I’m sorry, but I don’t deal with day-trading scenarios at all. I’m definitely a buy & hold sort of guy.

I’d suggest asking at the Motley Fool discussion boards, as there will be many people there who would be better qualified to answer your questions.

I am looking at trading ETFs in my traditional IRA. My plan is to buy Ultra or Short ETFs depending upon which way the market is heading, then set an automatic sell or stop loss when the target is reached. I have calculated the brokerage fee in this plan. I also understand this may trigger the day trader guidelines and the minimum $25,000 balance and 3 business days to settle transactions.

However, the answer that is eluding me is will I be charged the annual expense from the fund? For example, if I buy $10,000 of DDM when the market is headed up and then sell before the day is done, will I be charged the full annual expense fee? Is it prorata based on the portion of the year it is held? (1/365 of the fee). Or is it based on the amount of money invested regardless of how many times I invest the same $10,000? (I would hate to pay the 0.4-0.9% expense of $10,000 x 250 trading days!)

Also, would I qualify for any dividends? Thank you! Anthony

First, thanks for reading my blog and buying/reading one of my books.

As to Schwab ETFs, the no-commission policy certainly makes them look pretty good. The catch is that it isn’t a very broad offering of ETFs. Specifically, there are no bond ETFs, no REIT ETFs, and no small-cap value ETFs. To buy any ETFs in those asset classes, you’ll have to fork over an $8.95 commission.

So depending upon
a) the portfolio you want to build, and
b) the variables in the original article (how much you’re investing and the length of your expected holding period)
…ETFs via Schwab certainly could be a less expensive alternative than index funds at Vanguard. But that won’t be the case for everybody.

If you don’t work on it, I might for my own benefit. I haven’t talked much about investing on my new site yet, but I will be eventually.

Indeed. It is an assumption. I’ve been pondering how I might be able to find some actual data on how end-of-day NAV tends to compare to middle-of-day or beginning-of-day “ask” prices so that I could turn it into a post. Certainly seems interesting and worth discussing further.

Perhaps a project for this weekend.

The only problem I see there is that it is an assumption. Unless we actually look at the facts, we can’t know if The Finance Buff’s assumption is correct. With similar logic, I can expect that you could easily pay a far higher premium by trading throughout the day rather than just at the end-of-day NAV. Imagine if you’re buying while there’s a lot of hype about where the market’s going.

Of course, this could work the other way. Although it’s rare, you sometimes have the opportunity to buy ETFs at a discount to NAV. Then it could be far better to buy the ETF rather than an index fund. But those opportunities are quite rare and limited.

My thoughts on bid/ask spreads and NAV premiums mirror the following quote from The Finance Buff (originally from a discussion at the Bogleheads Forum):

“The question that really matters is whether the price paid is higher than the NAV at the end of the trading day, because the end-of-day NAV is the price you would pay if you buy a mutual fund on the same day. Is there any evidence that on average the ‘ask’ prices during the day are higher than the end-of-day NAV? I don’t think so. I’d expect that the price paid versus end-of-day NAV will even out over many trades.”

Two things you didn’t cover (and most people don’t when discussing ETFs) are the bid-ask spread and the NAV premium/discount that you’ll encounter when investing in ETFs. These create real, although hidden, costs that can severely dampen the benefits of investing in ETFs. Combine that with the commission costs and you’ll have a bigger hurdle to overcome. In my own analysis of all these costs, it only made sense to use ETFs if you were investing one large lump sum and wouldn’t be touching it for a long-time (including rebalancing). That’s just not a typical scenario for most investors. (Also, I was comparing Vanguard Index Funds to Vanguard ETFs.)

That’s why I only use and recommend index mutual funds myself instead of ETFs. I like the lower expense ratios of the ETFs, but you can’t ignore those other costs (bid-ask spreads and NAV premiums).