ETF or Mutual Fund

Ive been thinking about this a lot lately, and besides the active trading aspect of a mutual fund, I really do not see any reason to select a MF over an ETF. Im a pretty novice investor, but it really doesnt make much sense to pay fee after fee when you could invest in an ETF. Plus, ETF's trade like stocks so you can jump in out of them as you please.

Maybe someone with more experience could add on...



Edited 2 time(s). Last edit at Tuesday, June 27, 2006 at 08:39PM by Shep.
 
Depends if you want active management or not. Mutual funds with no transaction fee tend to be better for systematic investments as opposed to ETFs, where you get charged for every transaction.
As for passive vs. active, I get a kick out of CFA candidates and charterholders who think active management adds no performance benefit. If you believe markets are efficient, it seems to me this CFA exercise is kind of a waste. But that's another topic.
 
analyst26...

I've wondered about this too. If you're getting a CFA, presumably you are trying to argue that you can make better investment decisions than just indexing the market portfolio. The interesting economic question is that you somehow need to have a performance benefit that outweighs fees... this might be harder to do, especially since the incentive is to increase the fees to the point where your performance is marginally better than the next best performer. That way people will invest with you, you give them just enough return that they don't run to anyone else, and then take as much off the top of that as feasible.
 
it comes down to the fact that you need active management to make a market 'efficient', so the indexers out there are saying 'you active managers are useless in creating value, BUT please keep on doing what you're doing because i can index off your efforts'.
 
in mho, large cap funds fail miserably compared to etfs. How many large cap managers have outperformed the S&P500? Bill Miller is the only one I know of who can do it consistently and over a long period of time. Plus, etfs can be shorted where funds can't. I would assume that should be an important consideration to the smart investors. International, small and mids are another story. Due diligence is much more important there.
 
MOST mutual funds haven't been able to consistently beat the market, the ones that have are worth it. I agree with Z in saying buying a large cap MF isn't a good, buy, compared to an ETF. I was thinking about buying a five star "energy" Canadian MF, a while ago, but noticed that it shared a practical +1 correlation with the TSX energy index, so in this case, it would be best to buy the I-Unit instead of the MF, especially with the fees involved.

I agree with 26's statement that although MOST have not beaten the market, the ones that have are worthwhile. I subscribe to 10-10-80 rule for most things: 10% of something is great, 10% is terrible and 80% are mediocre. Unfortunately the ones that are great and start to get hyped, get closed, Resolute was a great example, something like 80% return over the last year.

Another advantage is you can get into some neat global funds too that are worthwhile; I've invested in some Indian and Chinese funds.
 
as has been suggested above, dollar cost averaging is a huge benefit of mutual funds. i can invest 100 per month and not pay any transaction fees. this is a very unrealistic method of investing with an ETF unless you are investing large sums of money where transaction fees become negligible. hence, i would prefer mutual funds with managers with proven track records and expense ratios under 1%. the lower the turnover in the fund the better.
 
I'm sure a lot of people are like me and are forced to invest in mutual funds through their 401k. not so much a tax, more like a jack...
 
depends onf the fund, some mutual funds are good, some aren't. If my 401k didn't force me to own mutual funds I'd probably own a mix of mutual funds i liked (big contrafund fan) and single stocks; however, I'd definitely buy SPY or QQQQ instead of a MF that tracks them, but I'm pretty skeptical of managed ETF's that don't track a specific index or commodity.
 
corvetteman,

do you have the names of some of these inexpensive funds (under 1% expense ratios) with proven performance records?
 
depends how much money you have. i'd say anyone with under $500k in investable assets is far better of in an ETF. Over that you can hire someone to individually manage your account. I don't believe in mutual funds. edit: because of high fees, trading costs on top of the fees, and too much diversification (i.e. can your really outperform the market if your fund hold 300 stocks?)



Edited 1 time(s). Last edit at Thursday, June 29, 2006 at 11:34AM by cosmo.
 
cosmo-good point on trading fees (the expense ratio does NOT include all fees incurred by a fund). You could probably add up to 50bps more.
 
Find yourself a good mutual fund with well proven managers, an investing philosophy you agree with, and low fees. I agree with everyone here that says if you're getting your CFA you gotta be thinking there's some sort of value-add of actively managed. Also agree with the great point about being able to invest small quantities of $$ often in a mutual fund, which is a big part of actually saving money.

But you need to make sure that "add" isn't eaten by fees, expenses, etc.

My personal favorite is ACRNX - managed by Charles McQuaid (been managing the fund since '78 I think, got his CFA in '80!), ridiculous performance (can you say 16.6% since inception in 1970?), low turnover (read: low trading fees, 5yr average holding period), and an investing philosophy I like.

Obviously, I own shares and have an interest in the above fund. (Look I'm already disclosing my conflicts!)

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Edited 1 time(s). Last edit at Thursday, June 29, 2006 at 05:58PM by mkgref.
 
As an inexperience investor, I would like to invest in ETF. Could anyone please tell me which on-line broker is reliable & who charge the most reasonable fee?
 
Where are you at? Any discount brokerage or deep discount brokerage like E-trade will do the job, but there will be no advice given so the onus is on you to make your own decisions, also make sure they offer al lthe investment choices you want, most offer Equity, Bonds, MFs and Options.
 
It isn't as if ETF's have no fee. You pay the brokerage commission which can vary depending on where you trade and the amount of shares you trade. Plus, ETFs do have a fees...they normally range from 25-40 basis points.

When you add the fees up they are nearly as expensive as some managed mutual funds. I would actually think indexed open ended mutual funds would be cheaper than ETFs.
 
I am living in Bangkok. We don't have ETF here yet. I am interested in the US ETFs. Is that easy for me to open an account through E-trade as non-US citizen?

As I learn from CFA Level 1 study material, ETFs trading passively & therefore have the lowest fees charges. It hedges with different indexes. It gives small investors like more a channel to start. If I am wrong, please do correct me.
 
Most broker dealers will want a permanent U.S residence address if you open an account.
 
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