I have been following Suze Orman for years and she is always recommending ETFs (exchange traded funds) and when pressed for a fund to pick she always says Vanguard. Vanguard is available in Canada now on the TSE (Toronto Stock Exchange) and I am considering making a purchase.
What I don’t understand is what is the difference between and ETFs and the mutual funds that every financial institution tries to sell me.
ETFs are shares in a stock or bond fund. The ETF managers pick shares or bonds to hold in the fund and make changes in the holdings when they feel something isn’t performing as well as expected. Isn’t that just what the mutual fund managers with the big banks and the pension fund managers that run my work pension do?
What is the difference between an ETF and a mutual fund?
Mutual funds are many of us pooling our money to increase holdings and spread risk among a large number of stocks and bonds – just like an ETF right? Wikipedia does not have a page on the difference. Google has 1,330,000 entries on the difference but most of them are trying to sell me something.
Here is the definition of a mutual fund from TD Canada Trust.
“A mutual fund is an investment that pools money from many individuals and invests it according to the fund’s stated objectives.
Professional money managers make investment decisions on behalf of fund investors, buying and selling investments such as money market investments, bonds and stocks.”
Here is a definition of an ETF from Wikipedia
“An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index.”
Can you see the big difference?
More research is needed and I am very open for suggestions. Besides, I only have $47.00 cash in my trading account so it will be a while before purchases are made. I just googled Vanguard funds available in Canada and there are many to choose from – REITS, bonds, S&P, dividend, emerging and sub categories of each of those. Keeping my money in an incredibly low paying savings account would not give me much of a return but it would give my brain a lot of free time.
I wonder if I email Ms Orman if she would pick a Vanguard ETF for me? I wonder if she makes her selections using a dart board? I wonder if I would have ended up with Shopper’s Drug Mart in my portfolio if I had used a dart board?
January No Spend update
I have spent no money because it was just too cold to go out this weekend and my son had the car (he WILL be putting gas in it). Free work dinner tonight so I only have 11 more days to worry about food. I have lots of breakfast food so I jut might have breakfast twice each day. I had pancakes for lunch yesterday and I am supplementing the dog food with big bowls of warm oatmeal because we got a lot of pancake mix and oatmeal for free.
You can only sell a mutual fund at the end of the day. You can trade an ETF any second of the day. I’m a fan of Suze Orman even though I might disagree with her at times. She seems to invest the bulk of her money in tax free municipal bonds. Other than that she is a fan of dividend stocks and ETF’s.
That was a straightforward answer. I thoought it was going to be some huge difference. I am a buy and hold kind of person so now I am not so sure what I should do. I was only considering the Vanguard ETF because Suze recommends them.
I think Suze used to be more aggresive but she has gone very widows and orphans sutff now that she has more than she needs. I enjoy hearing other peoples’ financial stories and Suze’s solutions so that is why I tune in.
If you’re looking for some guidance on where to invest and how, I don’t know if anyone does it better than this guy.
http://jlcollinsnh.wordpress.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
When I wrote this post I was hoping someone might send me better information than I could find myself.
Thank you.
I haven’t gone for ETFs simply because you have to buy them in whole increments, and I just like investing a set amount of money each month into Vanguard Index Funds.
I cannot put a regular amount in to anything and I just save up for some indeterminate amount of time then buy something. I can’t commit to regular because I don’t always have money for savings or investments but I will read up on Vanguard Index Funds because I can’t make a good decision about any investment without being well informed.
Note that at Vanguard (US, at least), the ETFs and the Mutual Funds are the same collection of assets, offered in different ways, the same way that there are “Investor” and “Admiral” versions of the same mutual funds (with different MERs and minimum investments).
Here are the differences as I understand it: ETFs trade on Exchanges (the “E”), so you can buy and sell whole shares of them whenever the market’s open, at a known (well, limited with a limit order, since you should never use a market order) price per share. Note, however, that like stocks, there’s a “spread” between how much people are willing to pay for a share and how much you’ll get when selling one. (You can think of this as pre- and post-loads. They’re generally small, so not a big deal for buy-and-hold, but are non-negligible, especially for smaller, less liquid funds.) A mutual fund, on the other hand, you put in a request to buy into it as a monetary value, and the number of shares you get is determined at the next end of a trading day. (Also not a big deal assuming you’re continually and regularly investing a consistent sum.)
So since we’re sensible people who know we can’t time the market, Mutual Funds are preferable where possible. However, they have minimum investments substantially more than the minimum one stock of an ETF, and often have even higher minimums to get the lowest MERS. (And you probably never want ETFs if you have to pay large fees to a broker for a trade. Vanguard Brokerage gives you free trades in Vanguard ETFs, however.)
My approach is to buy into the low-MER level of a fund (only $10k for most Vanguard US index funds) for main holdings (currently bond, stock, and international stock, for me), and use ETFs to get into lower-value diversification (like REITs). I’m still wondering whether I should liquidate the ETFs and convert to MF if I get above the minimums. There are some Vanguard funds where there’s no MF version with a MER as low as the ETFs, in which case it might be better to stick with the ETFs permanently…
Disclaimer: I’m no professional, etc.
My thought about trying Vanguard ETFs was that fees would be lower and I could buy when and where I wanted and not have to wait until I have a bundle then make an appointment, then go in the bank my bank and move money in to the MF and sign papers.
I find that most mutual funds come with high fees. When you are a very small investor fees can eat up all of your profits.
I like to do my own buying and selling and ETFs will give me that option.
Lots of good explanations in your comment. Maybe you should think about writing a blog?