Why I like mutual funds more than ETFs
I have been investing in mutual funds for over 10 years now. I’ve primarily invested in index funds and target date retirement funds. Last year I began investing in ETFs (exchange traded funds) for the first time. ETFs seem to be all the rage lately, especially with my Millennial generation, and they are very cost effective.
The cost is what intrigued me the most. Most mutual funds have two fund options; one for investors with $3,000 and another with $10,000. Obviously the latter is the one that charges the least in management expenses. Then there is the ETF, which typically has the same expense ratio as the mutual fund that requires $10,000 to open.
Fund cost comparison of S&P 500 index funds and ETF
- Vanguard 500 Index Fund Investor Shares (VFINX) – Expense ratio = 0.16%
- Requires $3,000 to open an account
- Vanguard 500 Index Fund Admiral Shares (VFIAX) – Expense ratio = 0.05%
- Requires $10,000 to open an account
- Vanguard S&P 500 ETF (VOO) – Expense ratio = 0.05%
- Requires the purchase of one share (like buying a stock), which is approximately $210 as of February 2017
Fund costs are what lured me in. But now that I am investing in an ETF, I have to admit I am not a big fan so far and here is why. I am huge on automating everything – from bill paying to savings. I do all on my investing via dollar-cost averaging and regular, bi-weekly investments. I love the “set it and forget it” mentality and so should all Millennials when it comes to investing.
Here is the catch…you can’t really invest in ETFs this way because it’s exactly like buying a stock and the share price changes constantly throughout the day. Instead I have to deposit money monthly into my money market account, then manually go into my brokerage account and purchase a set number of shares. Don’t get me wrong, that isn’t that challenging but its still much more inconvenient then the alternative.
I vote for mutual funds instead
You know how I invest in my mutual funds? I assign a specific amount I want to invest regularly, like weekly, bi-weekly, or monthly, and that exact amount is debited from my bank account and placed into my mutual fund. Once you connect your bank account to your brokerage account you’re essentially done. Then you just set up your automatic investment and you are done. No need to go back in and move the money from a money market to the stock market. You could in theory set this transaction up once and not look at it again for several months or a year. And that money still gets invested without any intervening from yourself.
Personally I am just not a big fan of ETFs. I prefer mutual funds as my investment vehicle of choice. I know many of my fellow Millennials strongly disagree with this premise so I would love to get your takes.