ETFs vs Mutual Funds
An ETF (Exchange Traded Fund) is a form of mutual fund. There is frequent discussion in the forum on the comparative merits of ETFs and mutual fund. User livesoft has offered a succinct summary below.
Pros of ETFs:
- Generally lower expense ratios and can purchase less than the minimums needed for some mutual funds.
- A good broker like WellsFargo or Fidelity make tax-loss harvesting and bookkeeping trivial since one can easily use specific share id (but they can do this with mutual fund shares as well).
- Can use limit orders so you know exactly what you are paying.
- Can purchase during the day at known prices without waiting for the close of the market session.
- Asset classes available that an entity like Vanguard does not have in their mutual funds.
- One can take advantage of occasional anomalies and purchase shares at a lower than expected price.
- No frequent trading restrictions.
Cons of ETFs:
- Some brokers charge a commission. Not a problem with brokers which do not charge a commission.
- The bid-ask spread confuses some people, but we have seen it can be small or one can be taken advantage of.
- No real way to get a fair price when the market is closed.
- Must buy integral number of shares ... cannot typically buy fractional shares (though some brokers allow this, but they are not no-commission brokers).
- Automatic investment is problematic. Your broker may have this functionality, but would you trust their prices? (Do not confuse automatic investment with automatic re-investment of distributions.)
- Some possible friction when tax-loss harvesting since one usually sells one fund and then buys another. (It is possible to buy first and double-up, then sell later. This can be done with mutual funds as well.)
- One can stupidly submit orders to sell when the market is closed or use stop-loss orders that get taken advantage of. Or one can make other errors entering orders.
Pros of mutual funds:
- Can buy fractional shares; all your money goes into shares without leftovers.
- Automatic investment is easy.
- Trades execute at end-of-day net asset value.
- Exchange from one fund to another has no friction since both sell & buy done at end-of-day NAV.
- Can submit orders when the market is closed. You will get a fair price at the next available NAV.
- Dividends re-invested the same day they are paid at NAV.
Cons of mutual funds:
- Expense ratios can be (not always) higher than corresponding ETF.
- No intraday transactions.
- Lack of some asset classes without excessive fees.
- Some funds have trading restrictions (cannot re-buy after selling for NN days).
- Both mutual funds and ETFs allow free automatic re-investment of distributions. It is really a broker function --- not a function of the investment.
- Both ETFs and mutual funds can be tax efficient ... or not.
- Each investor will need to assign value to the advantages important to them and subtract value of the disadvantages important to them. ETFs are not a slam dunk. Neither are mutual funds.
- The basics of ETFs: A primer for the perplexed is Vanguard's introduction to the topic.
- The Choice Between ETFs and Conventional Index Fund Shares is Vanguard's in-depth look.
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Wiki article link: [url=http://www.bogleheads.org/wiki/ETFs_vs_Mutual_Funds]ETFs vs Mutual Funds[/url]