ETFs vs. Mutual Funds – Who Ya Got?

Happy Tuesday everyone. I was going to write this yesterday, but I woke to a text from my wife saying, “Call me. We need to talk about deployment to Puerto Rico.” In the past 4-6 weeks she has been back and forth between being deployed to Houston, Florida, and now Puerto Rico at least a dozen times. Ross and Rachel had fewer twists and turns.

I listened to all the reasons why this time is different, but I’ll just wait and see.

I hang up the phone and scroll through my alerts. Twitter sent me something about an active shooter. I expand that story and… well you know the rest by now.

Writing an article about ETFs and mutual funds didn’t feel right… not that anything did.

So, let’s try again, today, shall we?

A couple of weeks ago, one of my personal finance blogger friends, Revanche from A Gai Shan Life Tweeted out a pretty innocent question:

Mutual funds or ETFs, and why?

— Revanche (@RevAGSL) September 23, 2017

I answered with, “ETFs. Lots of commission-free index options with Schwab too.”

What I didn’t do is explain “Why?” Why not say “why?” Why, I don’t know why I didn’t say why. Confused? Good, me too!

I had mutual funds in the early 90s, but I moved onto ETFs as soon as they became broadly available. And I never looked back. I think the reason why I went with ETFs is that they have slightly lower expense ratios. However, I could also understand the tax treatment better. It was easy for me to know that selling shares for a long-term capital will be taxed at whatever that rate is. With mutual funds, I’d get tax bills which depended on what the fund manager decided to do that year.

Overall, I never considered the difference between the two to be that big of a deal. As long as you focus on the expenses of the index investment it shouldn’t matter whether it is an ETF or a mutual fund.

Back in those days, the lowest expense ratios belonged to Vanguard and no one else was even close. Times change. Fidelity became very competitive with expense ratios several years ago. I think Schwab became competitive with them soon after that.

Again, back in my day (Cue SNL’s Grumpy Old Man), you’d have to pay a brokerage commission to companies like Datek and E-Trade to buy or sell the ETF. They were usually around $10 for each trade. (And we loved it!)

Today’s kids have it made. Fidelity has 70 index ETFs that trade commission-free, most with those competitive expense ratios. Vanguard is also competitive. However, Schwab seems to edge them out with more commission-free options and expense ratios that are a drop below the others.

Another of my blogger friends, Joe from Joe Taxpayer, chimed in:

Exactly. A few Schwab ETFs are sub .05%/yr expense, one or two are .03%. That's $300 per $1M invested.

— JoeTaxpayer® (@JoeTaxpayerBlog) September 23, 2017

This is exactly what I had been thinking, but didn’t have the data to back it up while in my phone’s Twitter app. The Schwab US Broad Market index covers a lot more than the S&P 500 and with that .03% expense ratio. If you are investing a million dollars, are you really going to be concerned about $300 a year? There used to be time when people paid 1% or more to invest. That’s more than $10,000 a year to invest if you have a million dollars. If you are going to take $9700 of my money, you have give me a lot of value for it. That buys a lot of coke prostitutes Patriots tickets.

What’s particularly great about many of these options is that there aren’t any commissions to trade. That means that you can rebalance your portfolio without being burdened by trade costs. When I went with ETFs years ago, I was concerned about spending the commissions to cash them out. Silly me! With commission-free trading of a bunch of these ETFs you can make some significant asset allocation changes and still end up paying probably an average of .07% in expenses. It makes me wonder why anyone would want to invest a large sum of money any other way.

All three companies are close enough that it probably doesn’t matter too much. If you’ve got your money at any of those three it’s probably more work than it’s worth to move it. However, if you are looking to start fresh or move some money from some expensive option, I’d choose Schwab. (Note: Schwab isn’t paying me to write this. I’m not even putting an affiliate link for you to go sign up with them.)

Isn’t it amazing when competition actually works to make things better for consumers. Don’t you wish your cable and internet providers were the same way? (Sorry, I couldn’t resist the tangent. That’s a rant for another day.)

It’s your turn now. As Revanche wrote, “Mutual funds or ETFs, and why?” Let me know in the comments.