MONEY stocks

How Owning Apple Stock is Now Like Owning Bonds

Inside Apple's balance sheet is a whole lot of cash and bonds. Jesus Jauregui—Getty Images

Apple's stock split makes it easier to buy. But you'll get a big bond fund as part of the bargain.

By splitting its shares 7-for-1 today, Apple has made its stock more easily accessible to retail investors. But of course if you have any money at all in an equity mutual fund, you almost certainly own a chunk of Apple . The stock is 3.11% of the S&P 500 , making it the biggest name in the index.

What you get if you own Apple is, of course, a world-beating consumer technology company. But you also get a huge chunk of cash and bonds—about $150 billion worth, or 27% of Apple’s total market value. One way to wrap your head around how much extra money Apple is managing is to compare it to the biggest bond mutual funds in the country. If Apple’s fixed-income portfolio were a fund, its only real peers would be the giant Pimco and Vanguard portfolios, the mainstay core holdings in many 401(k) plans.

Source: Morningstar, Apple
Source: Morningstar, Apple

If you’ve ever scratched your head and wondered why investors complain about Apple’s cash, as if being wildly successful at pulling in profits is a bad thing, this is why. If you have money to put in the market and wanted some of it to go into bonds, you could hand that money over to Pimco and Vanguard and get a reliable return. No one needs Apple CEO Tim Cook to be a bond manager.

Cook knows that, which is why Apple has announced it plans to return $130 billion in cash to shareholder via dividends and stock buybacks by the end of 2015. Of course, even if it does that, it would still have loads of cash on hand—the company generated about $36 billion in cash flow from operations in the six months ended March 31. That alone is enough to do twelve more Beats-sized deals. (One odd wrinkle: To get cash back to shareholders, Apple is actually borrowing. It’s a tax thing.)

Bottom line: If you buy Apple today, between now and the end of next year, you’ll get a lot of that money back and will have to figure out somewhere else to invest. Another portion will earn modest returns. And then you hope the rest is invested back in the business or in smart acquisitions in a way that continues to power growth forward. Shawn Tully over at thinks Apple is just too big to deliver the kind of growth Apple fans hope for. Then again, if you subtract Apple’s “bond fund” from its market value, you get the part of the business that’s still a tech company for about 11 times the past year’s earnings, compared to just under 20 for the S&P 500. Assuming you think Cook won’t waste the cash, that doesn’t sound like such a terrible deal.

MONEY 401(k)s

Vanguard Study Finds (Mostly) Good News: 401(k) Balances Hit Record Highs

Stock market gains boosted wealth for those putting away money regularly in the right funds. Are you one of them?

If you’ve been stashing away money in a 401(k) retirement plan, you probably feel a bit richer right now.

The average 401(k) balance climbed 18% in 2013 to $101,650, a new record, according to a report by Vanguard, which is scheduled to be released tomorrow. That’s an increase of 80% over the past five years.

The median 401(k) balance — which may better reflect the typical worker — is far lower, just $31,396. (Looking at the median, the middle value in a group of numbers, minimizes the statistical impact of a few high-income, long-term savers who can skew the averages.) Still, median balances rose 13% last year, and over five years, they’re also up by 80%. All of which suggests that rank-and-file employees are building bigger nest eggs.

Vanguard balances
Source: Vanguard Group

That’s the good news. Now for the downside. Those rising 401(k) balances are mostly the result of the impressive gains that stocks have chalked up during the bull market, now in its sixth year. (The typical saver currently holds 71% in stocks vs. 66% in 2012.) Why is that a negative? Because at some point stocks will enter negative territory again, and all those 401(k) balances will suffer a setback.

Meanwhile, the amount that workers are actually contributing to their plans remains stuck at an average of 7% of pay, which is down slightly from the peak of 7.3% in 2007. And nearly one of four workers didn’t contribute at all, which has been a persistent trend.

Ironically, the savings decline is largely a side-effect of automatic enrollment, which puts workers in 401(k)s unless they specifically opt out. More than half of all 401(k) savers were brought in through auto-enrollment in 2013. These plans usually start workers at a low savings rates, often 3% or less. Unless the plan automatically increases their contributions over time—and many don’t—workers tend to stick with that initial savings rate.

Still, when you include the employer match—typically another 3% of pay—a total of 10% of compensation is going into the average worker’s plan, says Jean Young, senior research analyst at Vanguard. That’s not bad. But most people need to save even more—as much as 15% of pay to ensure a comfortable retirement, according to many financial advisers. (To see how much you should be putting away, try the retirement savings calculator at AARP.)

Even if 401(k) providers haven’t managed to get people to step up their savings rate, they are tackling the problem of investing right. More workers are being enrolled in, or opting for, target-date retirement funds, which give you an all-in-one asset allocation and gradually shift to become more conservative as you near retirement. Some 55% of Vanguard savers hold target-date funds—and for 30%, a target fund is their only investment.

With target-date funds, as well as managed accounts (which are run by investment advisers) and online tools, more 401(k) savers are also receiving financial guidance, which may improve their returns. As a recent study by Financial Engines and AonHewitt found, 401(k) savers who used their plan’s investing advice between 2006 and 2012 earned median annual returns that were three percentage points higher than those with do-it-yourself allocations.

Vanguard’s data found smaller differences. Still, over the five years ending in 2013, target-date funds led with median annual returns of 15.3% vs just 14% for do-it-yourselfers.

The lessons for investors: You’re better off choosing your own 401(k) savings rate, and try to put away more than 10% of pay. And if you aren’t ready to manage your own fund portfolio, opting for a target-date fund can be a wise move.








MONEY Warren Buffett

One Weird Trick That Will Help You Beat the Market Like Warren

Warren Buffett Ben Baker—Redux

Here's a no-brainer way to win with "Warren" stocks. It won't do you any good now, but it would have been brilliant in 1993.

My story, Inside Buffett’s Brain, is about the search by financial economists and money managers for persistent patterns in stock returns. Some of these patterns might help to explain why a handful of money managers, including Buffett, have done so well. The story is about more than Buffett, though. The hunt through past market data for potentially winning strategies is a big business, and has fueled the growth of exchange-traded funds (ETFs). So a word of warning is in order.

Here’s the result of astoundingly simple Buffett-cloning strategy I put together, inspired by a “modest proposal” from Vanguard’s Joel Dickson. All you have to do buy stocks with tickers beginning with the letters in “Warren.” (You have double up on the “r” stocks, natch.)

Winning with Warren NEW

This likely “works” in part because it’s an equal-weight index—meaning each stock in the W.A.R.R.E.N. portfolio is held in the same proportion. Traditional indexes like the S&P 500 are “capitalization weighted,” meaning they give more weight to the biggest companies in the market. Because smaller stocks have outperformed in recent years, equally weighted indexes have done pretty well compared to traditional indexes in the period in question.

So you might find out that you can also beat the market with an equally weighted basket of stocks whose tickers begin with the letters in your name too. Just cross your fingers and hope the trend doesn’t reverse in favor of blue chips.

Another reason why this trick worked is that it picks from among current S&P 500 names, which means the stocks on the list are already in a sense known winners. Companies that used to be small and then graduated to the S&P 500 are on list, and companies that used to be big and then got small or disappeared aren’t on the list. But you couldn’t know which companies those were in 1993.

This is obviously dopey, and no way to run your money. (And the ideas I wrote about are much, much more sophisticated than this.) But there’s a serious point here. ETFs are a great way to buy cheap, reliable exposure to the stock market. But these days most ETFs track not a simple well-known benchmark, but a custom index built upon rules which, if followed, are thought to give investors an edge. For example there are indexes which tilt toward companies with better-than-average sales, or which specialize in certain sectors or investment themes.

These indexes often have really impressive past performance. In theory. Based on “back tests” of market data, from before the index was actually in operation.

And of course they do. Today indexes are often created with an ETF launch in mind. So there’s not much point in building an index and marketing it if you don’t know that the strategy has already won. Unfortunately, knowing what’s already worked in the past doesn’t mean you know what will work in the future.

In fact, investors in new indexes are likely to be disappointed. Samuel Lee, an ETF strategist at Morningstar, explains that in any group of past winning strategies, a high number will have won just through sheer luck. The future average performance of those strategies is almost certain to decay. Because luck runs out.


Mutual Funds Gone Down the Drain

Forty-one percent of U.S. mutual funds operating 10 years ago, closed before 2014.

Your mutual fund does worse when its close to extinction. Here's what to do about it.

Of all traditional U.S. mutual funds operating a decade ago, four in 10 shut down before 2014, reports Morningstar.

Why care? Even though you can cash out (or get shares in a fund absorbing the loser), costs rise and performance falls as the end nears, says Daniel Kern, president of investing firm Advisor Partners, who has studied closures.

Here’s how not to get swept away in the failures.

Stopping your losses

Seek high marks. Eight in 10 funds given five stars by Morningstar in 2002 lived to 2012; only 39% of one-star funds did, according to a study Kern co-wrote. Stewardship grades, gauging how shareholders are treated, count too: A and B funds outlast low-ranked ones, says Morningstar’s Laura Lutton.

Don’t think small. Bigger funds aren’t always better, but those that stay small or shrink too much have high failure rates. Be wary of portfolios with assets well under $250 million, says Kern’s collaborator Tim McCarthy, author of The Safe Investor.

Exit early. If you think a fund will close, sell. Funds lose an average of 3.6% in their final 18 months, Vanguard has found. Has your fund already merged into another offering? Be picky, advises San Diego planner Leonard Wright, and sell the new one if you wouldn’t have bought it otherwise.

MONEY 401(k)s

How to Get Low-Cost Index Funds into Your 401(k)

Index funds are hard to find in some 401(k)s, but you needn't let high fees sink your retirement. Illustration: Paul Blow

Index funds are hard to find in some plans, but you needn't let high fees sink your retirement.

After more than 30 years, the 401(k) has become our de facto national retirement savings plan. So how is it that most participants can’t build a portfolio out of the best, cheapest investments around — index funds?

In 2013 this should not be an issue. Decades of studies have shown that funds that simply track market benchmarks outperform actively managed funds over the long run because of the huge difference in fees — a typical 401(k) stock index fund may charge 0.06% of assets, vs. 0.63% for the average fund run by a manager who picks equities.

Assuming a 7% annualized return before expenses over 25 years, that fee difference can mean a 9% bigger nest egg.

The unhappy status quo exists in part because regulators are loath to demand that specific investments be included in 401(k) plans. And in designing plans, employers rely on consultants and fund groups, which have an incentive to favor higher-cost offerings.

Today most 401(k)s offer a single index option that usually invests in large stocks like those in the S&P 500. Only 42% of plans with indexing include an intermediate bond fund, and just 31% have a foreign-stock fund, according to consultants Aon Hewitt.

Even at index king Vanguard, “only about four out of 10 plans we manage offer enough index funds to build a core portfolio,” says Steve Utkus, head of Vanguard’s center for retirement research.

What can you do if your plan lacks index funds? Start by lobbying your employer — new rules require 401(k)s to disclose fees, which may nudge your boss in the right direction. Meanwhile, here are three coping strategies:

Check out your plan’s target date fund. Even if you lack enough standalone index options, your target-date fund, a mix of portfolios designed to grow conservative as you near retirement, may have them.

Vanguard’s index target series has been pulling in the most cash, $20 billion in 2012, according to Morningstar. Now Fidelity, Wells Fargo, and BlackRock have all-index offerings that provide enough diversification for you to be able to use them as your core holding.

Opt for low-cost active funds. Otherwise, make the best of your options. Look for the cheapest fund in each market segment you want to invest in.

“Owning more actively managed funds within an asset class means you’re more likely to lag your benchmark,” says Portfolio Solutions adviser Rick Ferri, who has studied the benefits of indexing over active portfolios.

Index outside your 401(k). If you’re stuck with high-cost stock funds charging near 2%, or bond funds charging half that, invest enough to get your employer’s match. Then fund a Roth IRA or taxable account, buying stock index funds that generate little in capital gains. You’ll end up with a larger nest egg, a goal your employer should want to share.


Balance Out a Lopsided Index Fund

Critics point out that stock index funds have a knack for loading up on frothy investments at the worst possible times. Photo: Kevin Van Aelst

How much of your portfolio should be invested in index funds has long been a weighty question. Or rather, a question of weights.

An index fund, of course, buys and holds all the stocks listed on an index, like the S&P 500 — but it’s not quite that simple. Most indexes are weighted by capitalization so that they hold more of whatever the market assigns the most value to. That makes them, in part, a popularity contest.

Critics have long pointed out that stock index funds have a knack for loading up on frothy investments at the worst possible times. Now a related critique is coming from a source who is hard to dismiss.

Vanguard founder Jack Bogle, who started the first retail index mutual fund, has recently been critical of bond market indexes. Again, it comes down to weighting. He says indexes have forced so-called total bond market funds to hold too much U.S. Treasury and government-related debt just when those securities are yielding next to nothing.

The fact that Bogle is questioning the suitability of an index investment that millions of investors use prompts the question, Is it time for you to rethink indexing?

MONEY has long been an advocate of low-cost index funds. After reexamining the case for passive investing and looking especially hard at its weak points, three guiding principles emerged:

No. 1: With U.S. stocks, indexing is very, very tough to beat.

Despite weighting issues, indexing starts with two huge advantages. The first is that investing is a zero-sum game of sorts. The investors who manage to outsmart the market have to be matched by other investors who got outsmarted. Over time, in this highly competitive game, it is very hard to identify fund managers who will be consistent winners.

The second is that index funds keep costs extremely low — you can buy a traditional cap-weighted index exchange-traded fund for under 0.1% a year, vs. more than 1% for the average actively managed domestic stock fund.

Most managers can’t beat the market by enough to surpass their fee. Over the past three years, just 14% of large-cap funds pulled it off.

Action plan: Use total stock market index funds for your core holdings in equities. You can cover the broad spectrum of domestic and foreign stocks with just two funds: Schwab Total Stock Market Index (expense ratio: 0.09%) and Vanguard FTSE All-World ex-U.S. ETF ( 0.15%).

Related: Money 50: Best Mutual Funds and ETFs

You can even add stakes in more targeted index funds that help you meet specific needs.

For example, if you’re older and seeking income, you may tilt toward dividend-paying stocks by adding to your core Vanguard Value ETF (0.10%), which holds lower-priced stocks with an average yield of 2.5%.

“Pick your own asset-allocation strategy, and then you can use index funds to implement it,” says New York City financial planner Lew Altfest.

No. 2: Index funds can still get into bubble trouble.

“What a traditional cap-weighted index represents is the market’s equilibrium — the prices buyers and sellers have agreed on for every security in the market,” says Joel Dickson, a senior strategist with Vanguard. Yet the market sometimes collectively gets things wrong. Think back to the tech bubble in the late 1990s, when that sector grew to be more than a third of the entire U.S. stock market as a result of the mania in Internet stocks.

Today, a worry has arisen about emerging-markets index funds, which recently held nearly half of their assets in companies based in the so-called BRIC economies — Brazil, Russia, India, and China. There’s no telling whether the market’s current judgment will seem wise in hindsight. But it’s fair to say that a broad emerging-markets index concentrates risk in a narrow group of countries.

Action plan: Avoiding lopsided exposure is straightforward on the international side. Advisers recommend spreading your bets beyond just the BRICs into other markets, such as Indonesia and Mexico.

To do that, keep your current investment in a broad emerging-markets fund. With new money, though, add a fund that weights differently, such as iShares MSCI Emerging Markets Minimum Volatility (0.25%) with a third less in the BRICs than the standard emerging-markets index.

How to avoid bubble exposure in U.S. indexes is less settled. Some index critics have designed their own alternative “fundamental” indexes, which are supposed to correct the tendency to load up on hot stocks.

For example, PowerShares FTSE RAFI U.S. 1000 (0.39%) weights not by a company’s stock market value, but by dividends, sales, and other indicators of business strength. Rob Arnott of Research Affiliates, which oversees the RAFI index, says his benchmark “has a pronounced value tilt” — that is, to stocks that are relatively unloved.

In theory, this should mute the effects of momentum-driven bubbles. Yet fundamental funds ran into their own problems in 2008 — they were loaded up on financial stocks heading into the crisis. They are also more expensive than their traditional counterparts.

You can almost as easily tilt away from go-go stocks by adding an indexer restricted to value, such as the Vanguard Value ETF , or small companies, like Vanguard Small Cap ETF (0.10%). (Bubbly stocks don’t stay small for long.)

No. 3: Handle bond indexes with care.

Indexing fixed income has never been as simple as it is with equities. For starters, “you’ve got the ‘bums’ problem,” says Paul Kaplan, director of research at Morningstar Canada and an indexing expert.

With stocks, capitalization weighting means loading up on the market’s biggest winners. With bonds, this approach calls for betting big on the market’s biggest debtors. Global bond index funds end up overweighting government bonds from Japan and Western Europe.

Here at home, U.S. Treasuries and government-related debt now make up more than 70% of the Barclays U.S. Aggregate bond index, with corporates representing less than 25%. Bogle thinks the Barclays aggregate bond index is flawed because it reflects not only bond purchases of investors but also those of foreign governments like China that are buying Treasuries more for policy purposes, not just because they think Treasuries are a great investment.

He argues that once you strip away government and central bank purchases of Treasury debt, government securities probably make up about a third of the U.S. debt market.

Action plan: A simple solution is to take half of your stake in a total bond market index fund and use that to buy a corporate bond index fund, such as Vanguard Intermediate-Term Corporate Bond Index (0.12%). The combination of the two will give you a portfolio that’s about two-thirds corporates and one-third governments. Alternatively, consider an active fund with a long track record of spotting bond values, such as Loomis Sayles Bond ( 0.92%).

Overseas, it’s a tougher challenge. There are few index funds that give you exposure to the broad array of governments and corporates in both the developed market and the emerging world.

As a result, you’re better off anchoring your overseas bond holdings with an actively managed fund like MONEY 50 recommendation Templeton Global ( 0.89%), whose top weightings are in low-debt nations like Poland, Mexico, South Korea, and Ukraine. Compare that with the Barclays Global non-U.S. Treasury index, whose top holdings are from Japan, with a sky-high debt-to-GDP level of about 212%. Talk about lopsided.


Building Your Own Target-Date Fund

I’m 30 years old and recently rolled my savings from a 401(k) into an IRA. I had been investing in a target-date retirement fund. But now that I have virtually unlimited investment options, I’m wondering whether I should just create the same portfolio using individual funds or ETFs. What do you think? — Brandon L., Rochester, N.Y.

Essentially, you’re asking whether you’re better off building your own target-date retirement fund or buying one off the shelf.

While you might be able to lower your expenses and thus boost your return with the DIY approach, it depends on how much you have to invest, which funds or ETFs you choose and how much work you’re willing to put into building and managing your own target-date portfolio.

To illustrate, let’s take a look at the Vanguard target-date fund designed for someone your age, the Vanguard Target Retirement 2045 .

This fund invests 90% of shareholders’ money in stocks and 10% in bonds by divvying up its assets among three Vanguard index funds as follows: total stock market index (63% of assets), total international stock index (27%) and total bond index (10%). To invest in this fund, you pay annual expenses of 0.19% of assets, or $19 per $10,000 invested.

You could create a virtually identical portfolio by just investing your money in a total stock market index, a total international stock index and a total bond market index fund in the same proportion a target fund holds them. But you wouldn’t necessarily save any money by doing so.

Related: What is an index fund?

Why? Because if you prorate the expenses to reflect the percentage that each fund would represent in your portfolio — 63% of the total stock market index’s 0.18% annual expenses, 27% of international stock fund’s 0.22% cost and 10% of total bond market’s 0.22% expense ratio — you end up with pretty much the same 0.19% in total expenses. (I say “pretty much” because the total bond market fund in the target date fund isn’t available to individual investors and has slightly different expenses than the one that is.)

But there are a few ways you may be able to pay less.

One is to invest in the same three underlying index funds, but buy a different share class of those funds.

When Vanguard assembles its target portfolios, it uses “Investor” shares. Vanguard has a cheaper version — called “Admiral” shares –but doesn’t use them in its target portfolios. You, however, can build your own target fund with the cheaper Admiral shares.

There’s one, rub, though: Each of the Admiral shares requires a $10,000 minimum initial investment, as opposed to a mere $1,000 minimum for the target-date fund.

As a practical matter, that would mean you would have to create a portfolio with at least $100,000 in assets in order to meet the $10,000 minimum for the bond index fund, while at the same time assuring that the bond fund represents no more than 10% of your portfolio overall.

If you can clear that hurdle, duplicating the 2045 target fund with Admiral shares would reduce your annual expenses by almost half from 0.19% to 0.10%. But while that represents a nearly 50% reduction in expenses, in dollar terms we’re not talking about a huge difference: about $90 a year for every $100,000 invested. Whoopee!

The second way you might be able to do better is by building the equivalent of a target fund portfolio with ETFs, which many firms, including Vanguard, allow you to buy without paying trading commissions.

Vanguard requires only a $3,000 minimum investment to open a brokerage account and invest in ETFs, so by going with ETFs you can get around the $10,000 minimum for Admiral shares.

And since Vanguard’s fees on the Admiral share and ETF versions of its total stock market, international stock index and total bond index funds are identical, you could reap the same savings in annual expenses as with the Admiral shares. (Vanguard’s brokerage firm levies a $20 annual fee for accounts with balances under $50,000, but you can sidestep that by agreeing to electronic delivery of confirmations and statements.)

There’s one other move you could try: Going with the funds or ETFs of another firm, such as Fidelity or Schwab, both of which have been chipping away at the fees on their index funds and/or ETFs.

For example, Schwab now charges just 0.04% for its version of a total stock market index ETF and 0.05% for its total bond market index ETF. Schwab doesn’t offer the equivalent of a total international stock index ETF that includes small-caps and emerging markets, but you could cobble one together by combining a few separate international Schwab ETFs.

I estimate that by mixing and matching various Schwab ETFs, you could create something close to the Vanguard target-date fund for roughly 0.06% in annual expenses. That’s about 40% lower than the 0.10% or so that you would pay with Vanguard ETFs.

Again, though, the dollar savings won’t exactly blow you away.

Even on a $100,000 investment, the difference would be about $130 a year vs. the Vanguard 2045 target fund and $40 compared to a DIY target portfolio made up of Vanguard Admiral funds or ETFs. In fact, the savings could be even smaller, as ETFs have other potential costs such as the bid-ask spread and the extent to which the ETF sells at a discount or premium to net asset value.

Which brings us to the larger question: Does it really makes sense to go to the trouble of creating your own target-date portfolio?

The idea behind these funds is simplicity and ease.

A target fund gives you a diversified portfolio of stocks and bonds appropriate for your age and shifts more of its assets to bonds as you age so your savings are less vulnerable to stock-market shocks as you near and enter retirement. They’re not perfect, but target funds can provide a reasonable investing strategy that many investors may not be able to come up with or stick to on their own.

If you build your own target portfolio, you have to set your asset allocation and maintain a “glide path,” or gradually move out of stocks and into bonds.

Even if you mimic a target-date fund for someone your age, you’ve still got to do the work. That will include periodically selling shares to rebalance the mix between domestic stocks, international shares and bonds. If the funds are held outside a tax-advantaged account, such sales could mean paying tax on realized gains.

Bottom line: If you’re investing a large sum and willing to monitor and fine tune your homemade target fund, then I suppose the potential savings you can reap might be worth it. But for the overwhelming majority of investors considering a target-date fund, I think buying a target fund off-the-rack is a more realistic approach.


Vanguard Joins the ETF Price War

Now the ETF game is really getting interesting.

Vanguard announced it has removed trading fees on all 46 of its exchange-traded funds. In addition, the fund group lowered its commissions for buying or selling stocks or non-Vanguard ETFs to just $7 to $2, depending on the size of your account.

With these moves, Vanguard has trumped rivals Schwab and Fidelity, at least for now.

Schwab started the commission-free war last year by removing trading fees on eight of its own ETFs; it currently charges $8.95 a stock trade. Fidelity, which charges $7.95 a trade, recently waived fees on 25 iShares ETFs.

Vanguard is clearly determined to dominate. The firm, which took over its brokerage operations from Pershing last year, now manages some $100 billion in ETF assets and ranks as the third-largest ETF provider, behind iShares and State Street. That rapid growth has come about largely because Vanguard’s ETFs generally carry the lowest expense ratios of any fund family, an average of 0.18%.

That growth is likely to continue, since commission-free trading has eliminated one of the few reasons to avoid ETFs: For those who seek to make regular deposits, or simply rebalance, the cost of paying for trades can quickly outweigh the advantage of the lower expense ratios that ETFs may offer. And investors are also attracted by the generally (but not always) low fees and tax efficiency of ETFs, as well as as the ability to trade while the markets are in session.

Still, for longtime Vanguard investors, it’s surprising to see the fund family shift toward commission-free ETF trading. After all, Vanguard founder Jack Bogle has often complained that ETFs foster “short term speculation” — exactly the opposite of the patient, buy-and-hold investing approach he has long advocated.

But the move toward commission-free trading will ultimately benefit Vanguard’s mutual fund investors, says investment adviser Rick Ferri, head of Portfolio Solutions.

That’s because of the unique nature of Vanguard’s ETFs, which are share classes of existing mutual funds. This patented structure gives managers tremendous flexibility in buying and selling the portfolio’s stocks and bonds, which can improve tax efficiency and lower costs.

Ferri notes that the commission-free trades will help attract more assets and trading liquidity to Vanguard’s ETFs, some of which — its new bond ETFs, for example — still lack critical mass. So, odd as it may seem, if Vanguard sees an influx of day traders, who furiously churn their portfolios, that may eventually benefit its core group of buy-and hold investors.

UPDATE: A Vanguard spokesperson says that the fund group “will closely monitor trading of our ETFs, and if a client is engaged in excessive trading, we will reserve the right to reject further trades.”

Does all this mean you should rush out and buy Vanguard’s ETFs? Or swap your existing Vanguard mutual funds for their more glamorous ETF counterparts?

Not at all. You first have to look at your long-term goals and asset allocation strategy. In many cases, your mutual funds may give you access to asset classes that you can’t find in ETFs. Or the ETFs may be thinly traded or fail to track their indexes closely; that’s especially true for micro-cap and some types of emerging market stocks. And many bond funds have had trouble hewing to their indexes, particularly during the 2008 credit crunch.

Still, for your core portfolio, ETFs do offer great choices for tracking broad asset classes. And Vanguard, along with iShares and State Street, offers sound, low-cost options. [UPDATE: According to Vanguard, a switch from a Vanguard mutual fund to its ETF share class is not considered a taxable event.] The Money 70 funds, for example, include Vanguard Total Stock Market ETF and Vanguard Europe Pacific ETF , among others.

And if the price wars continue, the choices are likely to get even better.

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