r2i forum

Hello All:

I know we have had a very passionate discussion about Index funds and active Vs Passive. I'm opening new thread to exclusively discuss Index funds Vs ETF. ( Admin, if you think this is redundant, please advise)

Now days ETFs are available for any sector, any asset class, ETFs for many countries unlike in the past. What should we choose?

Couple of advantages of ETFs.

1) You can buy and see like a stock
2) Tax efficiency
3) Expense ratios are even better than index funds.
4) No minimums to open an account, most vanguard index funds have $ 3,000 especially if you think the market had a solid run up for last few year, you may want to go slow.
5) No maintenance fee etc.


Disadvantage:

You pay brokerage commission every time you buy and sell, this could be offset as you have more control on when you want to buy and sell and also commission is falling down day by day with more competition. Like Freetrade charges only $ 5 per transaction.


Could you guys think of any other Index funds advantages over ETF?

Do you mean open ended funds vs ETFs?

There are many ETFs that are index funds.

SPY, MDY, QQQ, EWA etc are index funds in their respective sectors and ETFs are passive.

Desi,

For e.g. Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) is a index fund and iShares EEM is also a emerging market fund except it is an ETF. So you can probably get the same exposure by investing in either one of them except there is flexibility in EEM ETF in the sense that you could buy and sell whenever you want and there is no minimum required for EEM. I know that if you are frequently DCAing then EEM cost could be higher.

It seems like Vanguard index funds are actually index-mutual-funds. They operate like mutual fund except that they are passive funds which tracks an index.

What is the expense advantage of ETF over an index fund? Is it even 0.05%? Say your brokerage commisions are $5. So to overcome this fee, you need to invest at least $10,000. With DCA, I can invest as little as $50 or $100 at a time.

Some Spartan funds have ERs capped at 0.1%. Some of VG admiral status funds have ER even less than that. I don't think there are too many ETFs out there that can match this.

This being said, ETFs could be useful if you want to play a particular sector (that is not a long term continuous investment, but a short term one time investment). For example the corresponding funds have restrictions like high minimum, redemption fees, maintenance fees, or it might be closed to new investors.

how true about nav is the writer talking about ?

http://www.usatoday.com/money/perfi/columnist/krantz/2007-02-26-etf-prices_x.htm

One of the reason I'm considering ETF is this.

Say I don't have emerging market exposure in my AAP and I want to bring EM in my asset portfolio. If I invest into Vanguard emerging market Index fund and open an account with $ 3000 and subsequent DCAing, I am afraid that I might be opening account when the market is at peak as we all know in last couple of years EM have had a solid run up. So I want to add this sector to my portfolio but start slow and wait and watch and invest over a period of time to average out the peaks and valleys. If I invest through ETFs I believe I have more control and yet get the same exposure that my AAP needs.

ER and Tax Efficiency matter. ETF wins over its corresponding mutual fund cousin.

But for a portfolio there are three stages, (1) accumulation phase - early years (2) maintenance phase (3) liquidation phase - retirment

In (1) and (3) buy and sell commission play an important role in your costs, make the ETF option as a big disadvantage.

In stage (2) ETF are cheaper for buy-hold long term investors.

The other doubt that I had was whether there was a speculation price built into ETF? Link in Post # 5 cleared that up. Efficient market will bring NAVs of basket of stock pretty close to ETF price, which means you are not buying ETF at a too high premium and individual stock prices will always line up with ETF price. Because ultimately ETFs are as good as the stocks that it is holding.

Like Desi is INDEX ALL THE WAY. I'M ETF ALL THE WAY. :emwink:

>>In stage (2) ETF are cheaper for buy-hold long term investors.

How does ETF handle dividends and CG? Is there a commission if it is reinvested? With MF this is not an issue.