Does it matter whether I invest in index funds or ETFs?

Investing
#1

Would you suggest investing in index funds (ex. VTSAX) or ETFs (ex. VTI)? Or would it be ok to have both? What are the pros and cons of having an index fund and the equivalent in an ETF version?

#2

Hey @ChellH!

BROAD STROKES, they’re the same. VTI and VTSAX contain the exact same stocks in the exact same proportion and will grow your wealth at the exact same rate. They only differ in how they trade. Notably:

Index funds:

  • Are purchased in dollar amounts (e.g. $1,000)
  • Trade only once per day at the close of market
  • May have a minimum initial investment amount

ETFs:

  • Are purchased in whole shares (e.g. 2 shares or 3 shares)
  • Trade in real time when the market is open
  • No minimums (other than purchasing a full share)

Pros of using ETFs:

  • May have a lower minimum investment (e.g. VTI is is $164 today, VTSAX requires a $3,000 minimum investment)
  • Trades in real time if you want to day trade (I actually see this as a con. More rope to hang yourself with)
  • Generally available to almost all investors, including non-US investors
  • Trade for free on almost every US brokerage, including stock focused brokerages like TD Ameritrade and Robinhood
  • May offer a tax advantage over some index funds as they internally reinvest capital gains rather than report them to the owner (irrelevant in a tax advantaged account like IRA/401k/etc)

Pros of using index funds:

  • Simpler to buy in the exact dollar amount you want to invest rather than keep track of numbers of shares
  • Trades once per day so encourages “buy and hold” behavior which will make you more rich
  • Trades free on matching brokerage (e.g. Vanguard funds in a Vanguard account, Fidelity in Fidelity, etc)

Both ETFs and index funds offer very low fees these days (but it’s always good to check). Personally I prefer the index fund version… I think dumping all your money in to the dollar, leaving it for years and not worrying about shares or trading will make you more rich.

Here’s an article on index fund vs ETF.

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#3

Thanks for such a detailed response and explanation of the similarities/differences between the two. I am planning on purchasing my first index fund this month.

This is a great community with lots of great information. I am thoroughly enjoying it!

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#4

Is there a way to change from ETF’s to Index? I get the general concept of shares vs dollar but agree that’s easier to just focus on the $ amount I want to invest. I’m “playing around” with some investments on the thinkorswim app through TD Ameritrade. Right now I have ETF’s and I think that’s the best option that was available on that platform.I do have a 3 tiered portfolio though. BND, SPDW, and SPTM are what I currently have. I’d like to transition to Fidelity or Vanguard as they have more options in my opinion. What are my options for either closing and moving those accounts to another brokerage?

Also, I’m still a bit confused with some of the terms on the sites. I basically have $227.46 in long stock value and $21 available in total cash to purchase more shares. I’m a little confused how to actually access and utilize that $227 portion. Is that only available as it accrues dividends on the investments? In theory, I could sell those shares and it would return a dollar amount back to me correct? I’m not trying to play the market just a little unclear which $ is actually accessible to use.

#5

What type of account are the ETF’s in? If they are in a traditional or Roth IRA you could sell the ETFs and purchase the index funds. Or, @vivitron has mentioned in a couple other threads you can do an in-kind transfer to another brokerage and they usually take care of the details for you.

You could always hold the ETFs and just put future investments towards index funds until you hit withdrawal phase. Couple different options

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#6

As far as I know, it’s just through the brokerage firm. Not a Roth of any kind. After I took the course, I wanted to swap to Fidelity or Vanguard and do the retirement index fund just to make everything easier and more streamlined. I’ll check into an in-kind transfer. That’s probably the best option.

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