ETF vs. Mutual Funds

smokedog2 · Outlaw Joined: 02 Dec 2004 Posts: 210 City: Cincinnati

Does anyone have a compelling argument for buying Mutual Funds over ETFs?

MF have higher fees and the management in general is not much better than the sector.

For indexes, I say ETF is better than an index fund.

For sectors the same since ETF fees are less.

For “Management” the MF fees usually eat any edge they have.

I also think the more stocks and funds you own, the harder it is to beat the market, you start looking like the market, so why not just go index with the lowest fees.

I know there are some financial planner guys out there. What do you think?

chavez · RIP MHL 04/25/1958 - 01/11/2006

smokedog2, ETF gives better liquidity.

Why would someone want an indexed fund anyway? There are much better alternatives out there that have FAR less risk.

5280HighButter · Soul Rider Joined: 16 Mar 2005 Posts: 258 City: Littleton

I agree, ETFs are the way to go, in reality they will only save, on average, about $100-200/year in fees per $10,000 invested but that is still better than nothing. With an ETF you also have at least a $7 fee when you buy one and when you. I don't think that this savings should be the only reason for buying an ETF though. ETFs, as Chavez has pointed out, offer greater liquidity and unlike many mutuals they have no minimums and no fees for not holding long enough. You are also given a greater diversity of funds to choose from than if you were only shopping at one mutual fund company. If you do own Mutual Funds now don't just sell to buy into the same sectors/regions in an ETF, the tax hit would not be worth it.

Index is a broad term, you state that diversifying is a double edged sword, which I agree with, but what are you trying to accomplish? You state "The market" well which one is that, Brazil, NASDAQ, Australia??? People can beat the S&P (especially lately) with a 10 stock portfolio, but is that the type of investor you want to be and do you have the time for it? I said no to this after about a year because even though I was doing much better than the big 3 markets I could not keep up with my mutual fund performace. Good discussion though!!

chavez · RIP MHL 04/25/1958 - 01/11/2006

5280HighButter, the "market" is becoming more and more global everyday. How many of the Dow 30 only do business in the US? How bout the S&P? I think you will find that most US stocks are not really US stocks.

Anyhow, what I was saying is ETF is great, if you like undue risk for similar return.

I really can't get in to much "advice" here, but I will leave you with this tidbit: don't pick stocks, pick the people who pick stocks.

Hell, a lot of our business isn't even that, we pick the managers who pick the people who pick the stocks. Wink

5280HighButter · Soul Rider Joined: 16 Mar 2005 Posts: 258 City: Littleton

I agree Chavez, I do a lot of international investing and follow other markets closely. Many companies are multi-national companies, and I have heard many people argue that the only way to invest in other markets is to look into foreign small caps because they are least affected by the fluctuations of the U.S. markets.

However I must disagree with you about the ETF and the undue risk. Most ETFs track an index, this means they are diverse compared to a normal traders portfolio. Diversity like this usually equals less risk, and could also equal less return. Some people pick stocks well, but a great majority do not. Long term I will still advocate index investing (for the most part) because the chances of timing the market and picking the right stocks/people who pick stocks succesfully is likely to diminish over time. As I said above an ETFs fees should not be the reason to own them, it is whether or not you believe in what I just said.

J-Ro · Posted: May 17, 2006 2:32 pm Post subject:

If you want to invest in an index of any sort (Market, commodity, MSCI, any specialized index like Semis or Internet, etc) you should go ETF. If you're looking at more of an allocation based investing style, you should stick to Mutual Funds.

chavez · RIP MHL 04/25/1958 - 01/11/2006

5280HighButter, you would be amazed at the difference in risk between an ETF and many MF's that garner similar results.

Why anyone would want to directly track an index is beyond me.

Anyhow, this is how I would look at it:

smokedog2 · Outlaw Joined: 02 Dec 2004 Posts: 210 City: Cincinnati

I’m not sure how risk is accurately calculated in all this. The MF folks are more & more being allowed to invest in derivatives and their published “holdings” are always out of date. Standard deviation hurts you if you are wrong and helps if you are correct. The manager for my Clipper fund has moved on while my money stayed behind. The cost of moving it is not trivial.

Why is it assumed that someone will be much better at picking a money manager than they will be at picking a stock?

I did not check the MFs today but PHO (an ETF) did get hit the hardest of what I own. BRY is in a slide as well. I’m in no hurry to sell either, I may buy a little more PHO.

The OMG reaction to the data of the day tells me there are a lot of people managing so much money they know they are the market and are scared to death of being in during a decline. I see tulip bulb nervousness but not a lot in the way of tulip bulb bubbles.

yea, I’m buying.

J-Ro · Posted: May 17, 2006 5:07 pm Post subject:

smokedog2, Sell in May and go away.

chavez · RIP MHL 04/25/1958 - 01/11/2006

thrasher · Newbie Joined: 24 Jun 2003 Posts: 34 City: northern MN

One thing to consider when deciding between a mutual fund or ETF is whether you are investing one lump sum or making periodic contributions. If you're investing a lump sum, an ETF will be better because you only pay commissions once whereas in a periodic contribution schedule you are paying commissions for each contribution.

With a mutual fund, you usually will not encounter a fee each time you put more money into the fund. These small fee differences don't seem like much, but when you consider them over a long period and how much they compound, they can take a substantial bite out of your portfolio.

Anyways, in consideration to fees and commissions, when investing a lump sum, go with an ETF. When investing on a fixed schedule, go with a mutual fund.

chavez · RIP MHL 04/25/1958 - 01/11/2006

thrasher, many index tracking mutual funds are no-load and offer very low expense ratios (usually less than 25 basis points).

The biggest difference between the ETF and the index tracking fund is the tradeability of them. ETF's act like stocks, funds like funds. There are advantages to both.

Anyhow, when you move away from an index (at least in terms of risk) you pay for the services required to administer it - both in expense ratios and sales charges.

MLD004 · Newbie Joined: 09 Aug 2006 Posts: 1 City: Minneapolis

I understand the argument with ETF and lower fees. Especially when you are talking about using them for your blend holdings. However, when you look at small caps or growth and value investing, mutual funds can start to make a lot more sense. In the last couple of years the indexes really haven't seen any substantial returns, yet I have seen many portfolios do very well using mostly mutual funds. In todays market I would argue that MFs make even more sense. If we are going into a sideways market then the only people that are going to be able to make any money are stock picker (mf managers)

Just my opinion.

uncleboo · Newbie Joined: 23 Aug 2006 Posts: 6 City: Murfreesboro

I guess I will weigh in since I am a financial planner. ETF's are probably the cheapest way to own an index, but as mentioned above: what type of investor are you? Risk, time horizon, and investment experience all should weigh in on your investing decisions. If you prefer to track an index as a strictly passive investor, go for the ETF. If you prefer active management, go for the MF. There are plenty of funds out there who regularly beat the indexes, but you may pay more for that "potential" return. Just my .02