First Investment: Vanguard Roth IRA. ETF vs Mutual Index Funds

[Andy.N]

Hello everyone, I just wanted to gather some opinions about the pros and cons of choosing mutual funds or etf for a ROTH IRA, more specifically vanguard index funds. Here is my understanding

ETFs: pros and cons
Consistently smaller expense ratios (all though they require a brokerage account, $20/yr so until I have more money invested it will actually be more expensive than the mutual funds)

No minimum investment

More Liquid ( don't think this is much of an advantage for Roth investing)

No purchase or redeem fees

cons is losing money in the bid/ask spread

Mutual Funds:

can own partial shares, easier to reinvest.

no brokerage account required.

once I have 10,000 to put towards a single fund, I will qualify for admiral shares which have expense ratios nearly as low as the ETFs

Right now I am interested in small and midcap us stock funds and emerging market funds. I have 10,000 for both 2010 and 11 to invest. The emerging market fund has a purchase and redeem price which makes it pretty easy to choose ETF. But if I want to go a different route I think mutual funds my better suit my needs, especially once I have enough invested for admiral shares. Another point is I plan on doing additional investing outside of my Roth, in which case I might want the brokerage account because I have read ETFs have tax advantages over mutual funds, meaning the $20 fee is inconsequential for my comparison. But through my research I believe that low cost index funds are the investment tools best suited for myself, I just don't know whether to use the ETFs or the Mutual Funds. All thoughts and comments are welcome, sorry for rambling I'm just so interested to hear your thoughts, if you need clarification just ask. Thanks again!

 

[pimpmyretirement]

I looked into this after reading Ric Edelman pushing ETFs. I couldn't find a clear argument in favor of switching from low cost mutual funds like Vanguard's.

I eventually decided Ric was really selling his firm's financial services, left my money in my mutual funds, and stopped worrying about.

 

[Texas Proud]

An advantage of ETFs is that you know what you are selling your share at... IOW, you put in a trade and it trades then... even if you go market you get the market at that time...

With a mutual fund, you get the NPV at the end of the day...

How important is this to you is up to you...


Once you get some money (and I do not know how much you need), you can open a brokerage account inside Vanguard and the money is moved from your MFs to your brokerage account whenever you need it (this is what I have)...

 

[Animorph]

Maybe too late, but Fidelity (and a few others) offer commission free trades on some ETF's. Probably enough to suit you. That's nice when you have the $2500 minimum for a brokerage account but want to diversify into more than one fund. Best of both worlds.

Barring that, I prefer mutual funds so that I can rebalance between funds without commissions.

 

[Andy.N]

vanguard funds are also commission free, but they do have the bid/ask spread which could cost some little change in transactions. Because of operating expense it appears ETFs may be the better deal, am I overlooking anything benefits of mutual funds?

 

[bamsphd]

cons is losing money in the bid/ask spread

The spread, the inability to buy in fractional increments, and the temptation to TRADE seem to be the main downside to ETFs.

However, I believe Vanguard now offers commission free trading in their own ETFs, and I'm not certain, but I think they will let you reinvest dividends even if it means buying factional shares.

Personally, I invest in Admiral funds, and Treasuries at auction. However, if you are happier with ETFs, I don't see any major problems with using them.

Right now I am interested in small and midcap us stock funds and emerging market funds.

So you like to wait until a sector goes up in price before you buy?

 

[Andy.N]

So you like to wait until a sector goes up in price before you buy?

I take it these sectors have recently risen. I am interested in them because historically over long periods of time those sectors of the market have the largest gains. And because I'm starting my Roth, won't be able to withdraw for 25 more years, I figure i have a long enough period to handle the volatility so I might as well invest in what has the most potential for higher gains.

 

[bamsphd]

I take it these sectors have recently risen. I am interested in them because historically over long periods of time those sectors of the market have the largest gains. And because I'm starting my Roth, won't be able to withdraw for 25 more years, I figure i have a long enough period to handle the volatility so I might as well invest in what has the most potential for higher gains.

My portfolio has actually been "overweight" small and emerging since around 2000 for similar reasons. However, they are definitely NOT on sale at the moment.

 

[Andy.N]

My portfolio has actually been "overweight" small and emerging since around 2000 for similar reasons. However, they are definitely NOT on sale at the moment.

I see, something I need to consider. Would it be wise to buy a more broad index fund, wait for those markets to drop a little then move funds over into them. I don't have experience but some of what I have read, especially from IFA, is that market timing and stock picking are pretty random and should not be relied upon. That's why I am somewhat indifferent on the current trend of the sector, and think that having money in the sectors that have historically given the best yields while I am very far away from withdrawal would be wise. Is there a flaw in my thought process?