On Conversion From Mutual Funds to ETFs

Mutual Funds ETF

Conversion of Mutual Funds to ETFs

I may be a couple decades late to this game. While Greg has always touted the value of a great low cost index fund, I never went ahead and made the move until recently. Most of my funds have been mutual funds that I’ve owned for decades. While I am mindful of the expense ratios they all charge and always stay below 0.90%, it wasn’t until recently that I started looking at ETF replacements for my mutual funds that have little or no management fees. Now don’t get me wrong, not all mutual funds are bad or evil. I would gladly pay 1% if I could make 20% a year, or even beat the S&P 500 by more than expense the fund charges, however most funds don’t beat their index, so why pay a fee for someone to try and fail if the probability of beating the index is so low?

ETFs Can Provide More Liquidity for Less Cost

ETFs also have 2 other cool advantages over mutual funds – they are more liquid, meaning you can buy and sell them throughout the day, and you can also see their pricing in real time. If you want to buy or sell a mutual fund, you have to wait until settlement at the end of the day. This adds unnecessary risk in my opinion since you never know exactly how much the fund will buy or sell for. Also when viewing the price of the mutual fund, you are seeing yesterday’s Net Asset Value (NAV), which makes it difficult to make quick decisions on. Perhaps this is why mutual funds are much better for a set and forget, buy and hold type of strategy. My argument here is that ETFs can provide the same (or better) returns than mutual funds can with more liquidity. Since ETFs are generally more passive in nature, they also tend to be more tax efficient since there aren’t any managers constantly adding turnover to the portfolio.

So What’s the Downside?

This may sound too good to be true, but there is one thing to be aware of since many ETFs are passively managed and mutual funds are generally more actively managed. The reasons mutual funds often charge higher fees than ETFs is because there is a manager and a team of analysts that are constantly reviewing the equities in the mutual fund and making decisions to buy, sell, or hold the stocks. With ETFs, most are just benchmarked to an index, and there’s not a lot of oversight necessary. Depending on your stance, you may be happier to have a real person looking after the mutual fund, but you will pay for this with higher fees.  There is no guarantee that the mutual fund will exceed the index it is benchmarked to. Here some of the funds I’ll be moving from a mutual fund to an ETF, a Bond Fund:
  • For Bonds
    • FTBFX (Fidelity Total Bond Mutual Fund) to AGG (iShares Core US Aggregate Bond ETF)
    • Expense fee reduced from 0.45% to 0.05%
    • Both have a similar yield of over 2.5%
    • Credit Quality, Duration and Average maturity generally have stayed the same
    • Hypothetical Savings of 10K over 10 Years: $45 in expenses vs $5 over 10 years.
  • For Dividend Stocks
    • JAHYX (Janus Henderson High-Yield Fund mutual fund) to VYM (Vanguard High Dividend Yield)
    • Expense fee reduced from 0.88% to 0.06%
    • Hypothetical Savings of 10K over 10 Years:  88$ over 10 years vs 6$ over 10 years.

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