Unexpected benefit of ETF’s
There are many people like me that are leery of ETF’s. I can’t really explain why that is, they just seem like an odd investment. I have done research on ETF’s and I do understand them. But it still feels a bit like a sleight of hand. We already have index funds, why do we need ETF’s?
For some unexplained reason I just don’t trust them. Call me old fashioned. However, I have begun looking at them again as a possible investment, being a buy-and-hold guy they are generally better for me than index funds (my long time friend).
What I started noticing this time around was a change in index mutual funds. After doing more research I found out that this change was driven by a loss of index fund sales to ETF’s.
Whats changing? Expense ratios. More index funds are reducing their expense ratios as these seem to be a driving sales point (and rightfully so) for ETF’s. This is really good for the consumer, capitalism at work. I should note however, that the examples I found were in the form of fee waivers which means that the fund company can restore the fees at any time.
What does this mean? Well for people like me it means the break-even of ETF’s vs funds is even longer. You now have to hold the ETF for more than 36 months before it breaks even with the (low cost) index fund.
Still, in the end I don’t trust the fund companies and I don’t trust ETF’s maybe I should just clean out a mayonnaise jar and bury it in the back yard.
Bill Ramsay said,
June 14, 2007 at 1:48 pm
If it was possible to get real time quality data on the premium/discount of an ETF to the index, you could get rid of a rarely discussed risk- that you end up buying when its at a premium and selling when its at a discount. Granted that diff is usually not big, but if its .15%, and you miss on both sides, that increased your cost by .30%. I’m sure those tools exist, as the arbitragers which keep the price near the index must have them. Don’t know what they cost though.