Welcome to post number six in our continuing series of most common investor errors.

Today, we are going to look at something that relates back to several of our earlier bullet points on fees and active management relative to investor structures.

Mutual Fund vs ETFs: The average mutual fund charges far more than the average ETF does. Whenever possible, I recommend substituting a low cost ETF over the more expensive Mutual fund.

The fund industry seems to have figured this out. Some have put out ultra-low cost mutual funds that typically mimic broad indexes. Others have ETF-ified their existing mutual funds, converting them into Exchange Traded Funds. Over the next decade, it would not surprise me to see nearly half of the existing mutual fund offerings morph into ETFs.

The bias against mutuals over ETFs is in the many ways that mutual funds can tag you with hidden costs, taxes, 12b-1 fees, and expenses. With ETFs, you pretty much get what you pay for.

Do note however: Even within the ETF universe, there are a wide range of internal fees. These expenses come off of the top of your investment performance, so it pays to watch them closely.

Reducing your costs is a surefire way to improve long term results. Consider what ETFs you can substitute instead of mutual funds.



Top 10 Investor Errors
1. Excess Fees
2. Reaching for Yield
3. You Are Your Own Worst Enemy
4. Asset Allocation vs Stock Picking
5. Passive vs Active Management

Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Category: Apprenticed Investor, Index/ETFs, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Top 10 Investor Errors: Mutual Fund vs ETFs”

  1. CANDollar says:

    I switched to ETFs 15 years ago because I found that all but one of them were closet indexers and their MERs were far too high.
    4% real return is 237% in 30 years.
    2.5% real return is 115% in 30 years.

    A 1.5% MER halves your return over 30 years.

  2. SivBum says:

    Seekingalpha related that investors have caught on already:

    ETFs and ETNs drew another $12.84B AUM in June, bringing total H1 inflows to $75.91B, up 31% Y/Y. Fixed income funds led the way in June, bringing in $4.82B, with equity funds just behind at $4.6B. The QQQ was most popular, gaining $1.4B, with investment-grade bonds (LQD) and emerging market equities (VWO) in 2nd and 3rd place.

  3. mathman says:

    With all due respect Mr. Livermore (from the QOTD), our Congresspeople (who ostensibly talk to each other) and many Wall Street “insiders” use their “knowledge” to make more money (perhaps for “select clients”) than those of us not privy to it. In a perfect world we can rely on our own devices, but in the new “unreality” it’s all different.

  4. end game says:

    The net asset value premiums or discounts make me uneasy. Case in point – if you sold AGG in September of 2008 when the N.A.V. (net asset value, or book value) was $96.40 but the price fell to $87.90, getting a haircut of 8.8% to book value would not have made you happy, especially on, say, a sale of $1 million. Or try to buy the new low-volatility equity ETF, SPLV, and you’ll find that it generally sells at 1% premium to N.A.V. That is equivalent to an unintentional 1% sales load on the most liquid low-volatility index ETF on the market. I don’t like paying 1% hidden sales charges when I buy and I don’t like getting big haircuts during panics, which was supposed to be one of the big reason to hold ETFs — instant liquidity, as opposed to the “market close” liquidity of mutual funds. Unless and until they figure this out, I prefer the lowest-cost open ended mutual funds I can find, especially for large dollar figures. I still use ETFs when there is no low-cost mutual fund replacement.

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  7. pintelho says:

    The one thing that is certain in investing is cost.

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