Advantages of ETF index funds over mutual funds index funds:
- Management fees are usually lower. For example for inflation protected bonds the Schwab mutual fund SWRSX has a .5% expense ratio and the iShares Barclay equivalent TIP has an expense ratio of .2%.
- Instead of trades executing at the end of the day they can be bought or sold at any time the market is open (including pre and after market trading)
- No penalties for selling or restrictions on timing/ durations of round trips
- Low or no commissions – Schwab has their own commission free funds and Fidelity offers some commission free ETFs also. These ETFs enable people to dollar-cost-average by buying relatively small amounts every month without getting eaten up by commissions.
- Many can be sold short (in standard taxable accounts)
- Options are available on the mainstream ETFs (opens up protective put, covered call strategies)
- Standard tools (e.g., charts) work better with ETFs vs Mutual funds. ETF quotes are updated in real-time during trading hours, vs once per day updates on mutual funds.
- Inverse index funds exist as ETFs – for specific indexes they move in the opposite direction as the index on a daily percentage basis (e.g., SDS is double inverse of the S&P 500). For popular indexes these are available in single, double, and triple multipliers. They can be bought/sold in tax protected accounts (IRAs) – so you can go short the indexes if you want to.
- Some indexes (e.g., VIX) have no mutual fund coverage — see volatility tickers for the ETFs that are related to the VIX S&P 500 volatility index.
Disadvantages of ETF index funds
- They have a bid/ask spread, although for popular ETFs during regular market hours this is usually only $.01