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ETF v OEIC

Index tracking funds and ETFs
scrumpyjack
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Re: ETF v OEIC

#382820

Postby scrumpyjack » February 1st, 2021, 4:03 pm

I note that Vanguard UK also off a bulk dealing facility where there is no broker commission and, several times a day, they group orders together. I don't know whether that results in a lower spread cost.

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Re: ETF v OEIC

#382833

Postby GeoffF100 » February 1st, 2021, 4:43 pm

Newroad wrote:Hi Geoff.

Unless I'm missing something, you are basically agreeing with my simplified example of swing costing - albeit in a somewhat verbose way?

Noted on the passive forum bit - exactly one half of each of my portfolio's is passive, so it is relevant to me. However, whilst I accept the market price, I don't do so without thinking. For example, when rebalancing, which I do partially each month, I do so at a point when I judge spreads are OK. So, not taking a view on the market per se, just that it isn't being unreasonable as to on-costs.

If that's being vegetarian rather than vegan with respect to being passive, so be it - I'll take the classification.

Regards, Newroad

You said that the two sellers were not charged (i.e. they sold at NAV). Actually, it is better for them than that. They got more than the NAV, because the price had been pushed up by the eight buyers. (Actually, Vanguard does not implement swing pricing if the cost of doing so is greater than the money raised. If there were only eight buyers they would have to be very big buyers to affect the price.)

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Re: ETF v OEIC

#382834

Postby GeoffF100 » February 1st, 2021, 4:49 pm

scrumpyjack wrote:I note that Vanguard UK also off a bulk dealing facility where there is no broker commission and, several times a day, they group orders together. I don't know whether that results in a lower spread cost.

With Vanguard accounts you pay a commission to trade ETFs in real time. The bulk deals are free. Vanguard might get better prices if the trades are done in the auction, where there is scope for netting off with trades from other brokers.

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Re: ETF v OEIC

#382838

Postby Newroad » February 1st, 2021, 5:15 pm

Hi Geoff.

Imagine in my simplified example, that (the midday) NAV per unit is £10,000. The net trading costs remain £24 (6 * £4). I have been assuming ...

    The 8 buys will get charged £10,003 per unit
    The 2 sells will receive £10,000 per unit

is that broadly correct?

I think the tenor of your additional argument may be that buying pressure vs selling pressure might push the NAV higher. That's true, but appears independent to me of spread/charges etc. For example, in my above example, the NAV the day before may have been £9,995 - but that wouldn't affect the example of today's charge distribution.

Regards, Newroad

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Re: ETF v OEIC

#382856

Postby GeoffF100 » February 1st, 2021, 6:38 pm

No, you misunderstand. Vanguard OEICs have a single price, which is the same for buyers and sellers. If that single price swings up, the buyers not only pay the remaining trading costs (after netting out), but they also subsidise the sellers. It is not just a case of demand pushing the price up. That has already happened to the underlying shares, which has pushed the NAV up. Swing pricing pushes the price up even more than the market, because the buyers not only have to foot what is left of the trading bill, but they also subsidise the sellers, because of the single pricing.

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Re: ETF v OEIC

#382860

Postby Newroad » February 1st, 2021, 6:59 pm

Indeed, Geoff.

I did misunderstand what you were saying - I was perhaps lost in the past. However, when I tried to revise the example, it seemed to me that to set a single OEIC price, both buyers and sellers always both lost out unless their volumes matched - it was just that the smaller group lost out less.

If that remains conceptually wrong, perhaps you could illustrate by example?

Regards, Newroad

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Re: ETF v OEIC

#382870

Postby GeoffF100 » February 1st, 2021, 8:06 pm

NAV = £1,000

Vanguard has 2 buyers of 1 unit + 1 seller of 1 unit

Vanguard's cost to buy 1 unit = £1

Vanguard has to buy 1 unit at a cost of £1,001

Vanguard sets the price at x

Vanguard charges each of the buyers x and receives x from the seller

Vanguard balances its books so

£1,001 = 2 * x - x

Vanguard sets the price at £1,001

The two buyers are both paying £1 over the NAV, and the seller is also receiving £1 over the NAV

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Re: ETF v OEIC

#382873

Postby Newroad » February 1st, 2021, 8:17 pm

Thanks, Geoff.

Got it - the bit I was missing is that (initially at least) Vanguard is paying the trading charges - they are not being taken from and hence directly reducing the NAV. Vanguard recovers their trading charges by setting the daily unit price as appropriate.

The other bit, which is less relevant to the calculation but something I hadn't explictly realised, after all the transactions, is that daily unit price does not usually equal the NAV (it would only be so in the case of no transactions or equal numbers of buy and sell transactions). For whatever reason, I had assumed that at the end of the price setting, daily unit price would equal NAV - and had presumed that was desirable - perhaps it isn't.

Regards, Newroad

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Re: ETF v OEIC

#382959

Postby GeoffF100 » February 2nd, 2021, 8:59 am

It is called swing pricing because the price swings around the NAV. The purpose is to ensure that long term investors do not bear any of the costs of other investors entering or leaving the fund.

I have drawn attention to ETFs on large discounts when the underlying stock becomes illiquid. Clearly, it is important to be aware of that. You can get out, but at a discount to an already depressed price. An OEIC investing in the same stock will have problems if there are mass redemptions and the fund cannot sell the underlying stock. They have to stop redemptions. Woodford notoriously got into problems with illiquid equities in an OEIC. He sold good stock to meet redemptions and ended up holding a lot of rubbish. A whole market tracker cannot do that.

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Re: ETF v OEIC

#383116

Postby Newroad » February 2nd, 2021, 4:31 pm

Hi Geoff.

I've had to catch up 20 years in my knowledge of Unit Trusts/OEICS - I sold my last one in 2001 when buying a house - and have been only in Investment Trusts (and later ETF's) since. Thanks for your help in this re-education! :D

I've done some further reading - it seems there is Full Swing and Partial Swing - the latter ostensibly being more common as far as I can tell. In Partial Swing, as I believe used at Vanguard UK, it seems there is no swing adjustment until a threshold is reached. Finding what that (or those) thresholds are has evaded me thus far. However the Bogleheads site uses an example of +/-5% previous days close, with a 0.1% of NAV swing factor once exceeded - this may or may not be indicative.

If it is, I would draw two conclusions re Partial Swing pricing, as implemented

    It is to protect against large adverse moves, e.g. March 2020, not "normal operations"
    In normal operations, it would probably work much as I thought it might, with the trading charges being passed via the NAV onto both buyers and sellers in a pro-rated way, irrespective of the net trading flow for the day

Conversely, Full Swing Pricing, if implemented fully - it need not be, e.g. it might not have a threshold, but might only be a percentage of the swing - could protect the interests of those not trading fully and/or give an advantage to those on the lesser side of trading, as per your example.

On a personal note, I retain a personal preference for real-time market pricing (e.g. ETF's and Investments Trusts) and, all things being equal, closed-end funds (e.g. Investment Trusts) - amongst other reasons, I think they deal with illiquidity better. Clearly, both ETF's and OEICS have risks in this regard, as you outline, but arguably, the discounts that were seen on some ETF's for a period early last year were a better reflection of the grouped underlying instruments than trying to bottom up build a notional value based on the market price (if you could get one) of the underlying instruments themselves.

However, nothing's perfect, e.g. Investment Trusts have discounts/premiums etc, so it's a horses for courses view on need and risk. Thanks again for the dialogue.

Regards, Newroad

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Re: ETF v OEIC

#383151

Postby GeoffF100 » February 2nd, 2021, 6:27 pm

Vanguard UK move from full swing pricing to partial swing pricing last summer:

https://www.vanguardinvestor.co.uk/arti ... ng-pricing

Swing pricing works by adjusting the price for all deals on a given day up or down according to net cash flows in a given fund. With partial swing pricing, though, the price is only swung if net cash flows exceed a given threshold, either positive or negative.

Vanguard believes that partial swing pricing benefits all investors, including smaller ones. All new investors, irrespective of size, are treated the same, and existing investors are protected from the dilution caused by new subscriptions.

It is not clear to me how they protect existing investors from dilution when there is threshold to the swing. Certainly, they do not say in that article. Perhaps they apply a larger swing than they would with full swing pricing if the threshold is exceeded.

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Re: ETF v OEIC

#383170

Postby Newroad » February 2nd, 2021, 7:26 pm

Hi Geoff.

I can only speculate that they are compromising based on pragmatism having observed things for a bit.

Full swing advantages those who, perhaps accidentally, are on the right (i.e. lower volume) of the day's trade and hopefully protects those who aren't trading at all. It could be argued that during normal operations this is somewhat random and perhaps more importantly, can move the daily pricing more materially away from the NAV.

Conversely, partial swing will keep the daily price close to the NAV during normal operations (in essence, NAV minus trading charges averaged out across both directions of transaction). However, in extreme operations, once the threshold is breached, as it appears to apply to the whole NAV, it gives reasonable scope to protect those not transacting on the day, which I believe is the main purpose.

For what it's worth, I don't think the protection is as good for OEICS in extreme conditions as Investments Trusts. For ETF's vs OEIC's, its closer and less clear, but as you might imagine, I'd personally prefer to have an ETF and be able to make a trade throughout the trading day, for better or worse, rather than wait until the time when the pricing is nominally done for an OEIC, e.g. noon, make a decision just before and then hope what I expect to happen comes through later in the daily pricing.

Regards, Newroad

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Re: ETF v OEIC

#383278

Postby GeoffF100 » February 3rd, 2021, 8:42 am

Newroad wrote:For what it's worth, I don't think the protection is as good for OEICS in extreme conditions as Investments Trusts. For ETF's vs OEIC's, its closer and less clear, but as you might imagine, I'd personally prefer to have an ETF and be able to make a trade throughout the trading day, for better or worse, rather than wait until the time when the pricing is nominally done for an OEIC, e.g. noon, make a decision just before and then hope what I expect to happen comes through later in the daily pricing.

What extreme conditions are we talking about here? Over exuberant buying at a high is not usually called and extreme condition. I expect that you are talking about panic selling after a big fall in the market, which I would not recommend. You said that "you would rather have" an ETF in those conditions than an OIEC. If you are buying more, it does not matter what you are already holding. You are not going to sell what you already have anyway.

If you are a panic seller, you can immediately get out with an ETF, but there will be a big spread and most likely a big discount (but you will not know just how big). If you hold an OEIC, and you panic sell, the price may fall further before the trade happens, but the opposite could also happen. The bulls and bears are in balance at the moment that your finger hovers over the button. Do you know more than them?

If you panic sell an OEIC, the underlying assets will be sold that market price and not at a discount. If you are selling during a mass panic, there may be big net redemptions on the fund, and you may bear most of the cost of selling your share of the underlying securities.

For every buyer there is a seller. If most of the trades of your OEIC are sellers, who are the buyers of the underlying securities? Who holds your fund? Are they mostly panicky retail buyers, or big institutional pension funds? Vanguard has over $7 trillion under management, according to a recent news report. Who are they? I could not find any statistics. I expect that the weak sellers predominately buy the "hot" managed funds. Who are the buyers? Again, no statistics. Nonetheless, the surest way to make money is to buy more when others are panicked out, not to sell up - unless the collapse is terminal, of course. Barring that, for every panic seller, there is a buyer with a smile on his face.

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Re: ETF v OEIC

#383291

Postby Newroad » February 3rd, 2021, 9:35 am

Hi Geoff.

My ETF's are with Vanguard (VWRL and VAGP) so that observation is moot.

Yes, I agree a correction/crash is the most likely extreme scenario, though as we have seen recently, not the only one. Last time, in March 2020, I neither bought (other than scheduled purchases) nor sold - obviously I would rather have bought more with hindsight. As an aside, I am currently preparing to do this in the case of a serious market drop for our SIPP's - but that would be purchasing both ETF's and Investment Trusts.

The point about knowing (or not) more than the bulls and the bears is irrelevant, in my view. For me, the key point is about execution risk management were I (or anyone else, as I am talking more generally) to wish to pull the trigger. I may make the wrong decision in buying or selling ETF's during extreme conditions, but I will know exactly what I am getting at the point I do. I also like the fact that the transaction is immediately recorded with the "exchange".

With OEIC's, this is not the case until considerably later - and at its core, this is what I am fundamentally not comfortable with. For those who are comfortable with the delayed pricing, I have no reason to believe OEIC's are not otherwise fine - and as I have said previously, I have been enlightened overall by this dialogue on them.

Regards, Newroad

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Re: ETF v OEIC

#383294

Postby GeoffF100 » February 3rd, 2021, 9:51 am

Part of the answer to my question of who buys at the bottom is re-balancers. Many big institutional funds will have a target equity allocation and will rebalance (as will LifeStrategy). They will be buying at market lows. There is apparently no evidence that managed funds buy at market lows (there has been research on that).


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