Index Funds vs. ETFs

[jd2005]

For passive "set it and forget it" long term (25+ years) investing. What would you choose, and more importantly, why?

[midjd]

Good question, and I'm interested in others' responses... I have about half my $ in index funds and the rest in ETFs.

I suppose it depends on your definition of "set it and forget it"... do you have exceptions for market fluctuations? I know a lot of people follow the rule to bail once they've lost 10% of their assets. Having ETFs would make this easier. Do you need to rebalance your portfolio frequently? Again, ETFs are easier. However, if you really want to go for long-term growth and don't plan on messing with the money, I think index funds would be the best bet (contingent on lower management fees).

[Plain Old Petunia]

Well, now that you can buy ETFs commission free at many different brokerage houses, and now that Vanguard has made admiral shares of index mutual funds available at just 10k, I don't think it makes much difference. Choose whichever one will cost you less.

[txengineer]

For the same fund, ETF would typically have lower expense ratios than traditional mutual funds. So, you need to compare the cost of buying/selling ETFs against the expense ratio differences. Vanguard is now offering free ETF purchase/sale for the first 25 transactions? It's more than enough for me.

Other things to consider:
- ETF trades like stocks, you can buy/sell at bid/ask prices, so you know exactly what you are paying and getting it for. With mutual funds, you can only get transaction completed at the end of the trading day without knowing exactly the price until transaction is completed. For the same reason, you can do more options with ETF trade, limits, stops, etc.
- If a certain fund is low in trading volumes, ETF trades may have wide bid/ask spreads, which may not necessarily in your favor. I don't believe mutual fund has this constraint.
- You can only buy whole shares of ETF, but can buy fractions of MF.
- You can do automatic purchase of MF, can't do with ETF

Did I miss anything?

[Savoir Faire-Demogague in NJ]

I'd like to add that the poster is looking for a set it and forget it type of investing strategy. Seems that target date funds would be a suitable choice.

[azphx1972]

Apr 8, 2011 10:33:51 GMT -5 Plain Old Petunia said:

Well, now that you can buy ETFs commission free at many different brokerage houses, and now that Vanguard has made admiral shares of index mutual funds available at just 10k, I don't think it makes much difference. Choose whichever one will cost you less.

Agreed. Though to avoid the $20 annual fee for a Vanguard brokerage account (required to buy their ETFs) you need an account balance of $50k. I'm not quite there yet with my ROTH IRA, so I'm invested in admiral shares of index mutual funds. The only thing I don't like about that is that it takes a couple of days to execute a buy/sell order, whereas I think the brokerage account would execute the transactions at least on the same business day.