{"id":7563,"date":"2014-04-07T10:11:26","date_gmt":"2014-04-07T17:11:26","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7563"},"modified":"2016-12-21T07:28:06","modified_gmt":"2016-12-21T15:28:06","slug":"investing-basics-etfs-better-index-funds","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/investing-basics-etfs-better-index-funds\/","title":{"rendered":"Investing Basics: When ETFs Are Better Than Index Funds"},"content":{"rendered":"

As the offering of low-cost investment funds gets more and more competitive, confusion is bound to set in. Phrases such as “indexing” can get applied to funds and strategies that are anything but passive.<\/p>\n

Inexpensive, passive \u00a0funds break down into two big categories:\u00a0Index funds and exchange-traded funds (ETFs)<\/a>. Each has its own role to play in a retirement savings plan, so knowing the differences is important.<\/p>\n

\"index<\/a><\/p>\n

If you have all of your retirement funds in a single firm that offers index fund products, using them can be a very cheap way to retire. Index funds costs have shrunk dramatically, with expense ratios down to few hundredths of 1 percent.<\/p>\n

ETFs\u00a0are often equally cheap, but be careful. Plenty of funds that operate under the “ETF” banner are actually active trading vehicles with surprisingly high fees.\u00a0Be sure to buy ETFs<\/a>\u00a0that truly index the market.<\/p>\n

Why not just buy index funds? Here are some times when\u00a0ETFs\u00a0are better than index funds:<\/p>\n

1.\u00a0You \u00a0manage a portfolio yourself<\/strong><\/p>\n

Index funds are attractive if you hire an advisor to buy them on your behalf. Often, advisors have access to cheaper funds than do retail customers. They can avoid or negotiate away\u00a0brokerage fees you would otherwise have to pay<\/a>.<\/p>\n

If you are planning to buy and sell a portfolio with a variety of asset classes inside it,\u00a0ETFs\u00a0can give you that exposure passively and do so at minimal trading cost, even free in the case of many broadly traded index\u00a0ETFs.<\/p>\n

2. You need access to alternative asset classes<\/strong><\/p>\n

If all you want is a split of 60% bond and 40% stocks, index funds are an easy choice. However, you might want to own a selection of\u00a0real estate investment trusts<\/a>, or a smattering of commodities, or have access to the foreign bond market.<\/p>\n

The more esoteric the asset class, the less likely you are to find an index fund that follows that class closely. Mostly, index funds concern themselves with the biggest, most liquid markets, not international real estate. In those cases, an ETF is a better choice.<\/p>\n

3. You trade enough to worry about commissions<\/strong><\/p>\n

Generally speaking, you should trade as infrequently as possible. However,\u00a0rebalancing a portfolio<\/a>\u00a0sometimes requires that you sell off a portion of your gaining assets in order to buy those that have declined.<\/p>\n

In a volatile market, this can happen repeatedly. If you have to pay brokerage commissions of $50 for each trade, well, that adds up. Since most\u00a0ETFs\u00a0trade commission-free, the solution is to buy them instead of index funds.<\/p>\n

Lowering your cost of\u00a0investing\u00a0is paramount to ensuring a steady return that will\u00a0compound your wealth reliably<\/a>\u00a0over the years. It’s the surest way to retire well and on time.<\/p>\n","protected":false},"excerpt":{"rendered":"

As the offering of low-cost investment funds gets more and more competitive, confusion is bound to set in. Phrases such as “indexing” can get applied to funds and strategies that … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7565,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3],"tags":[62,42,43,37],"yoast_head":"\nInvesting Basics: When ETFs Are Better Than Index Funds | MarketRiders<\/title>\n<meta name=\"description\" content=\"Inexpensive, passive funds break down into two categories: Index funds and exchange-traded funds (ETFs). 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