Investing: ETFs or Index Funds instead of Stocks?

Question

I am planning to start investing but I have no real interest in "beating the market"; staying with the market is good enough for me, and it seems to me that ETFs and index funds are the ways to do this. If I do not want to deal with researching individual stocks, and I am satisfied with "staying with the market", what are the drawbacks of replacing all the stocks in my portfolio with ETFs and index funds?

I am a novice so I would also like to know what the difference between ETFs and index funds are, where I can go to learn more about them, and how I would choose, say, a Vanguard fund over a T. Rowe Price fund. Of course I would invest internationally, having a representation of all the major global markets in my portfolio instead of just the USA or something...

Answer 1

If you don't have the time, energy, or intellect (no offense) to research individual stocks, an index fund or ETF is a great idea. While you DO have the risk of being in the market, you have the safety of having a portfolio that holds many stocks. Historically, 10% per year is what an S&P index would provide. Put in $1000 when you're 21 and it'll grow to $41,000 by the time you're 60.

If you pick the right stocks, you can double your money overnight. But how many of us can really do that?

So, I think ETF/index funds are a good way to get started and should be part of an overall financial plan. Note: I repeat that they carry risk and you could lose it all, so make sure you also have money in other places.

The difference between index funds and ETFs? ETFs are traded like stocks. So, you can buy and see whenever you want. With funds, a purchase or sale may not occur for hours. As such, you have less control. You can't sent "stop loss" orders or "buy" orders to sell/buy based on certain things happening.

So, ETFs give more control. However, you'll pay the same fees as with stocks. As such, your fees might end up being more than with an index fund. However, if you just plan to sit on the investment, it's a wash.

Answer 2

Your plan is as sound as any... but, I don't know how many different Indices you would choose to follow... and how many funds you plan to buy into...
If you are really sticking to index funds, it really doesn't matter if your fund is with Price, Vanguard, Fidelity, whatever...they're following the same stocks ( those in the index)
Kiplinger just had a 2007 Fund Report out on the newsstands...it covered a lot of funds and ETF's...if you could find it there may be something in there to help...
The only positive that I know of with the ETF's is the ability to buy smaller amounts ( than most minimum init investments for funds)
So if you really wanted to , you could create your own " fund" of about 3 or 4 international ETF's for the same amount you would put into a fund.
more info: http://best-of-etfs.com?family.asp?fam=EXTRADED
There is a little more to learn than just "trade like stocks"...there might be a "tutorial" at that site.
Otherwise, moneycentral/msn usually covers all financial matters pretty good.
Good luck

Answer 3

If you want a simple article about ETFs written for a beginner, I suggest you read this: http://www.valuestockreports.com/021907.htm
At the end there is also an example of how one might construct a portfolio using ETFs to "stay with the market". There are alot of ETFs out there from the various fund families (iShares, Vanguard, State Street, etc.) and if you do a bit of research into them, you should learn more than enough about how many different places ETFs allow you to invest your money.
Hope this helps.

Answer 4

Drawbacks of replacing your stocks - having to pay broker commissions and capital gain taxes (if held in a taxable account) this year.
Difference between ETFs and index funds - ETFs buy and sell like stocks (pay commission) anytime market is open, ability to buy/sell at limit order (price you pick). Index funds buy and sell at the end of the business day at net asset value price, no buy/sell fees if from no-load fund family and held for a long enough time (no less than 6 months in many cases). How to choose - They all hold the same stocks (if like index funds are compared with each other example don't compare S&P 500 index fund from T. Rowe Price with Vanguard's Small Cap Growth Index fund). The major differences are number of stocks held and the annual expense ratio. An example is Total Stock Market Index Funds/ETF = Vanguard's Fund (VTSMX, investor shares $3,000 minimum {$10? per year fee in under $10,000 value}; VTSAX, admiral shares $100,000 minimum): T. Rowe Price Total Equity Market Index fund (POMIX, $2500 minimum): Vanguard's ETF (VTI)
fund expense ratio # of stocks held 3yr return 5yr return
VTSMX 0.19% 3,746 11.18% 8.92%
VTSAX 0.09% 3,746 11.30% 9.01%
VTI 0.07% 1,300 11.24% 8.81%
POMIX 0.40% 1,837 11.24% 8.84%
hope this helps.

Answer 5

The Admiral shares (VTSAX) have a similar rate ratio simply by fact the ETF. you purely choose for 100k. :) it relatively is obtainable for ETFs to commerce far off from NAV. it incredibly is a difficulty on some much less liquid themes, yet possibly no longer this one. there is not any assure that commissions stay at 0. considering which you're soft with the ETF, it form of feels like the wonderful determination for you.