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Do you favor mutual funds or ETFs?

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AUTHOR: 1PF on 6/26/2024

This HumbleDollar guide explains mutual funds and ETFs. Which do you favor, and why? Do you choose differently depending on whether the investments are in a taxable brokerage account, a traditional pretax account such as an IRA or 401(k), or a Roth account such as a Roth IRA or Roth 401(k)?

Mine are all mutual funds, in all three types of accounts. Initially that was because ETFs weren’t available when I started investing. Now it’s because I don’t wish to deal with bid-ask spreads, even though ETFs tend to have slightly lower expense ratios than their mutual fund counterparts.

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David Powell
7 months ago

I favor the Admiral mutual funds at Vanguard. Someone will pay the bid/ask spread of ETFs — you or your heirs, sooner thru rebalancing or retirement expenses, or later. ETFs can be even more expensive when markets are under stress or when the fund is less liquid, such as certain bond funds. I’m glad the ETF counterpart is available. I used them in my 401k when working, and today like having that price signal with less temptation to act on it.

Matt Morse
7 months ago

I use ETFs in all my accounts because it gives me access to products from Avantis at the lowest cost. I’m pretty much agnostic otherwise.

Jonathan Clements
Admin
7 months ago

As I’ve noted in articles, my biggest single holding is Vanguard Total World Stock, which is available as both a mutual fund (VTWAX) and an ETF (VT). In my Roth accounts, I own the ETF. I have no intention of selling the fund and, instead, plan to bequeath the accounts to my kids. By buying and holding the ETF, I enjoy the lower expenses but don’t incur the trading costs. In my traditional IRA, which I view as potential spending money, I take the opposite approach, sticking with the higher-cost mutual fund but knowing that any sale won’t trigger the bid-ask spread.

Olin
7 months ago

Jonathan, does the ETF bid/ask spread remain a factor if you never plan on selling?

Jonathan Clements
Admin
7 months ago
Reply to  Olin

If you don’t sell, you don’t incur the bid-ask spread.

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