Comparing ETF index funds to mutual funds

Advantages of ETF index funds over mutual funds index funds:

  • Management  fees are usually lower.  For example for inflation protected bonds the Schwab mutual fund SWRSX has a .5% expense ratio and the iShares Barclay equivalent TIP has an expense ratio of .2%.
  • Instead of trades executing at the end of the day they can be bought or sold at any time the market is open (including pre and after market trading)
  • No penalties for selling or restrictions on timing/ durations of round trips
  • Low or no commissions – Schwab has their own commission free funds and Fidelity offers some commission free ETFs also.  These ETFs enable people to dollar-cost-average by buying relatively small amounts every month without getting eaten up by commissions.
  • Many can be sold short (in standard taxable accounts)
  • Options are available on the mainstream ETFs  (opens up protective put, covered call strategies)
  • Standard tools (e.g., charts) work better with ETFs vs Mutual funds.  ETF quotes are updated in real-time during trading hours, vs once per day updates on mutual funds.
  • Inverse index funds exist as ETFs – for specific indexes they move in the opposite direction as the index on a daily percentage basis (e.g., SDS is double inverse of the S&P 500).  For popular indexes these are available in single, double, and triple multipliers.   They can be bought/sold in tax protected accounts (IRAs) – so you can go short the indexes if you want to.
  • Some indexes (e.g., VIX) have no mutual fund coverage  — see volatility tickers for the ETFs that are related to the VIX S&P 500 volatility index.

Disadvantages of ETF index funds

  • They have a bid/ask spread, although for popular ETFs during regular market hours this is usually only $.01

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