ETFs vs. Mutual Funds

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GuyLafleur
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ETFs vs. Mutual Funds

Post by GuyLafleur »

Hi all,

Recently read this article by Allan Roth on why ETFs won't replace mutual funds: http://www.etf.com/sections/index-inves ... newsletter

I'm currently fully invested in Vanguard Canada's ETFs (VXC, VCN, and VAB). Is there any significant downside or risk to having all of my investments in ETFs (e.g., lack of insurance if money lost to due hacking of my account, bid-ask spreads) as compared to if I had my money in mutual funds instead? (although I believe Vanguard Canada does not offer any mutual funds)
nisser
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Re: ETFs vs. Mutual Funds

Post by nisser »

Pretty lame article that doesn't address the fact that the average mutual fund under performs the average ETF/index.
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Re: ETFs vs. Mutual Funds

Post by brucecohen »

GuyLafleur wrote: lack of insurance if money lost to due hacking of my account
Your brokerage account is covered by CIPF regardless of whether it holds ETFs or mutfunds.
bid-ask spreads
Do you really do enough trading that often to worry about this? And the impact of the spread might well be offset by the risk of having to put in a mutfund order without knowing the price at which it will be executed.

You're correct; Vanguard Canada does not offer mutual funds.

From the linked article:
-- Can buy fractional shares: Yes, this is a mutfund advantage. Dribs and drabs from ETFs can be a pain in the ass.
-- No premium or discount—all transactions are at net asset value. Yes, they're at NAV but that amount is not known at the time of purchase/sale. Vanguard's website shows NAVs for its ETFs but I don't know how current that data is. In any event, if you're a long-term holder does it really matter? Also, I don't remember the details but NAV pricing on global mutfunds involves some form of estimation due to time zone differences.
-- Less cash drag, as dividends are reinvested more quickly. Yes, a mutfund advantage
-- Can do a tax-free exchange from mutual funds to ETFs, but not the reverse: This is an Americanism that I don't think applies to Canada
-- Can do automated dollar cost averaging: Yes, a mutfund advantage and there's no commission due on a mutfund PAC purchase.

Basically, mutfunds are much more convenient but at a cost in terms of higher MERs. For many the extra cost is worthwhile. For many others it's not.
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Mordko
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Re: ETFs vs. Mutual Funds

Post by Mordko »

Canadian mutual funds tend to be ultra-expensive, but the article deals with the US where funds can be just as cheap or cheaper than ETFs. Pension funds off mutual funds with competitive MERs + the e-series. In these cases I can't see much difference between ETFs and funds.
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Re: ETFs vs. Mutual Funds

Post by Thegipper »

You might want to take Buffett's advise and go with a broad based ETF. He challenged the hedge fund industry with a million dollar wager that the S&P 500 would beat any hedge fund over a 10 year period. At year 9 his return is up over 80%% compared to the hedge fund that took up his challenge. You would have to be awful lucky to find a Canadian mutual fund which would do better then the S&P500 over a 10 year period. Maybe a 1 out of 10 chance?
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adrian2
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Re: ETFs vs. Mutual Funds

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Thegipper wrote:You might want to take Buffett's advise and go with a broad based ETF. He challenged the hedge fund industry with a million dollar wager that the S&P 500 would beat any hedge fund over a 10 year period. At year 9 his return is up over 80%% compared to the hedge fund that took up his challenge. You would have to be awful lucky to find a Canadian mutual fund which would do better then the S&P500 over a 10 year period. Maybe a 1 out of 10 chance?
Apples and oranges. There's a much better chance that a Canadian mutual fund would do better than S&P500 over a 10 year period, the precondition is that the Canadian market does better than the US one. You may be suffering from recency bias.
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AltaRed
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Re: ETFs vs. Mutual Funds

Post by AltaRed »

Or does the Gipper mean a Canadian mutual fund investing in the US market?
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Thegipper
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Re: ETFs vs. Mutual Funds

Post by Thegipper »

adrian2 wrote:
Thegipper wrote:You might want to take Buffett's advise and go with a broad based ETF. He challenged the hedge fund industry with a million dollar wager that the S&P 500 would beat any hedge fund over a 10 year period. At year 9 his return is up over 80%% compared to the hedge fund that took up his challenge. You would have to be awful lucky to find a Canadian mutual fund which would do better then the S&P500 over a 10 year period. Maybe a 1 out of 10 chance?
Apples and oranges. There's a much better chance that a Canadian mutual fund would do better than S&P500 over a 10 year period, the precondition is that the Canadian market does better than the US one. You may be suffering from recency bias.
I would if we were talking about a fund investing in USA stocks. I suspect that a Canadian ETF outperforms most Canadian equity mutual funds. over a 10 year period. I wouldn't be betting against Buffett.

I hope my corrected error will stop the head spinning.
Last edited by Thegipper on 01 Mar 2017 14:29, edited 1 time in total.
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adrian2
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Re: ETFs vs. Mutual Funds

Post by adrian2 »

Thegipper wrote:I suspect that a Canadian ETF outperforms most Canadian equity ETFs. over a 10 year period.
My head is spinning! :P
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Thegipper
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Re: ETFs vs. Mutual Funds

Post by Thegipper »

Thegipper wrote:
adrian2 wrote:
Thegipper wrote:You might want to take Buffett's advise and go with a broad based ETF. He challenged the hedge fund industry with a million dollar wager that the S&P 500 would beat any hedge fund over a 10 year period. At year 9 his return is up over 80%% compared to the hedge fund that took up his challenge. You would have to be awful lucky to find a Canadian mutual fund which would do better then the S&P500 over a 10 year period. Maybe a 1 out of 10 chance?
Apples and oranges. There's a much better chance that a Canadian mutual fund would do better than S&P500 over a 10 year period, the precondition is that the Canadian market does better than the US one. You may be suffering from recency bias.
I would if we were talking about a fund investing in USA stocks. I suspect that a Canadian ETF outperforms most Canadian equity mutual funds. over a 10 year period. I wouldn't be betting against Buffett.

I hope my corrected error will stop the head spinning.
Before Adrian takes an aspirin.
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Re: ETFs vs. Mutual Funds

Post by big easy »

I caught a CBC news story last night that described all ETFs as low cost vehicles replicating an index and all mutual funds as actively managed with high fees. As if mutual funds could not do the same thing (TDM900) and an ETF could not be a 2x leveraged bet on crude oil (HOU)? Surprising that the CBC would get this wrong.
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Re: ETFs vs. Mutual Funds

Post by AltaRed »

News media like broadcast TV has to generalize to get the intended message out in a few minutes. I believe the CBC got it right (on average) and it was one of the first times I've seen something 'useful' for the masses... at least such that it might 'stick' enough with them to investigate further. Especially so after investors, especially mutual fund investors in active funds, would have seen their December statements with brutal cost data in them. On that basis, three cheers for CBC! A compliment for a change.
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Re: ETFs vs. Mutual Funds

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GuyLafleur wrote:Hi all,

Recently read this article by Allan Roth on why ETFs won't replace mutual funds: http://www.etf.com/sections/index-inves ... newsletter

I'm currently fully invested in Vanguard Canada's ETFs (VXC, VCN, and VAB). Is there any significant downside or risk to having all of my investments in ETFs (e.g., lack of insurance if money lost to due hacking of my account, bid-ask spreads) as compared to if I had my money in mutual funds instead? (although I believe Vanguard Canada does not offer any mutual funds)
Whether you are in mutual funds or etfs, it would not make any difference if your account gets hacked.
You would not be insured either way. But most bank owned brokers have precautions against this which would make it difficult to hack your brokerage account and take yor money.
Most brokers will not issue cheque to third party. They will only transfer funds to bank account in your name etc. Certain changes have to be made in writing with a signature. There are numerous other algorythms they run. Ask them for their policy. Some banks have internal guarantee against hacking.
Cipf only covers you in the event of insolvency of the broker where you do not get all your units or shares returned to you.
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Re: ETFs vs. Mutual Funds

Post by DanH »

big easy wrote:I caught a CBC news story last night that described all ETFs as low cost vehicles replicating an index and all mutual funds as actively managed with high fees. As if mutual funds could not do the same thing (TDM900) and an ETF could not be a 2x leveraged bet on crude oil (HOU)? Surprising that the CBC would get this wrong.
This notion that ETF = index tracking fund and mutual fund = active management is rather outdated. The fact is that most ETFs are active bets. I expand on this in a column I've just submitted to Investment Executive - but you'll have to wait until May to read it. But I attach more numbers and context around this statement. Most mutual funds are actively managed but some interest index fund offerings are available in mutual fund form. Aside from TD e-series there are CIBC's Premium Index funds (~0.4% per year for a $50k min investment).
GuyLafleur wrote:Hi all,

Recently read this article by Allan Roth on why ETFs won't replace mutual funds: http://www.etf.com/sections/index-inves ... newsletter

I'm currently fully invested in Vanguard Canada's ETFs (VXC, VCN, and VAB). Is there any significant downside or risk to having all of my investments in ETFs (e.g., lack of insurance if money lost to due hacking of my account, bid-ask spreads) as compared to if I had my money in mutual funds instead? (although I believe Vanguard Canada does not offer any mutual funds)
The biggest risks have to do with how much equity risk exposure you have and what type of exposure you have underneath the broad asset classes (i.e. type of stock and bond exposure). One could certainly quibble with the sector makeup of the Canadian market (large and small cap) but it's done okay in the face of that concentration challenge and that issue is offset by diversification within and between assets classes.

Your choice of product should not be a function of media characterization of the two product types; fears of hacking; or anything of this nature. The process should go something like this:

objectives --> goals --> asset mix --> breakdown by account --> determine type of asset class exposure --> search for product providing required/desired exposure --> select from products providing this exposure at an attractive cost

See this older article of mine on this issue.
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Re: ETFs vs. Mutual Funds

Post by Ken »

big easy wrote:I caught a CBC news story last night that described all ETFs as low cost vehicles replicating an index and all mutual funds as actively managed with high fees. As if mutual funds could not do the same thing (TDM900) and an ETF could not be a 2x leveraged bet on crude oil (HOU)? Surprising that the CBC would get this wrong.
I have given up getting annoyed by supposed investment experts calling index funds "ETFs". Index funds and mutual funds are two types of investments. ETF is a nice inexpensive method which can be used by either. The fact that it is rarely used by mutual funds is a reflection of the used car salesman approach used by most mutual funds.
Ken
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