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Posted by on July 14, 2007, 3:00 pm
I invest quarterly in my and my wife's Roth IRA's (Feb, May, Aug, Nov
for me and March, June, September, and December for my wife). I have
an index fund at .10% expense ratio and several other funds all around
1.2% or less. I am contemplating moving some of these periodic
investments to ETF funds but I am new to ETFs and wonder about how
commissions and the likes would affect periodic, but not frequent
investments. I dollar cost average for my workplace 403b and that is
rather frequent (ever other week) with relatively small sums so I
figure that is out for ETFs. But, what kind of a case can be made for
the Roth IRAs?
Thanks,
Mike
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Posted by joetaxpayer on July 14, 2007, 3:51 pm
mjgrinnell@gmail.com wrote:
> I invest quarterly in my and my wife's Roth IRA's (Feb, May, Aug, Nov
> for me and March, June, September, and December for my wife). I have
> an index fund at .10% expense ratio and several other funds all around
> 1.2% or less. I am contemplating moving some of these periodic
> investments to ETF funds but I am new to ETFs and wonder about how
> commissions and the likes would affect periodic, but not frequent
> investments. I dollar cost average for my workplace 403b and that is
> rather frequent (ever other week) with relatively small sums so I
> figure that is out for ETFs. But, what kind of a case can be made for
> the Roth IRAs?
If the type of investment is available in both fund and ETF choices, and
the expenses are similar, you are better off with the fund.
There are some reasons why in a post tax (non 401(k) or IRA, I mean)
account the ETF may have advantages. Depending how tightly you manage
your money with an eye on taxes, a fund's year end distribution may be
very unwelcome.
In your case, you mention funds with as high as 1.2% expenses. Is the
same type of investment available as an ETF with even a .7% expense? If
so, you need to do the math. .5% on $2000 is $10 which should cover the
commission on the ETF. If the saving is less, the break even is longer.
I see you making 8 transactions a year, you might consider cutting it
down to 6 or even 4 to reduce expenses. How about (in 2008) loading the
403(b) with a percentage that will let you hit your saving goal by
August, then making two deposits to your Roths at the end of the year?
Same total dollars, just deposited a bit differently to minimize
transactions. Just a thought.
JOE
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Posted by kastnna on July 16, 2007, 10:08 am
> If the type of investment is available in both fund and ETF choices, and
> the expenses are similar, you are better off with the fund.
Please clarify? I've read in various places that given two similar
investments the ETF will often outperform solely based on the lack of
active management (read: market timing) that is otherwise present in
most funds (average fund turnover is 89%). According to the S&P Index
versus active report (SPIVA) active managers rarely outperform the
market over any significant time period, so why would you take the
actively managed fund over the passive ETF if expenses were similar?
I am assuming you mean that the funds are a better buy because the
lack of a bid-ask spread and no transaction costs? If so, that is most
definitely an advantage of MFs. Some would argue that being able to
buy and sell ETFs at any time during the day can compensate for this.
I'm not a big market timer so I'll stay away from this one.
> In your case, you mention funds with as high as 1.2% expenses. Is the
> same type of investment available as an ETF with even a .7% expense? If
> so, you need to do the math. .5% on $2000 is $10 which should cover the
> commission on the ETF.
Very good point. There are plenty of low cost funds out there, but
according to morningstar the average expense ratio of ETFs in 2006 was
0.36%, while the average fund expense ratio was 1.07% (0.83% for bond
funds).
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Posted by Beliavsky on July 16, 2007, 3:08 pm
>
> > If the type of investment is available in both fund and ETF choices, and
> > the expenses are similar, you are better off with the fund.
Maybe the assertion was about ETFs vs. comparable INDEX funds.
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Posted by joetaxpayer on July 16, 2007, 4:20 pm
kastnna wrote:
>
>>If the type of investment is available in both fund and ETF choices, and
>>the expenses are similar, you are better off with the fund.
>
>
> Please clarify? I've read in various places that given two similar
> investments the ETF will often outperform solely based on the lack of
> active management (read: market timing) that is otherwise present in
> most funds (average fund turnover is 89%). According to the S&P Index
> versus active report (SPIVA) active managers rarely outperform the
> market over any significant time period, so why would you take the
> actively managed fund over the passive ETF if expenses were similar?
>
> I am assuming you mean that the funds are a better buy because the
> lack of a bid-ask spread and no transaction costs? If so, that is most
> definitely an advantage of MFs. Some would argue that being able to
> buy and sell ETFs at any time during the day can compensate for this.
> I'm not a big market timer so I'll stay away from this one.
The point I was trying to make (and failed, perhaps) is this; let's
compare VFINX to SPY, for example. Above, I say 'type' to try to get as
'apples to apples' as I can. I am big on recognizing the variables and
freezing the ones I can. VFINX has .18% expense, SPY, .08%. Recall, the
OP is using retirement accounts, and therefore any discussion of tax
consequences is valid, just not to him. There's a variable or two frozen
there. Assume a $10 commission. For $1000, that represents 1%, or about
10 years to have the .10% expense savings favor the ETF. If one can
limit transactions to $5000, the break even is 2 years.
For those with this investment in a post tax account, the ETF may be
favored as it avoids the risk of cap gain distributions which may mess
up one's tax planning. Or favor the fund, as it can be used for easy
rebalancing and sales to create a loss or gain if needed.
The choice isn't clear cut, it really depends on one's intent and
detailed background info. I hope that clarifies my first remarks.
JOE
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