Asked by Kathleen  |  Submitted January 21, 2014

Is there an advantage to ETFs vs. index funds?

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  Answers  |  4

January 21, 2014

It depends on how they are being used in an overall portfolio. The main advantage of an ETF is that it can be traded on an exchange in real time with instant liquidity. Mutual Funds usually take three days. The second advantage of ETF's is low cost.

$commenter.renderDisplayableName() | 05.24.17 @ 20:10

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January 21, 2014

Kathleen thank you for the question. The main reason why people might use ETFs is to gain to things: Have access to investments that are typicaly cheaper then a similar mutual fund. 2. Gain the ability to intra day trade it. Meaning you dont have to wait till 4pm to sell or buy a position. However right now many index funds like Vanguard and Fidelity are cheaper then a similar ETF. The only benefit of an ETF index vs a fund index would be the ability to sell it or buy it through out the day. If that is not a big enough advantage to you I would stick with Index Funds because they are cheaper.
Best of luck
Michael

$commenter.renderDisplayableName() | 05.24.17 @ 20:10

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January 12, 2016

Yes, ETFs offer far better liquidity, much broader diversification options to choose from, and lower expenses.

$commenter.renderDisplayableName() | 05.24.17 @ 20:10

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March 27, 2016

Hi Kathleen,

Lets dig deeper into the question. What are ETF's? They are virtually always invested in an Index.
Now, lets dig into an index. There are many and they come in various sizes. They are composed of a basket (index) of assets (stocks, bonds, commodities). There are various ways to weight them (price, market cap, etc.). An Index can be a basket of 2 assets or more than 5000. Choose wisely.
https://en.wikipedia.org/wiki/Exchange-traded_fund

ETFs offer both tax efficiency and lower transaction costs. More than two trillion dollars have been invested in ETFs since they were first introduced in the United States in 1993. By the end of 2015, ETFs offered "1,800 different products, covering almost every conceivable market sector, niche and trading strategy.

ETFs can be passively and actively managed investments. In 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs..
An index can be either passively managed or actively managed (by a fund manager).

The index itself can also be listed with various ETF administrators. The main difference between administrators are fees, commission, availability, etc. In general the index by itself is usually the same. READ the fine print.

There are advantages in everything. Perhaps, a better question is which is an advantage for you:

2 versions of this:
1). lower costs (Expense ratio, cash drag, fund manager bonus, etc)
2). Greater ROI-Return On Investment
I am not using risk as a #3 because as an Investment Manager my job is to eliminate risk.

On liquidity-for a passive investment this has little meaning other than your $$ are sitting in place and not growing. Now for an actively managed fund, liquidity is necessary for things like redemption's (you want $$ now for selling), purchasing new investments (buying more assets), paying taxes, fees, etc.

Feel free to send me a message to discuss further. No obligation

It's not what you make,, It's what you keep that determines our lifestyle.

$commenter.renderDisplayableName() | 05.24.17 @ 20:10

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