no_joke

I've been investing in mutual funds for just about 2 years now. Not really an "active" trader really- I do monitor how my funds are doing a few times a month and keep a spreadsheet. I heard about exchange traded funds (ETFs) and did some comparisons to my mutual funds over the last three years (since inception of the ETF).

For instance, I have an international equity mutual fund and comparing this with a similar ETF, the ETF has posted a higher 3yr annualized gain. I also noticed that the graphs for the mutual fund and ETF followed the same "trends" (rises and falls) as well. I also did some more comparisons and I could go on but in short, the ETFs seem to post better gains. I know it's a not as easy as that because it depends on what holdings are in each and it was a very short time frame for comparison. However fundamentally, ETFs have much lower MERs than mutual funds and actively managed funds most often do not outperform the market whereas ETFs basically follow the market. So in my position it's hard to see why I shouldn't make the switch to ETFs. I'd say I am a conservative investor with 3-5 yr time frame.

Any thoughts?

Evil Milkman

I'm bumping this post because I'm also interested in some follow-up.

Baraka_Guru

It would help if you let us know the kind of returns your used to.

Mutual funds are generally bad news to begin with because there are so many ways that fund managers hit up their clients with fees without it being fully disclosed. And there are also vested interests that encourage managers to suggest funds that earn them more money. How is that good for the client? And never believe advertised/promised returns, these are usually inflated and unachievable. You are right; actively managed funds almost never beat the market. Most managers don't even hit their promised targets, even the hotshots. (i.e. they are constantly being paid big money to be wrong.)

ETFs would be the way to go if you are looking to avoid some fees. But make sure you still do your research. Read some recently published books that focus on ETFs specifically if you want a good picture.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

iccky

Getting out of actively managed funds is a good idea. The real question is index funds vs. ETFs. Index funds have the same advantages as ETFs (very low management fees, track the market not try to beat the market etc.), but there are some differences.

The most important thing to consider is how often you plan on putting more money into your investments. With ETFs, the only way to increase your investment is by buying more shares. Each time you buy more shares, you get hit up for a broker's commission. That 10 or 15 bucks a trade can put a real ding in your returns if you do it often enough. No load index funds, on the other hand, will let you increase your investment for no charge. This isn't a big deal if you only plan on dumping in more money once or twice a year, or if you're dealing with five figure or larger sums, but it can be a pain otherwise.

There are some other differences. ETFs are slightly more tax efficient, and are more liquid (since you can trade them like stocks). But these are less important.

soniclifemonkey

ETF's will be the next thing I put my money into. I have 2 ira's and will be moving those into a few ETF's. It is amazing what you can pay in fees. What do you get for it?

Every mutual fund company will have a line up of ETF in the next few years. People are getting smart about those fees and expenses.