managed mutual funds).
I don't see much of a difference even for buy-and-hold investors
I really don't know that I heard anything that showed mutual funds are > ETFs except maybe the statement being repeated(clickbait?lol). You can always put in your ETF order at the EoD.
ETFs require a lot less headache when dealing with taxes. When mutual funds rebalance at the end of the year, doesn't this force u to pay taxes on the gains? You also get a tax credit on the losses but who wants to deal this major headache when u don't have to as it adds major complexity to ur life. ETFs make you life a lot more simple unless I am misunderstanding something.
You’re entirely correct, I’m not sure why this guy completely neglects to address this
It did take a moment before I realised that no matter what I chose to do, I wouldn't be dealing with the big ass spread. That came as a relief.
I always learn so much from these. Thanks Rob
I see two advantages of ETF's for ordinary people. 1. Equity ETF's don't have capital gains distributions. That's a good thing in a taxable account, especially one with long term holds. 2. Some useful ETF's don't have mutual fund counterparts. I believe that target maturity bond funds are a good example. You get diversification in an ETF versus holding individual bonds, and you still get a targeted maturity date that you would have with a bond that you plan to hold to maturity. If I'm missing something here, please let me know.
Very well explained Rob. I was curious as to what the difference was between the two.
Selling cash secured puts and covered calls via the wheel seems like it's not only a low risk method of options trading, but accelerates returns compared to the historic 10% market average by a considerable amount. The only downside I can see is that we may miss out on some upside in those years where the market just crashes through the ceiling, but over the long term it looks like, even taking commissions and short term capital gains into account, selling options on even relatively safe amd low implied volatility ETFs like XLF returns way better in listless markets. As far as how options perform during a crash...that I haven't experienced yet.
I am a big fan of your channel and agree with 90% of your advice overall but this advice you give on choosing mutual funds over ETFs I do not agree with. For example on the vanguard it costs 0.04% expense fee for the mutual fund compared to the 0.03% fee for the ETF on a fund with the EXACT same holdings. And another important consideration is that if a bad news headline hits the newspapers that causes a dramatic drop in the market.....having the ETF let's you bail out in an emergency at the best price compared to a mutual fund fund that won't calculate the nav until the end of the day. There have been days that you would have lost an extra 5% or more by being trapped in a mutual fund. And I will tell you something else .... When 20% of the participants in a mutual fund decide to bail out in the same day (such as what happened when COVID was announced I march of 2020) it causes massive damage to the mutual fund and it's liquidity because the fund manager will be forced to sell assets to cover all the outflows of customers. So I my opinion it is a bad idea to invest in mutual funds when there is an ETF equivalent. Vanguard even said that the reason the ETF has a cheaper fee than it's mutual fund equivalent is because so many more people are in the ETF instead of the mutual fund version. Mutual funds are a deprecated and old fashioned instrument. They are going the way of the DoDo 🦤
I hear it said so common that "you can't time the market" and that people should sit in same fund for years without exiting it but that that is not a logical thing to do. If I am in a fund that has lost more than 10% year to date I think it would be smarter to exit the position and to buy back in after the bear market has reversed. In the interim one could also choose to sit in an inverse ETF and continue making money
Fidelity has a few index MFs with zero interest expense ratios
One can trade an ETF like a stock and set a stop. Buy and hold is not as efficient as sitting on your hands in cash during down turns. I had to deal with mutual funds in my old 401k and got warnings when I would sell and then buy back in less than 30 days. So if one has 30+ years and is willing to ride out the down turns I'd agree that mutual funds are workable... just not my cup of tea.
You left out an important advantage mutual funds have over ETFs. Mutual funds like the Vanguard S&P500 can have funds automatically invested into them every pay period or 2 weeks etc without any effort on your behalf at all (facilitating dollar cost average investing). In contrast, ETFs do not allow that convenience. If you wish to dollar cost average into ETFs you have to log onto your account and manually buy more shares every time.
not true. Most brokerages provide automatic investment option that retrieves fund from a specified bank account and invests into the plan you set up. For instance, etrade has that feature.
@@CZcamsrkt The one's I'm familiar with only do that with Mutual funds. For instance, Vanguard provides that function for its total stock index VTSAX, but does not offer that option for its total stock index fund VTI.
VFIAX expense ratio .040. Vanguard 500 index ETF VOO expense ratio .003. Your choice.
Super low either way unless you're tossing around lots of weight as an active trader....
@@TheSmartLawyer a dollar saved is a dollar earned
I think one of the biggest things that you mentioned in passing is the purchasing of partial shares. It may not be an issue at Vanguard but at Schwab, you can't buy like that. So if you want to utilize DCA on a monthly contribution schedule, ETFs aren't an option at all. Depending upon your brokerage, that may be the deciding factor for someone.
What about buying funds of transaction fees from other houses? In this case, isn’t ETF the only way to go because many houses now charge zero trading fees on ETFs.
Buy and hold investors don't have much of a selling price risk with ETFs because they rarely sell. As for buying risk, what is so difficult for regular dollar cost averaging investors about looking at the relative prices during the day and buying when you think it will be lowest for the day? It's not a huge risk point but a potential small reward opportunity on which one can hone their performance. So, the ETFs overall have just a bit more reward opportunity and very little if any downside. With Vanguard non Admiral shares, also one basis point lower fees for the ETFs, and of course no minimum. Rob is listing all of the relevant details showing the small but real versatility and opportunity benefits of ETFs, but then coming to a conclusion which makes no sense to me. His main rationale seems to be that looking at daily price fluctuations frighten him, but index fluctuations are too small to be very scary.
Rob's presentations in general are excellent.
If you have the minimum investment then mutual funds are fine for buy and hold. My Roth is made up of ETFs because I just started it and deposit $575/month. Only have a total of $3k in it. I might "transfer" to equivalent mutual funds when I have enough in each to meet the minimums. I am only considering that though because it would make automatic investing possible. Right now I just have a calendar reminder set for when the funds hit my brokerage account to remind me to go in and invest the additional funds.
Also there are some I don't want to invest that much in at first.
I don't pay transaction fees with Vanguard because my total value is over the threshold.
One of the reasons I chose ETFs over Mutual Funds is that I believe there is less opportunity for malfeasance regarding ETFs, like the 2003 mutual fund scandal when select customers were allowed to trade in mutual fund shares after the markets had closed, at the closing price for the day.
The perspective here is strictly American. Everyone doesn’t have access to the same mutual funds at the same cost (not counting cost of currency exchange). So in the EU for example an ucits compliant ETF for eg S&P500 will be both cheaper and be closer to the index, which makes for a massive difference
Taxes, not the state---taxes.
The 'problem' with index investing is the fact that most are capitalization weighted. So the top 10 holdings is really all that you are investing in. The rest are just along for the ride with largely meaningless influence. So direct investing in those top 10 is not as complicated as you make it here. Equal weighted indexes usually perform lower than a capitalized index because 'diversification' really does not give you better performance. So index investing really is not the one all answer to good investing that you've made it.
Yes, but it reduces the volatility. It's the best option for most people. You do you.
The irony of this comparison is they literally are the same fund.
Yeah i got burned a little bit with the Vanguard ETF as a casual investor (ie kinda dumb and forgetful). I was online and on the phone with Vanguard for unrelated reason and i casually asked why i had $15k in a settlement fund. Well i normally do taxes on the weekend and also remember to contribute to IRA at that time. So i was contributing to the VOO ETF but forgot to call the next business day when actual price is determined to actually move funds from settlement fund to the index fund. Did this twice apparently. So anyways the 1 basis point not worth it for people like me who want to invest but deal with it once and be done with it, set it and forget it.
Not trying to be rude, but why did it take you over 20 minutes to simply say you preferred to pay the NAV after a trading day as opposed to during a day?
thank you for a clear concise explanation
ETFs are better for taxable accounts because they allow for more control over the timing of income and realized gains.
Hi Rob, is the capital gain tax on this mutual fund negligible? I know sp500 fund has very low turn over ratio but ETF such as VOO has no such a problem since it is traded like a stock. There would be no tax burden until you sell your shares.
There is a tax burden even if you buy and hold for years. VOO gives off a dividend annually that you must pay every year. It may be relatively small, but there is a dividend that will be taxed every year.
The reason that I prefer ETFs to Mutual Funds is the ability to set a limit order to buy or sell the fund. I think I save some $$ by doing that when I need to add or subtract money from my funds.
I think your advice might be a bit American specific. I went with ETFs because of the ownership model in Australia. With the CHESS system, I own the shares personally, mitigating all sorts of risks, which is more than I can say about mutual funds.
you can put a stop loss on an etf
Yes.
Awesome video.
Aren't ETFs better for our brokerage account, as opposed to our IRA, due to tax efficiency?
Not when it comes to vanguard index mutual funds, other companies index mutual funds, yes it’s better to own the etf in taxable.
With mutual funds when you sell you do not know at what price you are selling. In October 1987 the market fell 23% in a day. It could happen again.
Why are the NAVs different? At this very moment VFIAX has a NAV of 408.48 and VOO has a price of 402.57. Shouldn't they be pretty close? Maybe this is a topic for another video. Enjoying your videos so far.
Q2 No their share prices do not have to be similar. Initial share price is an arbitrary number. Look at:
~ $236 = Vanguard Total Stock Market ETF (VTI)
~ $114 = Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Mutual fund you can contribute or buy a exact amount , etf you always have to buy at current market price
See M1 Finance, Fidelity and similar brokerages that allow you to buy in dollar amounts and not shares. Also vanguard allows dollar purchases for their ETFs.
ETFs are more tax efficient, lower cost, and no minimum entry investment.
What about suprise tax bills with VFIAX?
@Rob B great video and detailed explanations - when i read the comments it’s funny most the questions are answered already in the video - expense ratios being the same or close , buy and hold the mutual is simple - less bells and whistles that I really don’t need
great video!
Hi Rob, thanks for this informational video, as i am is not US citizen and cant buy US mutual funds also i cant afford the minimum initial investment, are its still right to hold ETF as long term investment portfolios? Im glad if you can answer my question..
Thank You
Expense ratio is slightly higher. Why would I want to pay more?
If you own the mutual fund, you always have a Buyer
For Internarional non US investors isn’t there ETFs with no dividend ? As investors who earn dividend from US ETFs are liable to 30% withholding tax we wish to avoid given these are being held for long term ie retirement. thanks in advance
yes there are. Find the ones that are Accumulation, instead of Distribution.
Thanks. Could you help with atleast one name or how to filter on “ accumulation” pls thanks
@@oflavia2910 you have to look the ones that are available at your brokerage service. Some examples: IWDA, VAGU, EMIM.
I detected no positives given to index funds over ETFs…
I can buy VOO with no commission. VFIAX costs me $35 per trade.
One other reason to buy ETF is if your brokerage firm is other than Vanguard and you want to purchase a Vanguard fund without paying extra fees from your current broker. Is that correct?
A valid reason
Institutionalists hate ETFs. A globally diversified ETF like the FTSE All World does essentially what a well diversified mutual fund does, only you save on commission big time.
If your a long term investor then buying mutual funds is a terrible idea, point blank period. Your choosing to pay higher fees for the same thing
Rob, Is it true that perhaps with Mutual Funds one has the ability to decide to invest based on closing price - so if you like a particular MF and its NAV have gone down a few basis point then decide to invest on that day - Kind of like market timing based on EOD pricing.
Are there "synthetic" mutual funds? For non-US investors at least this may make quite a difference regarding taxes.
All a question of preference and how much you can invest at once.
Bid ask spread can be ridiculous in some cases when ETF is narrow or specialized
I am so confused. Sounds like you prefer mutual funds for long term, but in so many of your videos and profiles you promote EFT's??? Can you help me understand?
I like your analysis of MF vs ETF
We Are in Unchartered Financial Waters! every day we encounter challenges that have become the new standard. Although we previously perceived it as a crisis, we now acknowledge it as the new normal and must adapt accordingly. Given the current economic difficulties that the country is experiencing in 2024, how can we enhance our earnings during this period of adjustment? I cannot let my $680,000 savings vanish after putting in so much effort to accumulate them.
This Vanguard Mutual Fund is really cheap because it tracks the S&P 500 index and does not need much for active management. Most active mutual funds that are offered by financial advisors have very high expense ratios of 2-2.5%, at least the ones that's have been offered to me in the past. In that case, ETFs are so much cheaper.
You can have index funds... that match the etf lol. There's also active etfs.
This
Fidelity and Vanguard have several low cost managed mutual funds. Vanguard wellington is a 60/40 stock/bond fund that has been around since 1929 and has an expense rate of just 0.16!
@@donmountford797 Wellington Management Co is one of my favorite Vanguard advisors, I am in a number of its funds and they all do well and have low fees and costs. You are correct!
@@TheSmartLawyer My wife's IRA is with Wellington. She has done very well and unlike more aggressive funds she has had fairly stable growth over the years.
If my initial investment in '98 had been in the Wilshire 7000, it would be worth more than my entire present holdings. Most of the mutual funds that existed then, and many of the fund families, have disappeared. 68% of mutual funds under perform the market; 14% lose money. When the stats get too bad, they rename a fund or fold it into another fund and get the stats started anew. There's a sales pitch 'advisors' use: time in the market, etc. That keeps investors hanging on believing success is just around the corner. `
What are you talking about? He's talking about the S&P index. It performs quite well over the long term, and something like 92% or higher, of fund managers can't beat it. If you think you're an elite trader, or you know a fund manager that can beat it, by all means. For the vast majority of the population, index funds are the preferred way to go.
@@mplslawnguy3389 You should avail yourself in a course in reading comprehension.
I hate mutual funds. I lost $30,000 in one day. My broker said there was no safe place to put your money. I have been buying stock ever since. You have absolutely no control in what someone you never met is buying. They always profit on you rarely do. If I am going to lose money, I will pick what I invest in. Most mutual funds will put the money in stock any way.
I watched your video where you promote m1finance. I checked it out and like it. However, only ETFs can be added to the portfolio on their platform. Comments?
Is Robinhood just ETF's?
I contribute to my mutual funds in my Ira through my principal financial broker. I have no idea what he is charging me.
Elsewhere you expressed a preference for the M1 Finance platform which, as I understand it, only deals with ETFs, not the underlying index funds. [I'm thinking specifically about investing in Vanguard index funds.] Is the ease of using M1 Finance a reason to choose the ETFs to invest in?
I would say no. I would consider the services, technology, etc. of a broker first. I like the rebalancing feature of M1, particularly for those starting out. For those closer to retirement, I prefer Fidelity.
@@rob_berger Thanks.