We’ve talked in the past about the merits of index funds vs. ETFs. Today I wanted to highlight the views of one my favorite financial authors, William Bernstein.
In his book “The Intelligent Asset Allocator,” Bernstein said the following about ETFs in general, and SPDRs (i.e., ETFs that track the S&P 500) in particular:
“They have both advantages and disadvantages relative to a conventional index fund. On the plus side, they can be traded throughout the day, as opposed to a conventional fund, which is priced only at the end of the trading day. SPDRs do not generate appreciable capital gains and are thus slightly more tax-efficient than conventional S&P index funds. On the other hand, the purchase and sale of an ETF incurs both commissions and spreads, and so is slightly more expensive to own. Also, ETFs reinvest dividends only quarterly, and thus will suffer a slight performance drag relative to a conventional fund, which continuously reinvests its dividends. On the whole, unless you are an active trader, ETFs hold no real advantage over a conventional index fund.”
Well said. One thing that I would add is that, while ETFs are subject to brokerage commissions, they typically have lower expense ratios, and thus have marginally lower ongoing costs to own.
As for us, all of our stock and bond investments are in an index fund of some sort. We’ve considered ETFs, but we got started back before they were widely available, and have decided to stay the course.
According to Vanguard, you can convert index fund shares into ETFs without incurring taxes, even if you do this in a taxable account. We haven’t bothered to do this, in part because we now qualify for Admiral shares (which have a very low expense ratio) in several accounts, and would thus gain very little by switching to ETFs.