ETF or Index Fund? Which one should I buy?

ETFs or Mutual funds?

A regular investor has four investment vehicles.

1. Bonds. I don’t recommend bonds because in the long run they always underperform stocks.
2. Single stocks. I don’t recommend single stocks because you have two risks; the stock risk ( lower profits, corporate scandals, etc. ) and the market risk (this risk can not be avoided).
3. Mutual funds. I strongly discourage actively managed funds and equally promote index funds.
4. Exchange-Traded Funds (ETFs). Which are extremely similar to index funds, except on the way you buy then and sell them.

If you were my sister or my good friend, which one would I recommend to you

Both, ETF and Index funds are in all practical sense the same investment. Let’s say that I am interested in the Toronto-60 (which is an index of the 60 biggest Canadian companies). Both the ETF and the index will have exactly the same 60 companies.

The only difference will be on the way you buy them.

Let’s say I have $10,000. If I want to buy the ETF, I would go to my broker account, let’s say at 11:00 am. See what’s the price, imagine the price is $25/shr, and buy 400 shares. Most brokers charge $10 commission, so the total cost of my 400 shares would be $10,010.

If I want to buy the index fund. Most likely I will not have to pay a $10 commission, but my order to buy can only be executed at the end of the trading day. Let’s say that at 4:00 pm the stock closed at $25.05 then my transaction would cost me $10,020. On the other hand, they could have closed lower, let’s $24.90 and at this lower price, I could have saved a few dollars.

The bottom line is that with ETFs you have a bit more control over the purchase price than with index funds. But on the whole scheme of things, if you are investing long term, If you are planning to add this investment in your TFSA for many years, this little discrepancy should make no difference one way or another.

Buy this one if you have no money

However, let’s say you are my little sister, and you don’t have $10,000 just sitting in your checking account but could put $200 every month. In this case, an index fund would be the overwhelming choice. With an index fund, you could just buy $200 every month without paying a commission. The index fund company would even allow you to buy fractions of a share. Let’s say that after the first month, the price went up to $25.15. You could buy 7.95 shares.

To summarize, If you have a chunk of cash and you are planning to invest for a long time, it doesn’t make any difference if you invest in mutual funds or ETFs ( for the record, I prefer ETF ). But if you don’t have that much cash but you are willing to make periodic small purchases, then index fund would be the way to go.

1. Window dressing, mutual fund lying to their clients
2. Asset Allocation, my opinion and how I do it
3. Financial advisers are double-dipping

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