July 30, 2014 at 8:32 am #13085
I’m having difficulty trying to wrap my head around the benefits of ETFs over mutual funds. In my situation, I am interested in rolling over two simple IRAs that have a relatively high expense ratio (american funds/fidelity) into Vanguard index funds. From my research, when a person sells a share of a mutual fund, it is redeemed by the mutual fund company for market value and a share of an ETF must be sold to an interested buyer. How does an ETF not carry additional risk during a market downturn? Is it possible for an ETF to become less “desirable” and therefore be lower in value than a similar index mutual fund?
If this is not the case, why would an investor choose a mutual fund over an ETF when an ETF has a smaller expense ratio? I plan to mirror the buying/selling of different funds with my tsp.
Sorry if this is in the weeds… I am a young military member who is very green in investing. Thanks for everything you do!August 3, 2014 at 1:29 am #13121
I exclusively buy ETFs now, and most of them are with either Vanguard or iShares.There really are no advantages to mutual funds anymore, and an ETF does not have additional market risk.
Typically an ETF will have the same or lower fees than a mutual fund from the same company. With a Vanguard brokerage account, you do not pay trading commissions.
With an ETF you can trade anytime the market is open. With a mutual fund the price is set after the next time the market closes.
Minimum investment for a Vanguard brokerage account is $3000. Minimum investment for a Vanguard mutual fund varies from $1000 to much higher.
The only things which is really better about an index mutual fund these days is it is very simple to automatically reinvest your dividends, whereas with the ETF they are typically deposited to your account and you have to manually purchase additional shares. Not a big deal, and certainly not worth paying higher fees for.
Good luck. -ts
The TSP Allocation Guide www.TSPallocation.com
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