Index Fund vs. ETFs: Get The Facts - Forbes · The author is a Forbes contributor. The opinions...
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EXTENDED Cyber Monday SALE: Experience Forbes Wine Club at an unheard of price! Help | Connect | Sign up | Log in Most Read on Forbes INVESTING | 11/01/2013 @ 6:07PM | 4,140 views Index Fund vs. ETFs: Get The Facts (Photo credit: Flickr) You probably already hear a lot about investing using an index fund vs. ETFs. Both are cheap, and both can be used to own whole markets. Beyond that, things can get fuzzy. There are some very detailed breakdowns of the differences, largely on tax matters. And you can catch up on the specific advantages of ETFs at sites such as MoneyCrashers.com. But let’s assume you are invested in index funds in your IRA or your workplace 401k. Why bother looking at ETFs? Here are a few reasons: 1. No commissions! This is a biggie. If you happen to buy an index fund run by your own brokerage, the fee might be zero. But if you buy, say, a Vanguard Fund in a Fidelity or Schwab account, get ready to fork over some money, perhaps $50 each way. If you are a set-it-and-forget person, that won’t hurt much. If you rebalance among funds frequently, though, it adds up. Meanwhile, ETFs are largely commission-free these days or cost very little, typically $7.95 a trade. NEWS People Places Companies Follow (36) Mitch Tuchman, Contributor I write about the challenges facing serious retirement investors. Retirement Savings Kick-Start: A Guide Mitch Tuchman Contributor Mentally Strong People: The 13 Things Mentally Strong People: The 13 Things They Avoid They Avoid +459,307 views Xbox One: Buy Now, Later, Or Never? Xbox One: Buy Now, Later, Or Never? +91,186 views Pro Drivers, Jay Leno Also Struggled Pro Drivers, Jay Leno Also Struggled With The Porsche That Killed Paul With The Porsche That Killed Paul Walker Walker +44,516 views 5 Powerful Exercises To Increase Your 5 Powerful Exercises To Increase Your Mental Strength Mental Strength +43,103 views The Challenge Of Being Poor At The Challenge Of Being Poor At America's Richest Colleges America's Richest Colleges +37,757 views 16 67 Tweet Tweet 7 0 1 0 Comment Now Follow Comments New Posts New Posts +1 posts this hour +1 posts this hour Popular Popular Economic Inequality On C Lists Lists Video Video Top Charity Exec Pay The Business Of Hockey Index Fund vs. ETFs: Get The Facts - Forbes http://www.forbes.com/sites/mitchelltuchman/2013/11/01/index... 1 of 5 12/4/13 7:40 PM
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INVESTING | 11/01/2013 @ 6:07PM | 4,140 views
Index Fund vs. ETFs: Get TheFacts
(Photo credit: Flickr)
You probably already hear a lotabout investing using an indexfund vs. ETFs. Both are cheap,and both can be used to ownwhole markets.
Beyond that, things can getfuzzy. There are some verydetailed breakdowns of thedifferences, largely on taxmatters. And you can catch upon the specific advantages of ETFs at sites such asMoneyCrashers.com.
But let’s assume you are invested inindex funds in your IRA or yourworkplace 401k. Why bother looking atETFs? Here are a few reasons:
1. No commissions!
This is a biggie. If you happen to buy anindex fund run by your own brokerage,the fee might be zero. But if you buy, say, aVanguard Fund in a Fidelity or Schwab account, getready to fork over some money, perhaps $50 eachway.
If you are a set-it-and-forget person, that won’t hurtmuch. If you rebalance among funds frequently,though, it adds up. Meanwhile, ETFs are largelycommission-free these days or cost very little,typically $7.95 a trade.
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or sell, you will get end-of-day pricing. The pricewon’t be radically different from what you expect.But that’s no way to trade if you own severalaccounts and juggle five to seven asset classesamong them.
Liquidity in an ETF means that if you go to sell it for$28 a share, you will get very close to $28, maybeoff by hundredths of a cent either way. Not all ETFsare liquid, but the ones tracking the most commonindices will be.
3. Typically cheaper to own
There’s been a price war among ETF providers thatisn’t being echoed, yet, among index fund providers.A commonly used S&P 500 index fund these daysgoes for an expense ratio of 0.28%. A comparableETF has an expense ratio of 0.05%. Quite a gap.
4. More choices
We would never advise that you buy some of themore esoteric leveraged ETFs on the market.Almost nobody needs to play the price of sugarminute-to-minute using an exchange-traded fund.Seriously.
However, it is nice that you can be invested in avariety of asset classes quite cheaply through ETFs. Index fund providers tryto keep up with demand for mid-cap, specialty and real estate funds, but it’sjust more attractive to many investors to have the flexibility of an ETF.Consequently, there are more choices.
5. Cash flow to you
If you buy an index fund, you won’t have to hassle with what to do about theincoming dividends. They get reinvested for you. For many long-terminvestors, that’s a feature.
However, if you plan to rebalance frequently using cash, ETFs are going tosend you the money to invest as you see fit. Thankfully, you’ll be doing somostly commission-free.
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