ETFs vs. Index Mutual Funds

I found an informative Comparison of ETFs and Index Mutual Funds. It has some great information about the internals of ETFs and how they compare to index mutual funds. Notably, that “overall, there are few pros and many cons to using ETFs.” This came as a bit of a surprise to me. Much of what the article says is true, although told in a way that is biased towards index mutual funds. Some of the information is out of date such as: “ETFs have poor coverage of foreign style/size indexes. If you wanted to buy a foreign value ETF, for example, you would not be able to do so at present” and “there are few bond ETF options available at present.” I think these two points are no longer true.

One big difference between ETFs and mutual funds is that “they [ETFs] pay out distributions as cash. If you want to then reinvest that cash, you need to take some action to do so (and incur whatever transaction costs apply).” Although I initially found this annoying, it is really no big deal because the distributions can easily be re-invested into no-load mutual funds on a monthly basis along with other cash. Since you SHOULD be dollar-cost averaging on at least a monthly basis this should not be a problem for most people.

With many low-MER index mutual funds out there (and I expect to see even more, with possibly even lower MERs), the low-MER advantage of ETF is not a huge deal. I still think that the best option is to buy index mutual funds (with as low an MER as possible) on a monthly basis and switch them into index ETFs when the cost of making the ETF purchase (from commissions) becomes a small percentage of the total amount to be invested.

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