1. Your Questions About Etfs Vs Mutual Funds
Ruth asks…
etfs vs mutual funds?
I plan to open a Roth IRA with Vanguard. I have a lump sum of $5000 to open the account for
2010 (haven't done taxes yet) and I will use dollar cost averaging to continuing further investing
this year and in the future. I have read that ETFs have lower costs with a lump sum than mutual
funds (I will be purchasing index funds). I think I may have read (Suze Orman) that its best to
stick with one type of investment in one's Roth acct (all mutual funds or all efts rather than
mixing the two). If I had a lump sum every year to invest in the Roth IRA I would go with ETFs
across the board, but based on the fact I have only a lump sum for a one year but DCA
thereafter should I just go with mutual funds across the board? Basically the investing
resources I have read up on advise choosing etfs or mutual funds depending on whether the
investments are lump sum contributions or DCA. . . however, they dont address my situation
which is mixed- I have a lump sum now but wont in the future.
Steve Winston answers:
Presumably you will be investing every year you can from now til you retire. You need to keep a
long term focus. ETFs are good but lack a lot of the variety that mutual funds have. You also
may need to check if commissions have to be paid on transactions and if you will incur a bid-ask
spread. If you want to do dollar cost averaging, ETFs might not provide an automatic withdrawal
and investing schedule if you want to use one. Both are excellent vehicles though overall.
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2. Helen asks…
Mutual Funds vs. ETFs?
Seriously, what's the point of investing in Mutual Funds when I can just do it with ETFs? I don't
have a lot of money and I can't think of many reasons why Mutual Funds are much better.
Steve Winston answers:
You pay a transaction cost every time you adjust your position with an ETF. You do not with
Mutual Funds. Mutual funds can be used as aggregation vehicles.
Say every month you invest a portion of your paycheck. If you buy more shares of an ETF every
month the commission will eat into your returns (exponentially so because the transaction cost
is at the front). If you put more money into a no-load mutual fund it costs you nothing. So you
would do that for, say, a year, and then at the end of each year sell the mutual fund and buy the
equivalent ETF for the long run.
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