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Choosing an ETF versus an Index Fund For Your Long Term Investments

By Erik Folgate

The ETF (Exchange Traded Fund): The ETF seems like it was created for those active traders that like the way mutual funds perform, but they hated the way they traded.

Liquidity: The ETF is very liquid. It trades like a regular, single stock. Whereas, a mutual fund can only be traded once a day. If you sell a mutual fund, you get the price that it ends in at the end of the day. Active traders that trade on a margin or short sell like the ETF and the way its liquidity.

Costs: ETFs have considerable trading costs. You’re paying a commission every time you trade the ETF. The cost of trading ETFs has typically been considered one of its downfalls.

Rate of Return: ETFs have gained a lot of popularity and there are some out there that perform very well. However, they don’t boast much higher returns than growth stock mutual funds.

The Index Fund: An index fund is a mutual fund that follows a certain stock index such as the dow jones, the S&P 500, and the Russell Global 10000.

Liquidity: They trade just like mutual funds, so they are more for the passive investor that does not seek to actively trade stocks. But come on, if one day is not liquid enough for you, you’re probably a day trader.

Costs: The costs of an index fund are generally low, because most people hold index funds for the long-term.

Rate of Return: The rate of return for the big index funds is very solid. The reason for this is that the stock market has averaged 12% over the past 80 years. I’d take a consistent 12% over 10 to 30 years any day.

Conclusion: The average reader of this blog should go with the index fund. Index funds are solid and they are great for a long-term investing portfolio. You’ll lose when the big companies lose, but you’ll gain big when the big companies are doing well. Again, put your trust in the market. It has performed very well since companies started going public. If you don’t have much time on your hands to actively do your homework about the market, then the ETF and individual stocks may seem pointless to invest in when you factor in the risk involved.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • http://goldetfsilveretf.com Gold ETF

    Nice article! I see ETFs as a useful tool and still agree with most of what you say. But after the 2008 crash, pyramid schemes, and the flash crash wouldn’t an investor be crazy not to take the time to do their homework and keep an eye on the market? I know people who will spend weeks researching audio and video equipment, car buying, or weekend getaways but throw up their hands about investing when they shouldn’t.

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    Why on earth would anybody buy an exchange traded index fund that is invested in the broad based standard and poors five hundred. When you can buy a narrow sector like a solar exchange traded fund which are down by 93% from their highs. Im not talking exchange traded funds that use leverage I am not suggesting that one invest all their money in a fund like the one I refer to in the last sentence. But if you are building a Portfolio composed of single country funds and narrow sector funds like coal steel airlines just to name a few that are down by a enormous amount the odds most certainly will be greatly in your favor of coming out way way way way ahead of the broadly based Standared and poors five hundred index fund..

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