We’ve said for years that plain vanilla index funds are better than exchange traded funds (ETFs) for most fund investors, and a recent Wall Street Journal article confirms this view.
"Newly crunched data show it is a close race -- but ultra-low-cost conventional index funds outperform ETFs a lot more often than not."
As the table below shows, ETFs often slightly underperform regular index funds.
The article notes the comparison doesn’t even take commissions into consideration – an important cost you avoid buying a plain vanilla index fund directly from the fund.
The article also doesn’t note another cost of choosing ETFs: the spread. Somebody makes money when you buy and sell a stock or ETF (in addition to ordinary commissions). Buy an ETF and sell it a few seconds later, and you will lose money beyond the commissions most of the time.
The article debunks another much-ballyhooed benefit of ETFs: tax efficiency. ETFs are not more tax efficient than low fee index funds.
The financial press is fond of comparing ETFs to ordinary actively managed mutual funds, making them look in the comparison – Suze Orman is particularly guilty of this one. Actively managed mutual funds are higher fee and more tax inefficient – and they compare just as poorly to ordinary index funds as they do to ETFs.
Bottom line, ETFs can be the right choice if you trade frequently, prefer the convenience of owning all your investments in a brokerage account, or when there is no comparable traditional index mutual fund (as is increasingly the case with the newfangled ETFs that aim for more specific strategies).
We’ve said for years that plain vanilla index funds are better than exchange traded funds (ETFs) for most fund investors, and a recent Wall Street Journal article confirms this view.
"Newly crunched data show it is a close race -- but ultra-low-cost conventional index funds outperform ETFs a lot more often than not."
As the table below shows, ETFs often slightly underperform regular index funds.
The article notes the comparison doesn’t even take commissions into consideration – an important cost you avoid buying a plain vanilla index fund directly from the fund.
The article also doesn’t note another cost of choosing ETFs: the spread. Somebody makes money when you buy and sell a stock or ETF (in addition to ordinary commissions). Buy an ETF and sell it a few seconds later, and you will lose money beyond the commissions most of the time.
The article debunks another much-ballyhooed benefit of ETFs: tax efficiency. ETFs are not more tax efficient than low fee index funds.
The financial press is fond of comparing ETFs to ordinary actively managed mutual funds, making them look in the comparison – Suze Orman is particularly guilty of this one. Actively managed mutual funds are higher fee and more tax inefficient – and they compare just as poorly to ordinary index funds as they do to ETFs.
Bottom line, ETFs can be the right choice if you trade frequently, prefer the convenience of owning all your investments in a brokerage account, or when there is no comparable traditional index mutual fund (as is increasingly the case with the newfangled ETFs that aim for more specific strategies).
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