monex tokutei

[YouMeWeThem]

The key word here being "Japanese" mutual funds. For Americans like captainspoke and I the ETF version of a Vanguard fund is preferable to its mutual fund version since they both pay out taxable dividends as per US law while the ETF has significantly lower fees. Japanese mutual funds can be accumulating, that is reinvest dividends internally without causing a taxable event for the investor, which makes them superior for non-US taxpayers.

[Tsumitate Wrestler]

The key word here being "Japanese" mutual funds. For Americans like captainspoke and I the ETF version of a Vanguard fund is preferable to its mutual fund version since they both pay out taxable dividends as per US law while the ETF has significantly lower fees. Japanese mutual funds can be accumulating, that is reinvest dividends internally without causing a taxable event for the investor, which makes them superior for non-US taxpayers.

As US mutual funds can only be purchased by those who reside in America, I did not think they had any relevance to this forum. They do not share most of the advantages mentioned, with the exception of those behavioral and simplicity argurements. I think the mutual fund products offered by Vanguard, and preferred by the great John Bogle, have a loyal following on some of these grounds.

[TokyoWart]

The key word here being "Japanese" mutual funds. For Americans like captainspoke and I the ETF version of a Vanguard fund is preferable to its mutual fund version since they both pay out taxable dividends as per US law while the ETF has significantly lower fees. Japanese mutual funds can be accumulating, that is reinvest dividends internally without causing a taxable event for the investor, which makes them superior for non-US taxpayers.

As US mutual funds can only be purchased by those who reside in America, I did not think they had any relevance to this forum. They do not share most of the advantages mentioned, with the exception of those behavioral and simplicity argurements. I think the mutual fund products offered by Vanguard, and preferred by the great John Bogle, have a loyal following on some of these grounds.

Interesting for me to read the exchange between you (Tsumitate Wrestler) and captainspoke about the relative merits of mutual funds and ETFs in part because I have respect for both of you given the soundness of your prior posts and in some ways your debate reiterates Bogle's opposition to ETFs within his own company. I wanted to add a couple of comments:

1. The ability to access these products is a mess both for US investors (who can't buy non-US mutual funds without bizarre tax reporting consequenses but also can't buy US domiciled mutual funds while living outside the US) but also for other nationalities because mutual fund sales are not possible across borders and even ETF sales are problematic for expats who live in the EU. In some ways this makes the debate moot because we don't get to choose our investment form freely.

2. Personally I think the trend to shift to ETFs is going to be overwhelming because they save so much cost and accounting expense for the issuers. Instead of needing to maintain a lot of staff and book keeping systems as a mutual fund issuer, and ETF sponsor can basically just come up with the list of stocks and weights they want in their ETF and the market makers and authorized participants do the rest. In the US they also have some additional advantages in being able to avoid capital gains distributions in many (but not all) cases.

3. I also think the delay in ETFs taking over is relatively specific to the country. In the US, the way qualified retirement account custodians bill for services is well suited to mutual funds but not to ETFs so mutual funds still dominated the workplace retirement accounts (401Ks, etc.). In Japan, there are accumulating mutual funds but I don't think there are any accumulating ETFs, hence some of the advantages pointed out by Tsumitate Wrestler.

4. I think the major advantage a mutual fund has over ETFs is that it can close itself to new investors. That means that ETFs cannot control the amount of fund flows into their stock picks and lose the ability to sustain alpha in smaller cap stocks. Because almost no mutual fund managers one really demonstrate alpha this is also a moot point in most situations.

[Tsumitate Wrestler]

The key word here being "Japanese" mutual funds. For Americans like captainspoke and I the ETF version of a Vanguard fund is preferable to its mutual fund version since they both pay out taxable dividends as per US law while the ETF has significantly lower fees. Japanese mutual funds can be accumulating, that is reinvest dividends internally without causing a taxable event for the investor, which makes them superior for non-US taxpayers.

As US mutual funds can only be purchased by those who reside in America, I did not think they had any relevance to this forum. They do not share most of the advantages mentioned, with the exception of those behavioral and simplicity argurements. I think the mutual fund products offered by Vanguard, and preferred by the great John Bogle, have a loyal following on some of these grounds.

Interesting for me to read the exchange between you (Tsumitate Wrestler) and captainspoke about the relative merits of mutual funds and ETFs in part because I have respect for both of you given the soundness of your prior posts and in some ways your debate reiterates Bogle's opposition to ETFs within his own company. I wanted to add a couple of comments:

1. The ability to access these products is a mess both for US investors (who can't buy non-US mutual funds without bizarre tax reporting consequenses but also can't buy US domiciled mutual funds while living outside the US) but also for other nationalities because mutual fund sales are not possible across borders and even ETF sales are problematic for expats who live in the EU. In some ways this makes the debate moot because we don't get to choose our investment form freely.

2. Personally I think the trend to shift to ETFs is going to be overwhelming because they save so much cost and accounting expense for the issuers. Instead of needing to maintain a lot of staff and book keeping systems as a mutual fund issuer, and ETF sponsor can basically just come up with the list of stocks and weights they want in their ETF and the market makers and authorized participants do the rest. In the US they also have some additional advantages in being able to avoid capital gains distributions in many (but not all) cases.

3. I also think the delay in ETFs taking over is relatively specific to the country. In the US, the way qualified retirement account custodians bill for services is well suited to mutual funds but not to ETFs so mutual funds still dominated the workplace retirement accounts (401Ks, etc.). In Japan, there are accumulating mutual funds but I don't think there are any accumulating ETFs, hence some of the advantages pointed out by Tsumitate Wrestler.

4. I think the major advantage a mutual fund has over ETFs is that it can close itself to new investors. That means that ETFs cannot control the amount of fund flows into their stock picks and lose the ability to sustain alpha in smaller cap stocks. Because almost no mutual fund managers one really demonstrate alpha this is also a moot point in most situations.

You make some very cogent points. As usual, Americans tend to be the exception when it comes to expat finances—American exceptionalism, perhaps?

For the rest of us, Japanese mutual funds (e.g., eMaxis Slim) are the best option for a variety of reasons. For those more experienced, there are arguments in favor of American ETFs in certain cases, though Japanese ETFs are seldom recommended as core holdings.

This could change, but the new NISA design and the Tsumitate framework further cement their dominance.

[captainspoke]

...Japanese mutual funds ...in addition to the tax efficiency ...

How about a look at that "tax efficiency" of internally reinvesting dividends while adding expense ratio into the mix. At first, it would seem that reinvesting those dividends without tax would be better--but is it? (and I welcome any criticism on this math! )

Let's say two people invest 100,000 --and that could be dollars or yen, I don't think that makes any difference here.

So person J invests in the eMaxis slim S&P 500 mutual fund, and person US invests in the vanguard ETF, VOO. In the first case, the investor never sees the dividend, and it is invested tax-free, and life goes on. Wow, what a deal!

In the latter case, VOO pays a dividend of 1.26%. So to simplify things, after a year, the US investor gets a dividend payout of 1.26% x 100,000 = 12.6, and oh my gosh, they're going to pay tax on that, whereas person J, above, is smiling, since they get the dividend reinvested internally--and no tax.

But the expense ratio of the eMaxis slim fund is 0.09372%, so that means it has cost person J 100,000 times that percentage, or 93.72 to own that mutual fund for the year.

On the other hand, person US bought the VOO ETF, and the expense ratio is 0.03%. So their 100,000 times that comes to 30 to own that for the year.

So person J has paid 93.72, and person US has paid 30, so far. That's a difference of 63.72 (and of course assuming fund performance has been equal) But doesn't person J have the more tax efficient mutual fund?

Person US will pay 20.315% tax here on the 1.26% dividend. So 100,000 x 1.26% = 126 (= dividend), and the tax will be 126 x 20.315 = 25.5969 and then, subtract that from the 63.72 above, and you still get a positive number--person US who bought the ETF is still ahead by 38.1231

So to me (and again, correct me if this math is wrong) it looks like person US is coming out ahead--the lower expense ratio of the VOO ETF more than offsets what person J gets via tax free reinvested dividends, but with an expense ratio that is triple what the US person pays.

I've done all this on the back of this envelope that I happened to have here, and I've run out of space. So I won't go on to how this itty-bitty difference (advantage, person US) is magnified in successive years.

My point is that the supposed conclusion that Japanese MFs and their tax-free reinvesting is simply the cat's meow of it all, and that ETFs are satan's instrument, might not be correct.

**

We return you now, to the "monex tokutei" topic. Or not, as you please.

[captainspoke]

Also, these are tiny bits compared to 100,000 of something. So even tho ETFs come out better, above, there is no real conclusion, and we're talking about peanuts.

So better to say that they are effectively equal, and not that one or the other is unequivocally better.

(and as with faxes, ETFs have taken over in the US. how long will it take japan to catch up?)

[Tsumitate Wrestler]

Also, these are tiny bits compared to 100,000 of something. So even tho ETFs come out better, above, there is no real conclusion, and we're talking about peanuts.

So better to say that they are effectively equal, and not that one or the other is unequivocally better.

(and as with faxes, ETFs have taken over in the US. how long will it take japan to catch up?)

I wasn't solely focusing on fees—you're overly fixating on the cost issue without considering the broader picture. I think you would agree, as I was trying to state above, that mutual funds are far more user friendly to beginners.

For a breakdown of the cost analysis, someone has already done the math: https://shintaro-money.com/kaigai-etf-relay-2/

[captainspoke]

....but I always recommend limit orders when trading.
...

Can you address this?

And if it's not obvious, why is it that you "always recommend limit orders when trading."?

edit: and what is your trading expertise such that you recommend doing so?

[Tsumitate Wrestler]

....but I always recommend limit orders when trading.
...

Can you address this?

And if it's not obvious, why is it that you "always recommend limit orders when trading."?

Why I recommend someone new to trading ETFs use limit orders?

Market orders can cost more than expected due to the bid-ask spread, leading to a need for extra cash and trades not executing. New traders are confused by this. Limit orders, however, let you control the maximum price you're willing to pay.

[ToushiTime]

Also, these are tiny bits compared to 100,000 of something. So even tho ETFs come out better, above, there is no real conclusion, and we're talking about peanuts.

So better to say that they are effectively equal, and not that one or the other is unequivocally better.

(and as with faxes, ETFs have taken over in the US. how long will it take japan to catch up?)

I wasn't solely focusing on fees—you're overly fixating on the cost issue without considering the broader picture. I think you would agree, as I was trying to state above, that mutual funds are far more user friendly to beginners.

For a breakdown of the cost analysis, someone has already done the math: https://shintaro-money.com/kaigai-etf-relay-2/

Automated reinvesting has been mentioned already as a mutual fund advantage, but just to spell that out for the benefit of others:
A drawback of ETFs is that your holding needs to be large enough to generate enough dividends to pay for a new unit when reinvesting. If not, you have to postpone the reinvestment or supplement it with other funds that you hadn't planned on investing.

TBS did an interesting comparison of a Japan-listed mutual fund versus a Japan-listed ETF a few years ago.
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