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Investing in ETF - Any pros or cons

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  • Investing in ETF - Any pros or cons

    Are there any pros or cons for investing in ETFs - for a long term investor and am not looking to draw anything out.

    Thanks a bunch for the input.

     

  • #2
    Most broad ETFs are investing in a large # of stocks to basically try to match the performance of various indexes.  They are usually very lost cost and many brokerages even allow commission free trades.  My account is at Charles Schwab.  I have holdings in SCHB and the goal of the ETF:  "The investment seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Broad Stock Market Index."

    With ETFs you will basically miss out on the upside of owning certain individual stocks, but then you also have less risk to losing large amounts with any one particular stock crashing.  The goal isn't to outperform the market, but match it at a lower cost.  Since fees have been shown to eat away large portions of people's portfolios, the low cost nature of ETFs has shown to create similar returns.

    I have purchased individual shares in companies where I felt there was a very good chance for upside returns whether through dividends or growth, but my portfolio and contributions aren't all that large so the commissions do each into my earnings.  I have lately just been investing in the ETFs because they are commission free.

    I hope that helps.

    cd :O)
    Yet those who wait for the LORD Will gain new strength; They will mount up with wings like eagles, They will run and not get tired, They will walk and not become weary. -- Isaiah 40:31

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    • #3
      Thanks.

      I guess I was trying to see if there are any specific cons to choosing ETF versus say the standard mutual fund ( for example, Vanguard S&P 500 ETF [ VOO] versus Vanguard S&P 500 Index fund investor shares [VFINX].

       

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      • #4
        VOO has a lower expense ratio.  The discrepancy disappears with admiral shares of the same fund, VFIAX (which has a minimum of $10,000 to open).

        More general info from Vanguard, Motley Fool,  and WCI.

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        • #5
          Yes, there are cons to investing in ETFs. The big ones are commissions, bid/ask spreads, having to actually put in trades while markets are open, and when tax-loss harvesting, the possibility that you sell low and buy high if the market gets away from you between the two trades.

          Bear in mind I'm assuming you're using appropriate ETFs- low-cost, broadly diversified, heavily traded, well-managed etc. There are plenty of crappy ETFs just like there are crappy funds.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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          • #6
            Thanks again. WCI, I am only looking at the VOO. So, from the tax point of view, you feel it is less desirable?? I didn't quite catch the point you made about tax loss harvesting.

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            • #7
              Most spreads on good etfs are a penny, and I prefer the market price which is much more transparent than some end of day NAV change price that could be anything. I think iShares just decreased their expense ratios on their major funds to 0.03%, which is basically free.

               

              Why only VOO? If only a single fund VTI or a tdf is probably simpler and slightly more diverse.

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              • #8
                Agree VTI (TSM) better than VOO (500 Index) for most uses.

                I'm not saying ETF is better or worse. I've also had the opposite happen when TLHing, I sold the first ETF high, then the market dropped, and I bought the second one low a few minutes later. But it's not something you have to deal with when you use a traditional mutual fund-both funds are transacted at end of day prices.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                • #9
                  I like the ETFs because of their lower expense ration until I have enough to get into admiral shares. I think most of them compare to the corresponding index funds. It allows me to be more diversified with less money at the start.

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                  • #10
                    I wouldnt get too hung up on the difference or even switch later on unless there was a cost benefit to do so. In reality, the only difference between the two is the legal structure. In addition to the above differences, ETFs shield you from lots of transaction and capital gains that you might otherwise incur among a same holdings mutual fund and that is a benefit in a taxable account. Otherwise, differences arent worth losing sleep over.

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