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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
m...@g...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
On Jul 14, 2:51 pm, joetaxpayer <j...@n...com> 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.
> 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).
On Jul 16, 10:08 am, kastnna <k...@a...org> wrote:
> On Jul 14, 2:51 pm, joetaxpayer <j...@n...com> 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.
Maybe the assertion was about ETFs vs. comparable INDEX funds.
kastnna wrote:
> On Jul 14, 2:51 pm, joetaxpayer <j...@n...com> 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
On Jul 16, 3:20 pm, joetaxpayer <j...@n...com> wrote:
>
> The choice isn't clear cut, it really depends on one's intent and
> detailed background info. I hope that clarifies my first remarks.
>
Makes perfect sense now. As Beliavsky stated above, I was not looking
purely at index funds, but all mutual funds. Many actively managed MF
perform worse than their respective benchmarks/ETFs. Index funds do
not have that problem however.
kastnna
> 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
Hi Joe,
Thanks much for the comments and expertise. I wonder if any studies
have been done on frequencies of dollar cost averaging? In other
words, if I'm only investing twice/year versus month/weekly, or even
daily, is that still dollar cost averaging? Is there any optimal
frequency? There is an obvious trade-off between advantages of dollar
cost averaging and the cost of doing so in ETFs with their obvious
advantages of low cost.
> Hi Joe,
>
> Thanks much for the comments and expertise. I wonder if any studies
> have been done on frequencies of dollar cost averaging? In other
> words, if I'm only investing twice/year versus month/weekly, or even
> daily, is that still dollar cost averaging? Is there any optimal
> frequency? There is an obvious trade-off between advantages of dollar
> cost averaging and the cost of doing so in ETFs with their obvious
> advantages of low cost.
Actual Dollar cost averaging has been proven inferior to investing a
lump sum immediately.
http://www.altruistfa.com/readingroomarticles.htm#Do
llarCostAveraging
It feels better, and would keep one from investing too much money the
month the market peaks, but the link has multiple articles supporting
this view.
What you propose is a way of putting new money into the funds or ETFs.
I'd think one can 'do the math' given the values for the variables; $$
amount per period, commission cost for ETF, assumed market return,
current return on cash. This may turn into an "angels on the head of a
pin" discussion, as it seems to me that on $1000, MM = 5% and even with
assumed stock return of 8%, that's just $30/yr or $2.50/mo. So, you lose
$2.50 by waiting one month, but save the commission, say $10, by
grouping two months into one purchase. There's nothing wrong with going
the fund route until the dollars are more significant and maybe once
every year or so converting some amount to the ETF.
That help?
JOE
JoeTaxpayer.com
On Jul 18, 4:08 pm, m...@g...com wrote:
> Thanks much for the comments and expertise. I wonder if any studies
> have been done on frequencies of dollar cost averaging? In other
> words, if I'm only investing twice/year versus month/weekly, or even
> daily, is that still dollar cost averaging? Is there any optimal
> frequency? There is an obvious trade-off between advantages of dollar
> cost averaging and the cost of doing so in ETFs with their obvious
> advantages of low cost.
It would help to know how large an investment we are discussing. In
your case, it sounds like you are "forced" to DCA. As you make the
money you invest it. You are not sitting a large pile of cash that you
are slowly integrating into the market. If that is the case, you have
no choice but to DCA (at least to some extent). Transaction costs are
fixed, not variable. What you should do largely depends on how much of
an impact these fixed costs have on your investment. A good goal would
be to keep transaction costs below a certain level (perhaps 1% or
0.5%). This may mean investing weekly, monthly, quarterly, etc, etc.
It is dependent on your specific case.
It helps to look at the situation in extremes. Assume a $10 trade
charge. If you are depositing $20 a week, you would lose half your
money just to transaction costs if you purchased ETFs weekly. You
would need a 100% annual return just to get back to even! On the other
hand, if you were depositing $20,000 a week, I would say go for it. In
the latter case, fixed costs only erode 0.05% of your investment. That
should be easy to recover.
On Jul 18, 9:44 pm, joetaxpayer <j...@n...com> wrote:
> > Hi Joe,
>
> > Thanks much for the comments and expertise. I wonder if any studies
> > have been done on frequencies of dollar cost averaging? In other
> > words, if I'm only investing twice/year versus month/weekly, or even
> > daily, is that still dollar cost averaging? Is there any optimal
> > frequency? There is an obvious trade-off between advantages of dollar
> > cost averaging and the cost of doing so in ETFs with their obvious
> > advantages of low cost.
>
> Actual Dollar cost averaging has been proven inferior to investing a
> lump sum immediately.http://www.altruistfa.com/readingroomart
icles.htm#DollarCostAveraging
> It feels better, and would keep one from investing too much money the
> month the market peaks, but the link has multiple articles supporting
> this view.
> What you propose is a way of putting new money into the funds or ETFs.
> I'd think one can 'do the math' given the values for the variables; $$
> amount per period, commission cost for ETF, assumed market return,
> current return on cash. This may turn into an "angels on the head of a
> pin" discussion, as it seems to me that on $1000, MM = 5% and even with
> assumed stock return of 8%, that's just $30/yr or $2.50/mo. So, you lose
> $2.50 by waiting one month, but save the commission, say $10, by
> grouping two months into one purchase. There's nothing wrong with going
> the fund route until the dollars are more significant and maybe once
> every year or so converting some amount to the ETF.
> That help?
Hi Joe,
I would think that the scenario the authors of the article you site
would be seen relatively infrequently. That is, how often do people
receive a large, lump sum of money they have to invest? Most people
have some amount they have from each paycheck of periodically that
they have to invest. The other option is to not invest the small sums
they have and save them all until they are large sums and then invest
them. But, I suppose the gist is that most people who are ostensibly
dollar cost averaging are really just investing whatever funds they
have available at the time. Not sure if that makes sense or not, but
I guess that relatively speaking the average Joe is investing his lump
sum each time he gets a paycheck instead of immediately when he
receives his lump sum from his rich uncle.
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