Exchange-Traded Funds For Dummies
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It may sound like exchange-traded funds (ETFs) are not only the best thing since sliced bread but as a replacement for sliced bread. Well, not quite. As nice as ETFs are, good old mutual funds still enjoy their place in the sun. That’s especially true of inexpensive index mutual funds, such as the ones offered by Vanguard and Fidelity.

Mutual funds, for example, are clearly the better option when you’re investing in dribs and drabs and don’t want to have to pay for each trade you make . . . although a number of brokerage houses, including Charles Schwab, TD Ameritrade, and Fidelity, allow customers to trade certain ETFs for free.

One of the largest purveyors of ETFs is The Vanguard Group, the very same people who pioneered index mutual funds.

In the case of Vanguard (and only Vanguard at this point), shares in the company’s ETFs are the equivalent of shares in one of the company’s index mutual funds. In other words, they are different share classes of the same fund — the same representation of companies but a different structure and generally slightly lower management fees for the ETFs.

In addition, Vanguard allows its customers to trade all Vanguard ETFs for free.

Because Vanguard funds allow for an apples-to-apples comparison of ETFs and index mutual funds, and because the company presumably has no great stake in which you choose, Vanguard may be a good place to turn for objective advice on which investment is better for you.

But rest assured , this ain’t rocket science. For most buy-and-hold investors, ETFs will almost always be the better choice, at least in the long run.

About This Article

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About the book author:

Russell Wild, MBA, an expert on index investing, is a fee-only financial planner and investment advisor and the principal of Global Portfolios. He is the author or coauthor of nearly two dozen nonfiction books.

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