ETFs vs Passive Index Funds

So I know the basic differences between ETFs and mutual funds, as well as, passive index funds. However, I still have yet to come up with a good reason why anyone would prefer a passive index fund over an ETF other than that the former actually owns the underlying shares.

I’m looking at some VG funds and the savings are about 8-10bps, which isn’t a whole lot, but does have an impact over say 10 years.


Probably the commission difference for reinvestment of dividend, I think index funds dividends are reinvested commission free whereas ETF dividend you will have to buy more shares thus incuring more fees.

I think the main difference is that people view mutual funds as investment services, while they view brokerages as stock trading platforms. So, people who are new to investing or who are not comfortable executing their own stock orders usually choose mutual funds before they consider ETFs. Execution risk is not an issue with mutual funds, since these funds trade on daily NAV. Furthermore, it is possible to set up processes like direct deposit, which liken mutual fund accounts to bank accounts that most people are already comfortable with.

You also get certain perks, discounts, and FA access from holding large balances at investment companies. Usually, a range of services activate when you invest $1 million, $5 million or $10 million with Vanguard, Fidelity, or others. However, it should be assumed that their main objective is to sell you fee based services. So, the value is probably questionable. I’ve seen brokerages offer perks as well, but these are usually in the form of lower margin rates or better rates on other services like mortgages.

Other than that, I don’t think cost is a main differentiating factor between mutual funds and ETFs. Both should be comparable, and if anything, ETFs are more cost effective, due to 1) lack of tax from rebalancing, and 2) the rule that allows ETFs to earn borrow cost through securities lending. You have to pay a commission for trading ETFs, but that should be small as well.

Isn’t a difference the securities lending? I have a couple funds that routinely have negative expense ratios be because of it. Ohai mentioned, but figured I’d highlight

ohai is right. here was my thoguht process when making decisions:

when i first started working i did mutual funds because i was still building my money base and transactions were free and i can contribute weekly and automatically. i will prolly switch this over to a brokerage someday, prolly when i convert my 401k to an ira.

my more recent contribution is to a brokerage with etfs/stocks. i usually contribute once a year and in full, then dump it all in one stock. etfs are free transaction, but i have to be more active with the trade orders.