Don't Give Up on Index Funds Yet

Smart Money has a good post on index funds and how they may (or may not) be replaced by exchange traded funds (ETFs). First, let's set the scene:

"Like index funds, ETFs are structured to mimic the performance of a benchmark index. Unlike index funds, their value updates throughout the course of the trading day, and they can be bought and sold like stocks. And ETFs are cheap. The average expense ratio for ETFs is 0.42% vs. 0.93% for index funds, according to Lipper. For all of these reasons, ETFs are gaining in popularity."

But Smart Money says, "We're not ready to eulogize index funds just yet." The details:

"For one thing, a number of fund companies have responded to the onslaught of ETFs with lower fees on their index funds. This is particularly true among S&P 500 index funds, which have engaged in a fee war over the last year."

"Clark thinks that index funds with fees of less than 20 basis points (or two-tenths of a percentage point) are "in the game." Of course, apples to apples comparisons of index fund fees with ETF fees aren't exactly fair to begin with. That's because, for now, ETFs can be purchased only through a broker, a transaction that in itself involves a fee. Most index funds, on the other hand, are available without a transaction fee when purchased directly through the issuing fund company.

The article then goes on to recommend various index funds based on criteria set up by Smart Money.

I have good-sized investments in the E*Trade and Vanguard index funds noted above. I'm not really anxious to change, but I'll keep an eye on this situation in case better opportunities do open up with ETFs.

Comments

[geoff]

Yet another tremendous synopsis of a very handy article. Thanks, fmf.