ETFs: More choices - I can choose a SPDR, iShare, Vanguard, etc in a huge variety of sectors or indexes. They seem to have lower expense ratios than mutual funds as well. The bad part is it will be bought through a broker and I have had bad experiences in the past where they like to tack on frivolous fees.

Mutual funds: Open an account with whoever owns the mutual funds and you'll be limited to their funds. I have experience with mutual funds and have never had any problems investing in them, no hidden fees or anything like that.

It seems ETFs are a much better option, assuming I can find a good discount broker, but I might be overlooking something. I'm wondering why some people have gone with mutual funds over ETFs or vice versa.

If those are your only considerations for choosing between the two, choose an open-end mutual (index based) fund family like Vanguard.

There are other things to decide on when picking the two, usually is whether you believe in active management of the fund assets (typically mutual funds) or not (typically index funds or ETFs).

And ETFs may not be a good choice for many small frequent transactions because each buy/sell is a trade (i.e. monthly investing). A more traditional mutual (or index) fund does not have the same buy/sell cost structure charged to the individual, its spread as a cost to the fund. Another main diff is the ETF is priced throughout the day, and may deviate from the NAV price, a mutual/index fund is priced once a day.

666beers said:For crying out loud, ETFs are mutual funds.

I don't know if that is exactly true in the strict definition of the two investment products.

ETFs
Lower Expense Ratios
Broker Trading Fees
Better for large amounts invested over infrequent periods
No active management as per FTC regulations
Better tax consequences (less taxable distributions) - best for Taxable Accounts

Mutual Funds
Higher Expense Ratios
No Broker Trading Fees (if buying direct)
Better for smaller amounts invested over more frequent periods
Can have active management if you are looking for that sort of thing
Worse tax consequences (more taxable distributions) - best for Tax-sheltered Accounts

markwm said:SimpleMoney said:ETFs
Better tax consequences (less taxable distributions) - best for Taxable Accounts

Mutual Funds
Worse tax consequences (more taxable distributions) - best for Tax-sheltered Accounts

This money is for an IRA so I'm curious how are mutual funds better for tax sheltered accounts.

At the end of each year, a mutual fund has to give taxable distributions to its shareholders in the amount of all capital gains that the fund made through the year. So if it had a huge turnover, you might have 10 to 20% distributions. Example: $100 per share fund might give you a $20 distribution, reduce its price to $80, give you more shares (say you had 8 shares for $800 total before distribution, afterwards you have 10 shares of $80 each - same total amount invested). Then you have to pay taxes on $20 per share even if you hold the fund and dont sell it. So the money you could have invested into buying more mutual fund, you have to pay the IRS that year instead.

In a tax sheltered fund thats not a consideration. So mutual funds are better in a sheltered account. ETFs are also better in a sheltered account than taxable (anything is of course), however the difference of how much better is it, is less than that of a mutual fund.

grudsom said:At this time ETF's are superior but you wanna go into the ultrashort ETF's like SRS (shorts commercial real estate stocks) SKF (shorts financial stocks) etc. Untell this whole subprime/banking crisis blows over. You have to watch these and right now is a pretty decent entry point, TA suggests, though it's possible they may dip a tad lower, but inevitibly these will go higher for the short term.

After the bull markets comeback ditch the etf's and move into a solid growth mutual for the long term, if you have the extra time to be involved watching your portfolio than ETF's arent a bad thing to stay in, just make sure your on the right side of the market and you watch it, learn to set stop losses and trailing stop losses to keep yourself safe.

-edit-
damn read it wrong.

Bobalude said:ETFs may not be a good choice for many small frequent transactions because each buy/sell is a trade (i.e. monthly investing). A more traditional mutual (or index) fund does not have the same buy/sell cost structure charged to the individual, its spread as a cost to the fund.

This is only true for small total investments.

Suppose you can invest $20k in a mutual fund with 1% fees or an ETF with 0.1% fees, but your broker charges $10 per trade. The mutual fund costs 20000*0.01 = $200 per year. The ETF, if you make one trade per month, costs 20000*0.001+10*12 = $140 per year. So you come out ahead even if you pay a commission every month because the fees are so drastically lower.

Typically ETFs have about 1/2 to 1/3 the ERs of the same fund. Look at Vanguard Funds. A VG Fund with a 0.4 ER will have a 0.15 to 0.2 ER for the corresponding ETF. Reason is that VG doesnt have to manage the ETF, a secondary broker does, so they dont have to charge as much maintenance. Whereas the fund has to sell and maintain paperwork and tax forms and such so they charge double expenses for the same ETF. Whether or not the ETF or the fund version is better depends on amounts purchased, frequency of purchase, cost of trades, and difference between ERs.

Some ETFs dont have a corresponding fund and therefore its all you have the option to buy. Be careful of a new ETF or one with low volume because it wont be as liquid as a mutual fund that will simply liquidate assets to return your money if theres no other immediate buyer for your shares.

SimpleMoney said:ETFs
No active management as per FTC regulations

The SEC controls regulations, not the FTC. They now allow actively managed ETFs. Bear Stearns was scheduled to launch the first active ETF earlier this week but they canceled it due to their ongoing problems. PowerShares will most likely be the first to launch active ETFs in the next several weeks. The SEC already approved them.