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Our two car payments finish this summer, leaving me with about $1k/month in free cash flow. I'm thinking about putting this into a set of ETFs along these lines:

33% Emerging Markets
33% International (i.e. NON-USA)
33% Small- and Mid-cap USA stocks.

Leaving out the S&P-500/large cap stocks is intentional, as I'm already very heavily invested there in my and my wife's 401k plans. The international funds offered by our 401k plans have extremely high expense ratios (over 1.5%) and I can't justify paying that kind of expense when I can do it for 1/5th of that somewhere else.

I'm considering the new Vanguard ETFs, specifically VWO, VEU, VXF. These are very new issues, should there be any concerns there? The Vanguard funds appear to have very reasonable expense ratios: VWO: 0.08% VEU: 0.25% VXF 0.30%

Is there any reason to believe that funds from a different company would be significantly better? (I'm by no means wedded to Vanguard, they just seemed to have the stuff I was most interested in at very low expense ratios)

My main question is whether I'm better off buying the funds themselves, or purchasing through ETFs. Given my $1k/month budget, I'm planning on just buying a block of each ETF per month, at $10/trade for the commission. Is a net 1% fee structure reasonable here?

Any other suggestions that folks have would be welcome.
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How are you planning to pay for your next cars and when ?

rad
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Cash, and not for several years. These were both short-term loans (2yr and 3yr) at rates that were essentially less than inflation: one was at 1.9% and another was at 2.9%. I would have paid cash for these if the rates hadn't been so incredibly low. The assumption is that this part of our cash flow will be dedicated to retirement savings for the forseeable future.
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>> These were both short-term loans (2yr and 3yr) at rates that were essentially less than inflation: one was at 1.9% and another was at 2.9%. I would have paid cash for these if the rates hadn't been so incredibly low. <<

Keep in mind that such "cut rate" financing often comes at the expense of a cash back offer, or at the very least makes it less likely the dealer will significantly cut the price in negotiations.

Ever notice the ads that say things like "special 1.9% financing OR $2,000 cash back" or some such?

There's no free lunch here. "Zero percent financing" isn't necessarily better than a typical 7% car loan with (say) $2,000 cash back.

#29
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Keep in mind that such "cut rate" financing often comes at the expense of a cash back offer, or at the very least makes it less likely the dealer will significantly cut the price in negotiations.

Often but not always. Sometimes there are just zero percent offers. Also it doesn't mean the dealer won't negotiate on price if the zero percent is being offered by the manufacturer.

IF
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The financing was "thrown in" after the cash price was negotiated, but the original point of this thread isn't buying a car -- it's looking at a set of Indexed ETFs vs. buying the funds themselves. ;)
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Go to http://moneycentral.msn.com/detail/market_quote?symbol=VXF

Look at the returns, Sharp ratios, etc. If you are into these for the long haul you can compare vs otheroptions.

Gordon
Alanta
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... Is a net 1% fee structure reasonable here?...

Some downsides.

1) ETF's can trade at a small premium or discount to the underlying fun. My guess is that there is a small premium more often than a discount.

2) Whenever you buy or sell an ETF, you will loose a small percentage due to the spread.

3) Eventually when you sell the fund, you will also pay a commission.

4) With a Vanguard fund, once you get some big bucks in an account, you can get their Admiral funds that have a lower expense ratio.

5) Sometimes a fund closes to new investors but current investors can still add money. I'm not sure what happens to an ETF when the fund that it is based on closes.

6) Keeping track of your cost basis and tracking your performance will be a lot of paperwork, especially with reinvested dividends. I would not count on you broker having all the information 25 years from now when they have gone through several mergers.

I might use ETF's for obscure funds but I not for Vanguard funds.

Greg
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Hi,

Well, I own VWO, and I like it due to the low expenses and because I bought it in my Schwab account - they charge more for Vanguard Funds than for stock trades, so it was cheaper for me to buy the ETF from that standpoint.

Having said that - with the money that I invest each month, which is about the same as what you are investing, I buy low cost mutual funds that are part of Schwab's OneSource list of funds (there are thousands to choose from). These funds can be bought and sold with no transaction fee.

So, I have a mix of ETFs and funds, and I generally buy them based on whether I have a lump sum from somewhere or if I am DCA-ing.

Karen
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Index ETFs:

Cost to buy and sell
Cost to rebalance

No Load Index Funds:

No cost to buy or sell
Op Expense
No cost to rebalance

------

Other than that, there should be no difference. Both buy the index so they should never close. In your case, I think I might lean toward the funds but I don't think either way is wrong.

The only other thing that is a red flag to me is the 33% in emerging markets. I don't think I would ever put that much into that sector unless it represented no more than 10% of my total holdings. Additionally - many emerging markets are a bit overpriced so you might see some significant downside volatility in that area for the next few years (as we saw yesterday).
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I am in the same situation as Kaudrey. Most of my funds are with Schwab (I recently opened a Vanguard) and they charge to purchase Vanguard funds. So I buy Vanguard ETF instead. In my situation, because I am purchasing large quantities 50-100K at time the difference in expense ratio between an ETF and equivalent Vanguard fund (roughly .1-2%) adds up to $100 or so a year, and much larger than the $10 it cost to trade and even compensates for the slight premium Vanguard international ETFs trade at.

In your case I'd definitely stick with funds for two reasons A. it is cheaper, and B. you can make automatic greatly increasing your painless saving.

Say you next year you make 10 $1,000 purchase of a Vanguard Internationl ETF. You have spent $100 on commission, plus you'll be charged a bit extra because you are not purchasing the ETF in round lots of 100 shares (which would cost between $5500-$8400 today), plus pay a few pennies and the bid ask difference and you'll pay small premium over the net asset value . In return for all of these expense you'll save $15/year per $10,000 for example VEU (.25%) vs VFWIX (.4%).

The other advantage is more pyschological than financial. Vanguard (along with most fund families) make it pretty simple to make automatic investments into their funds. So you can invest $400-$500 twice a month automatically. If you have to physically purchase an ETF every month you maybe tempted to buy some hot stock you heard about or spend the money on some cool new gizmo.

A couple other alternatives once you have $10K saved up. Vanguard offers a terrific tax managed international fund, and Fidelity offers the Spartan Internation Index fund, with a very low ER of .1%



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The only other thing that is a red flag to me is the 33% in emerging markets. I don't think I would ever put that much into that sector unless it represented no more than 10% of my total holdings. Additionally - many emerging markets are a bit overpriced so you might see some significant downside volatility in that area for the next few years (as we saw yesterday).

The target is 15% emerging -- this investment is in addition to my 401k, my wife's 401k, and some significant other US-based investments. I agree that this market is probably overpriced at the moment, but this money is looking at a 20-30 year time horizon (I just turned 30) so the emerging markets should provide sufficient long term risk/reward.
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And you are doing DCA, so less of a concern.
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