Investment choices: passive ETF’s versus actively managed open-end mutual funds
Reasons for ETF’s:
* Lower annual fee
* Lower broker fee than mutual fund
* Trades during the trading day
* Smaller minimum purchases than mutual funds
* No distribution pass-through tax trap
Reasons for mutual funds:
* Actively managed funds seek to become aware of risks and try avoid mistakes made by blind, passive investing
* Some screens of best performing active mutual funds showed mutual funds beating passive ETF’s, however past performance should not be relied on for future performance.
* Annual fees for “I” class mutual funds are not that much higher than ETF’s
* No concern about illiquid, hard to trade shares
* No need to be concerned with spread between bid and ask that may occur in ETF’s
* Buy at NAV (if no load), by contrast ETF’s may not track NAV
* Suffered less problems during May 6, 2010 flash crash than ETF’s. 90% of the problems that day were in ETF’s.
* Mutual funds do not lend out shares of the stocks they own to short sellers; some ETF’s do.
Conclusion: Because of investor’s need for guidance I believe that actively managed mutual funds are better than passive ETF’s. For example see “Stock ownership lasts 22 seconds” to see how program trading can interfere with investments made by ordinary investors.
This is an example of independent financial advice.