Mutual Fund Question

[Dexter]

I feel like I have posted this before, but if I did then I definitely didn't find a suitable response. I've also searched the internet several times for a long time and I can never find the answer.

What is the advantage of owning Mutual Fund that tracks the S&P versus and owning a commission free ETF that does the same with a lower expense ratio?

Are there any advantages to mutual funds over ETF's?

Both allow you to dollar cost average with small amounts and the ETF's generally have smaller expense ratios. I know ETF's sometimes trade slightly above their NAV but this seems inconsequential as the amount is so small, and sometimes they trade below their NAV I would guess too.

Thanks for any help with this.

[Dan Mac @DGSInvesting]

Hi Dexter-

In my opinion, if you want to buy a fund that tracks the S&P you are best sticking with a low expense rate ETF.

The actively managed mutual fund is going to charge higher fees because they are going to have to pay a professional fund manager. An ETF that just tracks the S&P 500 index will be run by computers and thus have much lower management costs. This is why they can charge lower fees generally.

I don't think there would be any advantage to buying a mutual fund in this situation.

[TomK]

I always understood the advantage of funds to be lower commissions if you are making regular periodic purchases. If you can buy the ETF without commissions, and they are otherwise comparable (fees, etc.), then I'm not sure the mutual fund would have any advantages.

[cannew]

If one feels the need to own all the stocks that make up an index then an etf is probably the better route because of lower fees. Having said that I don't believe there is any advantage to owing either a mutual fund or etf, over owing individual stocks.

If you only have small amounts to invest go the drip route. If you have larger amounts, create your own fund buy buying select stocks which meet your criteria and buy them when they are value priced.

[Dexter]

Thanks for the help guys, great replies!!

[earthtodan]

I think it has a lot to do with consumer ignorance, and people going with what they know. I've dealt with this question because my mom is retired, and had to make some decisions about what to do with her 401k. She is fairly financially illiterate and she has it drilled into her head that any individual strategy has a 99% chance of trailing the market. She wants to buy index mutual funds, per the advice of John Bogle.

Having come across ETFs in her research, she asked me what the difference was between an ETF and an index mutual fund because she couldn't wrap her head around it. She is suspicious of ETFs because she read that they are an "exotic" financial instrument, and financial instruments may have had a role in the financial crisis, although she could never explain how. She also came across some scary sounding accusations like "tracking error vs net asset value" and "ETFs are used as a trading vehicle." I explained it as best I could, including with expense ratios, how ETFs are the definitive way to track any market index, are dirt cheap, and there's nothing to be afraid of. I also explained that on average, mutual funds trail the market by, coincidentally, the average expense ratio of mutual funds in general. She thanked me for my explanation but decided to steer clear of ETFs, because John Bogle says to buy "index mutual funds."

Personally I don't know how ETFs haven't put mutual funds out of business, but having seen the slice of the investing market constituted by my parents, it's not so hard to believe.

[Kerim]

(04-10-2014, 08:45 PM)earthtodan Wrote: Personally I don't know how ETFs haven't put mutual funds out of business, but having seen the slice of the investing market constituted by my parents, it's not so hard to believe.

People are incredibly skittish when it comes to money, especially if they do not speak the language. Understandable, for sure. Fortunately, she'll be just fine in index funds as well, if they are thoughtfully chosen.

[Dexter]

(04-10-2014, 08:45 PM)earthtodan Wrote: I think it has a lot to do with consumer ignorance, and people going with what they know. I've dealt with this question because my mom is retired, and had to make some decisions about what to do with her 401k. She is fairly financially illiterate and she has it drilled into her head that any individual strategy has a 99% chance of trailing the market. She wants to buy index mutual funds, per the advice of John Bogle.

Having come across ETFs in her research, she asked me what the difference was between an ETF and an index mutual fund because she couldn't wrap her head around it. She is suspicious of ETFs because she read that they are an "exotic" financial instrument, and financial instruments may have had a role in the financial crisis, although she could never explain how. She also came across some scary sounding accusations like "tracking error vs net asset value" and "ETFs are used as a trading vehicle." I explained it as best I could, including with expense ratios, how ETFs are the definitive way to track any market index, are dirt cheap, and there's nothing to be afraid of. I also explained that on average, mutual funds trail the market by, coincidentally, the average expense ratio of mutual funds in general. She thanked me for my explanation but decided to steer clear of ETFs, because John Bogle says to buy "index mutual funds."

Personally I don't know how ETFs haven't put mutual funds out of business, but having seen the slice of the investing market constituted by my parents, it's not so hard to believe.

GREAT post. Yes I agree 100%, I cannot see how mutual funds have any advantage other than say, if you wanted a dollar cost average with a fund to track xyz and en etf was not available commission free to allow you to do the same.

For example, if you wanted to buy the entire Dow Jones Index there are no commission free ETF's currently available for this. DIA is the most popular ETF, but you'd have to pay a commission every time to dollar cost average. Maybe an alternative would be a mutual fund that did the same. I've never looked, just throwing out an example.

It seems there is a lot of bad information on the internet about this.The more I searched the more I found all of the mutual fund junky's proclaiming that mutual funds are better. I just don't get it. Glad I'm not insane

[Robandcindy2]

There was a really good article on this not too long ago on SA. I'm sorry but I can't seem to find it right now.

The gist of it was that ETF's have the advantage of being able to sell/buy when YOU want to rather than the close of business.

ETF's are better for stocks, mutual funds better for bond assets. All had to do with the managers maintaining sufficient liquidity...

Anyway, I recently ran into this pretty good comparison tool at FINRA. Allows you to side by side compare up to 3 funds/ETFs at a time.

FINRA Fund/ETF Analyzer

Try it for DVY vs VYM.....

[EricL]

(04-14-2014, 08:25 AM)Robandcindy2 Wrote: There was a really good article on this not too long ago on SA. I'm sorry but I can't seem to find it right now.

The gist of it was that ETF's have the advantage of being able to sell/buy when YOU want to rather than the close of business.

ETF's are better for stocks, mutual funds better for bond assets. All had to do with the managers maintaining sufficient liquidity...

Anyway, I recently ran into this pretty good comparison tool at FINRA. Allows you to side by side compare up to 3 funds/ETFs at a time.

FINRA Fund/ETF Analyzer

Try it for DVY vs VYM.....

Thanks for the link, that looks like a useful tool.

[Robandcindy2]

I'll also throw this article out there:

Why This Dividend Aristocrat ETF Isn't So Noble

At the FINRA page pay attention to those annual expenses....John Bogle was right...