So what would a passive investment fund manager say to answer this question? Why should I invest in your passive investment fund that mimics the ETF when I can just go out and buy that same ETF?
That’s where a CFP comes in.
There are lots of reasons to prefer a mutual fund over an ETF (and vice versa of couse) 1) Trading costs on ETF’s are higher because you pay commissions + bid/ask spread 2) Management fees may be higher (or not). 3) The mutual fund doesn’t mimc the ETF, it mimics the index and trades at NAV. Mutual funds generally track indices more closely than ETF’s. 4) ETF’s suck at rebalancing due to index changes as they have to sell shares of stock to buy shares of companies added to the index. Mutual funds can just do this with their normal cash management. 5) Mutual funds generally help out more in tax reporting, having nice people to talk to on the phone, sending you Christmas cards, etc. 6) Due to regulatory stuff, ETF’s need to keep incoming cash in non-interest bearing accounts until distribution. For high dividend stuff, that’s a disadvantage to a mutual fund that would generally keep cash in the money market until distribution. 7) For small accounts, you can add $10/week to a mutual fund for your kids but not to an ETF. and probably 40 other reasons I can’t think of now (but the passive investment fund manager could). I love watching someone smugly ask such a question to a professional in the business and get schooled. ETF’s may be better in your spot, but they are not uniformly better.
Some funds, such as Dimensional Fund Advisers, add value by minimizing transaction costs and by applying certain trading techniques. They can do things like wait till volatility settles on a stock that was recently added to or drop from an index as well as not trade around earnings announcement dates. Some mutual funds may make it cheaper or free to buy/sell more of the fund once you establish an account with them. In any case, the differences are not huge and if you are looking for liquidity so that you can quickly jump in an out of a position, stick with ETFs.
True passive funds are not slaves to the index. As in any negotiation, the best position to be in is to never “have” to do anything. An ETF or any index fund has to purchase the securities in the same weights as the index. So there pinnacle is zero tracking error. So as kaklan points out, when a index is reconstituted the index fund or ETF is forced to buy some stocks (new additions to the index) and drop some stocks (stocks kicked out of the index) on a certain date…generally months after it is announced by the index committee. So what do you think active managers do with this information? Smart guys front run of course since they know every index fund must buy the new stocks in the index in 30 days. Conversely, the passive fund will still keep exposure to the asset class without having the down side of being “forced” to buy the new stocks in the index. The passive manager can avoid the run up and eventual dump from the active managers listed above. The only really good example I know of is DFA, which has already been pointed out.
i think i’d rather own an index fund over same index ETF… leveraged ETF are more unique… not totally sure what OP was asking. closet indexers?