Index funds vs ETFs... Help?

[lifejoy]

My SO is reading A Walk Down Wall Street, and we're both learning lots. But we are getting confused; what are the pros and cons of index funds vs ETFs? The stuff my SO has been reading makes index funds sound preferable.

(We're Canadian, if that makes a difference.)


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[goose318]

One difference between ETF's and index funds is that since ETFs are traded like stocks they often charge a commission when you buy additional shares. An Index Fund usually will be free to add additional money to on a regular basis. Index funds usually have a minimum investment to open as well, such as Vanguard Total Marked Index Fund Investor Shares requires $3,000 to purchase the first time.

[thedayisbrave]

goose318 points out some valuable differences but the difference should be between mutual funds and ETFs, not index funds and ETFs.  You can get an ETF of an index fund.

Do more reading about the pros and cons of each - mutual funds and ETFs.  There's a ton of information out there and it's largely a personal preference based on goals, amount to be invested, etc. rather than one being clearly superior than the other.

[GGNoob]

Some of those books (I've started reading that one) talk about index funds in general. Mutual Funds and ETFs can be "index funds" as in they follow a broad index versus being actively managed. So you can have index mutual funds and index ETFs. ETFs are traded throughout the day like stocks whereas mutual fund shares are priced and bought/sold at the end of the day. ETFs can be commission free (Vanguard lets you trade Vanguard ETFs for free, Fidelity trades iShares ETFs for free, and TDAmeritrade has over 100 ETFs comission free). You usually need to buy complete shares of ETFs while mutual funds let you buy partial shares with minimum investments (usually $1,000 to $3,000 to open the fund and then minimum deposits after that of $100).

No matter what you invest in, whether its ETFs or Mutual Funds, invest in the "index" versions.

As an example, these 2 track the same index (and are "index funds") but one is an ETF and the other is a Mutual Fund:
https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT

These books basically say stay away from actively managed funds and financial advisors who want to beat the market. Most of the time the passive index funds come out ahead (I think its around 80% of the time).

[lifejoy]

Sweet! This helps a lot. Thanks for clarifying :)


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[pom]

There is not really a big difference between the two for a long term investor.

Advantage of ETF is that you can buy or sell during the market hours, index funds are only traded at the end of the day. So if at 11am you decide to sell, you will have to wait until 4pm to know the price you sold it at.

Main disadvantage of ETF is that when you buy or sell you will pay brokerage fee. Nowaday fees are pretty cheap so for me this is a non-issue for a long term investor, management fees are much more important.

Hope this helps!

[milesdividendmd]

One other advantage of ETFs is that they are slightly more tax efficient.

The main disadvantage is that, unlike a mutual fund, they can cost more or less than the net asset value of the funds in the index because they are actively traded through the day. For a buy and hold investor this is a non issue.

These days you can purchase most plain vanilla index etfs through your brokerage fee free.

So the final advice is, when choosing between an ETF or the mutual fund which it tracks, choose whichever is cheapest.

[lifejoy]

Excellent :) MDD I'm glad you commented because it reminded me about your site!


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[Shooter_D]

Here are a few Canadian-specific links about index funds and ETFs...

http://canadiancouchpotato.com/recommended-index-funds/
http://canadiancouchpotato.com/recommended-etfs/

The book you're reading was originally published in 1973 and ETFs didn't come on the scene until 1993, so that may be why there's not much information on them...?

I find ETFs more prevalent and accessible in Canada than index funds. This is probably because they can be bought and sold like stocks, by most brokerages. TD has some index funds called the e-series--the most recommended Canadian index fund series I have come across. If you are with the TD Waterhouse brokerage, you can buy the TD e-series funds for free (the fees are embedded in the expense ratio of the fund, which is considerably cheaper than many actively managed mutual funds). So if you have a smaller investment portfolio, brokerage fees won't eat up as much of your investments. If you have a larger amount invested, the brokerage fees for ETFs will have less of an impact on your investments. At a discount brokerage such as Questrade though, you only pay fees upon selling ETFs; there is no commission upon purchase.

Here are a few more Canadian links about passive investing:

http://www.milliondollarjourney.com/investment-strategies-i-passive-investing.htm
http://www.givemebackmyfivebucks.com/2011/12/07/how-to-open-up-a-td-e-series-fund-account/

Happy reading and investing!