Index Fund or ETF

[James Boston]

Which would you go with? This question can only have one of two answers. It's not meant to be a continuation of the index vs mutual fund discussion.

I've considered buying a spider, so I looking for reasons why an S&P index fund would be better/worse.

[Sniper]

James,

In a nutshell... index funds have a small management fee and usually no transaction costs, while ETFs have a built in very small fee and brokerage commissions on transactions.

If you plan on making monthly contributions to add to your position an index fund may work out to be cheaper and you can usually setup automatic transactions. You can also purchase fractional shares, so its easy to make same dollar value add ons each month.

However, if you plan on actively trading your posiions, even with the transaction costs, ETFs allow you to move in and out at any time of the day. Some ETFs are limited to trading in 100 share blocks.

So the answer is, it depends on what your plan is.

[AceHigh]

There's only one fund worth owning:

http://finance.yahoo.com/q?s=BRK-B&d=t

[Sniper]

Off topic for this thread, since the question was about Index funds vs ETFs, but in any event, Berkshire Hathaway is not even a mutual fund.

As a side comment, BRK.B has also way underperformed the indexes over the last year, as Warren predicted.

[newfant]

Get the prospectuses for each and see which one has the lower fees. I think the EFT has a little bit smaller fee but I'm not sure.

Personally, I prefer the EFTs because they are easier to buy and sell. Basically you can trade them just like a stock.

Also, the tax treatment might be different. The index fund may have to distribute profit every year whereas EFT gains and losses may have to be booked only when you sell.

[Dan Mezick]

You have to trade at daily NAV with an index fund.

With an ETF you can get out at any time of the day. You can also short an ETF anytime you like.

[James Boston]

I did understand prior to my question that ETF's trade like a stock, you can shorts them, NAV isn't in play, etc... However, these issues aren't really in play with me. One thing I think I read is that in an ETF, you get a monthly dividend based on the companies in the portfolio who paid a dividend that month. Is this accurate?

I guess my question is which of the two would be a better income generator?

[alekhine8]

[ QUOTE ]
One thing I think I read is that in an ETF, you get a monthly dividend based on the companies in the portfolio who paid a dividend that month. Is this accurate?

I guess my question is which of the two would be a better income generator?

[/ QUOTE ]

It shouldn't make a difference. For instance, SPY and VFINX (Vanguard's S&P 500 fund) both pay dividends on a quarterly basis. The difference in the yield reflects the differences in the expense ratios.

Index fund advantages:

- Can purchase fractional shares
- Can have dividends/gains automatically reinvested
- No commissions - easier to setup recurring investments

Unless you are looking to actively trade various indices, mutual funds are probably the way to go. The expense ratio on the VFINX is slightly higher, but you incur no commissions so it washes.