I believe I understand the general differences of the two…but I am really not clear of the advantages/disadvantages. Enlighten me!!!
ETF: Tax advantage, lower expense ratios, trade like stock, no automatic reinvestment of dividends. Mutaual Fund: Annual capital gains taxation, auto reinivest cap gains/dividends, higher expense ratios, 12b-1 fees sometimes, etc. Consensus is ETF’s are a bit better.
yeah, Etf fees usually lower, easier to trade (can trade at intraday prices), better tax treatment if you hold them longer, AND you can short them, which you cant do with mutual funds. Only real drawback is that dividends arent automatically reinvested, if that is important to you.
So why would somebody invest in a mutual fund that mirrors an ETF?
actually, there quite a few passive mutual funds with lower expenses than etfs… so maybe that’s why.
homie Wrote: ------------------------------------------------------- > So why would somebody invest in a mutual fund that > mirrors an ETF? I think the reason is because, if you have an account with a place like Vanguard or Schwab, you do do not pay transaction costs to buy many no load mutual funds. So, even if a mutual fund has a slightly higher expense ratio than a comparable ETF, you’re still saving money unless you’re talking about a large investment. Think of it kind of as a fixed (ETF transaction cost) versus variable (mutual fund expense rati) costs arguement.
Many mutual funds have no transaction fees to buy in. if you buy an ETF from your broker you will most likely pay transaction costs (~$10) or so depending on who your broker is…not a big deal if you are putting a large sum in at once or large sums relative to the transaction costs, but if you are a small investor and continuously invest (say $100/week for dollar cost averaging) these costs will add up quick.
How does an ETF treat dividends? I know a mutual fund will reinvest it in the fund. Also do any 401K or IRA plans allow investments in ETF’s?
The dividend simply gets deposited as cash in your money market. One benefit of mutual funds is the auto reinvestment.
Pink, I was talking to you about this a couple weeks ago…remember? I’m looking at iShares, which is Barclays I guess, right now…they have a some cool funds (Canada, Europe, etc.). ANybody involved with these before?
I do remember. By the way it’s Mr. Pink to you.
as far as CFA exams go you just need to learn all the mechanical differences (see above + some other advantages llike: no up-tick rule on shorting - which is actually very handy at times, tax advantage due to in specie creation/redemtpion of units, etc, etc) But in real life the main difference is performance (after taxes and fees). Index ETFs beat active funds (after taxes and fees) by a mile over the the long term. Sure some active funds will beat the index each year, but over the long term no active manager has delivered alpha consistently over the time horizon of most clients (pension funds, insto’s or retail)- ie 20-30+ years (and yes I have BRKa, etc). Why don’t more people use them? Main reason is marketing & distribution. ETFs don’t pay sales commission because they have no loads and very low MER - IVV, IYY, etc at about 9bp pa. Can’t pay sales commissions out of that. So they do virtually no advertising & promotion and find it hard to get a look-in with commission-driven brokers, planners, advisors, wealth managers, asset consultants, etc - all of whom are on the payroll of the active funds. Bottom line is that, over the long term, the active funds industry is a complete waste of space - purely a mechanism to line the pockets of sales commission-driven “advisors” who put their own interests above the interests of their clients. I have used i-shares and SSGA SPDRs for years for the core of portfolios - especally good for international MSCI indexes - where active funds are even more patchy and expensive than the developed markets ones. Re-investment - some SPDRs do and some don’t. Personally I don’t like it because you have to keep track of a million little cost bases all over the place after a few years. Sure there is software to do it, but having hundreds of little DRP cost bases is just messy. Go alpha-seekers!!!