Investment Advice. Anyone know the Pro's and Con's of an ETF?

[Paratus]

My financial advisor called the other day and wants me to dump a mutual fund that's mostly in international and instead buy into an ETF that used to be for big investors but is now open to peons like myself.

I'm not really familiar with ETFs. This one is supposedly S&P 500 based but has an algorithm to defensively jump into bonds if it looks like the market is going to tank.

The past 15 years it's outperformed the S&P at lower risk.

Anyone know what I should be concerned about or questions I should be asking?

Edit: Money would be coming from both tax deferred and non-tax deferred accounts. So some capital gains if I sell the mutual fund but not a lot.

 

[Rakehellion]

Which one?

 

[maddogchen]

is there a commission fee for buying and selling shares of the ETF? Does your financial advisor get a portion of the commission fee?

 

[MongGrel]

The wife is still newer along those lines, she changed from an office manager to getting into financial a few years ago, but she knows a little about Exchange Traded Funds.

I had her read this, she said she would take your advisors recommendation.

 

[stlc8tr]

This one is supposedly S&P 500 based but has an algorithm to defensively jump into bonds if it looks like the market is going to tank.

The past 15 years it's outperformed the S&P at lower risk.

I call shens.

If it was really this easy, everyone would be doing it. 😛

 

[DaveSimmons]

is there a commission fee for buying and selling shares of the ETF? Does your financial advisor get a portion of the commission fee?

Exactly. Some advisers want you to churn because it buys them a new car.

ETF = Exchange Traded Fund. By itself that tells you nothing. Just like a mutual fund an ETF can be made up of any kind of stocks, bonds, real estate or frozen puffin futures.

ETFs can have some slightly lower taxes than a mutual fund holding the same assets (which only matters for non-sheltered accounts), and they can be day-traded more easily than mutual funds. The expense ratio might be lower if it is at the same company. If the ETF is at SleazyBroker and the mutual fund is at Vanguard then the ETF might have a much higher ratio.

This one is supposedly S&P 500 based but has an algorithm to defensively jump into bonds if it looks like the market is going to tank.

Market timing. I'm not fond of that. I buy and hold forever. During the recession stocks tanked but if you did nothing and held on to your mutual fund or ETF shares you did not lose money. If you are investing for decades then a recession is just a chance to buy more shares at a discount.

Anyone know what I should be concerned about or questions I should be asking?

What's the expense ratio compared to an S&P 500 mf or ETF at Vanguard?

 

[MongGrel]

She warns me about leaving most of my money in one stock in particular, but it's doing so well for decades, so doesn't gripe about it over time.

I have some others diversified I guess.

I still have an old SEP I think the guy was churning for awhile actually, it took a big hit during the crash, I just left it alone and it finally recovered and has been doing well.

I think the new one I have at work they started is compatible with it, might finally move it, but it has been doing well on it's own lately.

 

[DaveSimmons]

She warns me about leaving most of my money in one stock in particular, but it's doing well, so doesn't gripe about it over time.

I have some others diversified I guess.

Betting on one stock is a bad idea.

Betting on one index fund that includes hundreds of stocks is just fine.

Betting on a some algorithm that attempts to time the market is something I'd never do.

Ideally you should have index funds for the US stock market, international stocks, and some bonds. For example the Bogleheads 3-fund idea or Vanguard's Target <year> (or the index funds that it bundles for you):

http://www.bogleheads.org/wiki/Three-fund_portfolio

 

[Paratus]

Which one?

They're through Merrill Lynch.

is there a commission fee for buying and selling shares of the ETF? Does your financial advisor get a portion of the commission fee?

I believe it's a single yearly fee of 2-2.7% depending on how much is invested. (This is significantly higher than my govt TSP (401k))

No other fees for selling or commission

The wife is still newer along those lines, she changed from an office manager to getting into financial a few years ago, but she knows a little about Exchange Traded Funds.

I had her read this, she said she would take your advisors recommendation.

Thanks!

 

[Paratus]

I'll answer more questions later.
Off to dinner with my wife. Kids at home!

 

[DaveSimmons]

I believe it's a single yearly fee of 2-2.7% depending on how much is invested. (This is significantly higher than my govt TSP (401k))

Yikes. I manage my own brokerage account without an adviser so all I pay are the MF / ETF expense ratios of 0.2% or less.

 

[Charmonium]

Betting on one stock is a bad idea.

Betting on one index fund that includes hundreds of stocks is just fine.

Betting on a some algorithm that attempts to time the market is something I'd never do.

Ideally you should have index funds for the US stock market, international stocks, and some bonds. For example the Bogleheads 3-fund idea or Vanguard's Target <year> (or the index funds that it bundles for you):

http://www.bogleheads.org/wiki/Three-fund_portfolio

This. Diversification is your friend. But you should try to diversify across asset classes as well as within them. Typically, people put money into stocks and bonds with more into bonds the more conservative you are.

However with interest rates poised to go higher this year and in coming years, you will be looking at a capital loss since as yields go up, prices have to come down.

The one exception to this is high yield since they tend to behave more like the stock of the underlying company than a debt instrument.

The most important thing you can do as an investor besides diversifying is to only buy etfs and funds that have low expense ratios. Every percentage point the manager takes off for fees and expenses drives down your long term profit.

Vanguard is the best known group of low cost funds. ETFs tend to be much more costly, especially ones that need to turn over their portfolios on a regular basis. Such funds are called 'actively managed' rather than passively managed like Vanguard. In Vanguard, most of the funds cost less than .5% per year and some are as low as .1% IIRC. Most ETFs will cost you in the 2% range.

You can usually purchase mutual funds directly from the fund for no initial fee and only pay the management fees. But there will probably be restrictions on how soon you can take money out of a fund once invested. That can be anywhere from 3 months to more than twice that.

 

[dr150]

They're through Merrill Lynch.

I believe it's a single yearly fee of 2-2.7% depending on how much is invested. (This is significantly higher than my govt TSP (401k))

No other fees for selling or commission

Thanks!

You should seriously kick anybody in the wise and beautiful woman that comes at you with a yearly 2.7% fee. 😡

If your looking for fee free advisory services, free trading, free rebalancing, free tax loss harvesting, then get an account at WiseBanyan.com.

As second option to Wisebanyan, consider other roboadvisor systems like Betterment, Schwab, Wealthfront for similar services, but at a fee substantially LESS than that ML crap.

Alternatively, you can get a Target Date Fund at Vanguard and cal it a day.

IF you buy into a "fund" they say has consistently beaten SPY for over a decade plus, then I have a lake house inthe Gobi Derert I'd like to sell you as well. :thumbsup:

 

[Ichinisan]

For the consumer, how could there ever be a "pro" to an ETF?
Obligatory: "Pro is? Con is?"
It's that thang whurr ay tee enn tee chargizz yor ass.

 

[dullard]

If it has done so well for so long, then you'll be buying it at a very high price. Remember, buy LOW sell high. You want something that is a good value. You want something that will do well in the future and SELL those that have done well in the past. This guy wants you to do the exact opposite.

(Plus, he'll get a 2.7% fee year after year watching you lose your shirt).

 

[dullard]

There are differences between an ETF and a mutual fund. ETFs trade during the day, so you can jump in and out when you want. Meaning you need to make quick decisions to time things well, but at least you know the exact price that you are paying.

Mutual funds trade all at once at the end of the day. Meaning that you can take your time and wait hours to see if the market is going up or going down before you buy. But you'll never know the exact price you are paying until after you buy.

ETFs used to generally have lower fees, but that is changing quickly. For example compare Vanguard S&P 500 EFT (VOO) to their mutual fund (VFIAX), the prices over time track virtually identically and both charge 0.05% yearly fees. So, ETFs are no longer necessarily lower fees. And you certainly found one with a high fee.

 

[vi edit]

The biggest difference to ETF's is leverage. You can easily put options on EFT's. You can long/short them. And some EFT's already have built in leverage into them. Some may already be double long on oil or short on some other commodity.

You could have went with a double long oil ETF in March and made bank. Can't do that as easily with mutual funds.

 

[Markbnj]

I'm clueless about money. I just put whatever I have in Vanguard index funds and they seem to do ok year in and year out.

 

[Dirigible]

You should seriously kick anybody in the wise and beautiful woman that comes at you with a yearly 2.7% fee. 😡

This. Yearly fees that high deserve a response of violence.

 

[Paratus]

You should seriously kick anybody in the wise and beautiful woman that comes at you with a yearly 2.7% fee. 😡

If your looking for fee free advisory services, free trading, free rebalancing, free tax loss harvesting, then get an account at WiseBanyan.com.

As second option to Wisebanyan, consider other roboadvisor systems like Betterment, Schwab, Wealthfront for similar services, but at a fee substantially LESS than that ML crap.

Alternatively, you can get a Target Date Fund at Vanguard and cal it a day.

IF you buy into a "fund" they say has consistently beaten SPY for over a decade plus, then I have a lake house inthe Gobi Derert I'd like to sell you as well. :thumbsup:

Well that answers my other questions. I have a couple of 401ks from previous employers. I think I'll role them into my TSP. Fees are ~0.03%. Returns have been good.

I guess I need to have a chat with my advisor. :hmm:

 

[Paratus]

This. Yearly fees that high deserve a response of violence.

Returns have been good enough that I've made quite a bit, and never lost principle.

Guess I'll confirm the fees. If I want to move money out I'll have to see what the impact is for the non-deferred accounts.

 

[SSSnail]

Schwab has some no fees ETFs, check them out.

 

[Jeff7]

Betting on one stock is a bad idea.

Betting on one index fund that includes hundreds of stocks is just fine.

Betting on a some algorithm that attempts to time the market is something I'd never do.

Ideally you should have index funds for the US stock market, international stocks, and some bonds. For example the Bogleheads 3-fund idea or Vanguard's Target <year> (or the index funds that it bundles for you):

http://www.bogleheads.org/wiki/Three-fund_portfolio

:thumbsup:

They're through Merrill Lynch.



I believe it's a single yearly fee of 2-2.7% depending on how much is invested. (This is significantly higher than my govt TSP (401k))

No other fees for selling or commission


Thanks!

😵
Good lord.

That advisor should be well on track for an early and lavish retirement.

 

[Balt]

Roll everything that you can into the TSP account (I believe only tax-deferred retirement funds can be rolled in, but I'm not 100% certain on that). Ultra-low fees and access to the G fund are pretty nice.

Of course I don't recommend putting much into the G fund until you're actually close to or in retirement, since it doesn't earn much (particularly with the low interest rates these days). Still, it's nice to have access to something that can't lose money.

As for the rest that you can't roll in to TSP, find one/two/three well-diversified ETF(s). Any advisor that is charging you 2-2.7% is basically committing robbery. I have my extra money in VTI and VXUS. I am very bearish on bonds these days, so I haven't thrown much into those. I have about 4% of my TSP in the F fund, and I cringe at even having that much.

 

[brianmanahan]

For the consumer, how could there ever be a "pro" to an ETF?

one pro of ETFs is that they have no minimum required purchase amounts. also, they can have lower expense ratios than mutual funds.

i have run into this at vanguard - VTI is their total US market ETF and has an ER of %.05. there are 2 mutual fund versions of this ETF - VTSMX with an ER of %.17 and minimum amount of 3$k, and VTSAX with an ER of %.05 and minimum amount of 10$k.

so if you have 10$k or more, the mutual fund is fine and there's no reason to buy the ETF. but if you have less than 10$k, the ETF will be cheaper.