ETFs vs mutual funds

An exchange-traded fund (ETF) is a form of mutual fund. There is frequent discussion in the Bogleheads forum on the comparative merits of ETFs and mutual funds. User livesoft has offered a succinct summary below.

Pros of ETFs:

 * 1) Generally lower expense ratios and can purchase less than the minimums needed for some mutual funds.
 * 2) 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).
 * 3) Can use  limit orders so you know exactly what you are paying.
 * 4) 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.
 * 1) One can take advantage of occasional anomalies and purchase shares at a lower than expected price.
 * 2) No frequent trading restrictions.

Cons of ETFs:

 * 1) Some brokers charge a commission. Not a problem with brokers which do not charge a commission.
 * 2) The bid-ask spread confuses some people, but we have seen it can be small or one can be taken advantage of.
 * 3) No real way to get a fair price when the market is closed.
 * 4) Must buy integral number of shares ... cannot typically buy fractional shares (though some brokers allow this, but they are not no-commission brokers).
 * 5) 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.)
 * 6) 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.)
 * 7) 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:

 * 1) Can buy fractional shares; all your money goes into shares without leftovers.
 * 2) Automatic investment is easy.
 * 3) Trades execute at end-of-day net asset value (NAV).
 * 4) Exchange from one fund to another has no friction since both sell & buy done at end-of-day NAV.
 * 5) Can submit orders when the market is closed. You will get a fair price at the next available NAV.
 * 6) Dividends re-invested the same day they are paid at NAV.

Cons of mutual funds:

 * 1) Expense ratios can be (not always) higher than corresponding ETF.
 * 2) No intraday transactions.
 * 3) Usually must submit the order before the end of the trading day. The actual price is not known (but is legally guaranteed to be the NAV).
 * 4) Lack of some asset classes without excessive fees.
 * 5) Some funds have trading restrictions (cannot re-buy after selling for NN days).

General remarks

 * 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.