Not a very interesting topic, but I just want to get this off my chest.
For years now, I still see online that people tout ETFs because of their low expense ratios relative to their equivalent mutual funds. Based on that, they therefore conclude that ETFs are better.
However, with a few exceptions, ETFs also require a trading fee. Translated into mutual fund terms, that's a front and a back load you have to pay as well!
Now, I'm not saying that in certain circumstances, ETFs can't be cheaper. I'm saying the real answer is: It Depends.
* It depends on how much you contribute. The smaller your contribution balance is, the larger in percentage your trading fees are.
* It depends on how often you contribute. If you're in a 401(k) program, where you may be automatically contributing bi-weekly, the fees are going to destroy you. However, if you're someone who is only making annual buys, say, in an IRA, then it's not so bad.
* It also depends on how many ETFs you plan on buying. A typical portfolio will consist of at least one large cap ETF, one bond ETF, and perhaps an international ETF. You may have more, and the point is, all those ETFs each require a separate trading fee from you.
* And finally, it depends on your existing balance. For example, if you're someone who is just starting out and have a fairly small amount, the difference in the expense ratio is negligible. Now, if you have a lot of money already invested, then yes, I agree expense ratios are extremely important.
Bottom line, I don't understand what the fascination with ETFs are. I mean I can articulate circumstances where even I will use them, but for the most part, I think you can do just fine with regular mutual funds.
Investing isn't always exciting, but it doesn't have to be. It just has to work.
Rant about ETFs
July 2nd, 2010 at 02:31 pm
July 2nd, 2010 at 03:42 pm 1278085361
July 2nd, 2010 at 04:28 pm 1278088110
That and I don't know how prevalent or how permanent this deal is? There is a good possibility that Vanguard and Fidelity are currently engaged in a price war, hence the freebie deal.
Moreover, on a strict expense ratio basis, select index funds such as Vanguard's Admiral Shares and Fidelity Spartan Funds can be just as competitive, each floating around 0.1%.
Either way, my only point of contention is that I don't believe in blanket statements such as "ETFs are always better than mutual funds" or vice versa. It just depends.
July 2nd, 2010 at 05:38 pm 1278092320
For sure. Until I heard about the Vanguard and Schwab deals, I didn't really see much point at all in ETFs since I'm a dollar-cost-averaging investor. It is only now that they've eliminated the commissions that I've started to take a closer look.
July 2nd, 2010 at 06:42 pm 1278096146