Comments on: Index Mutual Funds vs. Exchange Traded Funds (ETFs)

By: Lauren Noelle

Lauren Noelle — Sat, 01 Aug 2009 01:06:49 +0000

Thank you for explaining the advantages and disadvantages of ETFs. I am interested in investing in ETFs but am unsure of exactly how to go about it. Any help would be greatly appreciated, you can contact me directly at laurenbeck@gmail.com

By: retireby35

retireby35 — Wed, 24 Jun 2009 18:01:18 +0000

I generally use index mutual funds than ETFs mainly because I dollar-cost-average. I don’t want to pay the ETF fee everytime I buy into a certain index.

But I do use ETFs if I plan on doing any ultrashorts or longs on a particular index because Vanguard doesn’t let you time it when you buy/sell mutual funds.

By: Travis

Travis — Sun, 21 Jun 2009 22:06:01 +0000

I admit I’m a bit bias, because I’m an option trader, but I prefer the ETF. If I’m already going to get a decent return with low cost I might as well squeeze some extra income from the ETF by selling covered calls and the sorts.

I prefer to hold them in my ROTH because of the tax advantages. Paying taxes on trading income is a pain in the butt.

By: ETF Guy

ETF Guy — Sun, 21 Jun 2009 03:02:21 +0000

I think that David (commenter before) may be technically right about ETFs trading above/below the actual value of the stocks in the ETF, I think in practice that doesn’t happen with popular ETFs. Those that do arbitrage for a living are certainly quick to swoop in to make sure the value of an ETF is in line with the underlying holdings.

Also, with an account at Sharebuilder, you can reinvest dividends into fractional shares by setting the right account setting.

By: David

David — Fri, 19 Jun 2009 01:22:31 +0000

Some more important points about ETFs/Funds –

While ETFs match a basket of stocks like an index fund, because of their traded nature they can be at a premium or discount to the actual values of the stocks.

Mutual Funds are valued at their Net Asset Value at the end of the trading day and that’s their price.

What this means is, with an ETF you could pay more than the index is worth, or less depending on market forces. Mutual Funds are always valued at their actual value.

In addition, ETFs are subject to the Bid/Ask spread which introduces more risk. Some ETFs trade extremely lightly – the price difference between what you could buy the ETF for (bid) and the selling price (ask) could be drastic.

Lastly, Mutual Funds allow you to purchase and reinvest fractional shares, ETFs don’t.

By: Laura

Laura — Fri, 19 Jun 2009 01:01:41 +0000

@Mike: I’m glad your company offers both 401ks. I checked with some of my friends and they do not have that option.

By: MikeS

MikeS — Thu, 18 Jun 2009 17:33:28 +0000

I’m trying to rebuild my savings, so I recently started using an ETF for my taxable account. I’ve been using ShareBuilder’s automatic investment program, so it only costs $4 to buy. It’s worked well so far. Very little hassle to set-up and pretty user-friendly interface. I don’t have an IRA yet, still using the company’s plan to save and haven’t maxed it out yet. They offer both the 401k and the Roth 401k.

By: Nickel

Nickel — Thu, 18 Jun 2009 14:00:13 +0000

We’ve been using index funds, and recently qualified for Admiral Shares in one of our Vanguard accounts, which drives the costs even lower. That being said, I’ve considered converting to ETFs in our taxable accounts to reduce the tax hit due to year-end capital gains distributions. You can actually do this (at least at Vanguard) without taking a tax hit on the conversion (more info in a forthcoming post). The only downside is that you have to pay a $50 conversion fee.

By: ObliviousInvestor

ObliviousInvestor — Thu, 18 Jun 2009 11:34:14 +0000

My wife and I use both. My own IRAs are at Vanguard (entirely in the 2050 fund). And her IRA is at TradeKing (in Vanguard ETFs that round out our combined asset allocation to be more to our liking).