We’ve previously compared ETFs1 [1] against index funds on the basis of:
- Simplicity [2]
- Costs [3]
- Tracking difference (aka tracking error) [4]
Now we consider choice, and after two losses and a draw, it’s here that ETFs finally land a blow against their index fund brethren.
There’s simply much more choice when it comes to ETFs, especially if you want to invest beyond the major indices.
Indeed, sometimes you’ll have no choice but to pick an ETF if you want to track certain asset classes. As I write, there is no index fund aimed at UK investors that covers:
- Property
- UK Small Cap
- Value
- Commodities
So if you want a diversified portfolio [5] that includes any of those asset classes, ETFs will have to be part of your mix.
Too much ETF choice?
The ETF population has exploded over the past ten years like rabbits bounding over virginal Australia. They’ve burrowed into almost every conceivable market niche – and yet still the financial engineers keep tinkering and dreaming of new ones!
You want to track a Christian friendly index, or a fish food benchmark?
You can!
You want to bet on the prospects of renewable energy?
You can with ETFs – but not with index funds.
Of course, once you step off the broad avenues of the main indices, you can find yourself up some pretty dark alleyways that harbour all kinds of exotic offerings [6]. Make sure you keep your wits about you.
Also, keep in mind that not all things with ET in the title work in exactly the same way. For example Exchange Traded Commodities [7] (ETCs) are a quite different barrel of fish.
Take it steady,
The Accumulator
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- Exchange Traded Funds. [↩ [13]]