For this latest article in our series of bite-sized battles pitting ETFs against index funds, we’ll look at how it’s easier to trade ETFs.

We’ve already compared ETFs¹ against index funds on the basis of:

• Simplicity
• Costs
• Tracking difference (aka tracking error)
• Choice

ETFs have so far only landed an outright victory when it comes to choice.

But the ability to trade ETFs at a moment’s notice at an exact, quoted price – and to instantly convert your ETF holdings to cash, if you want to – gives them the edge when it comes to hands-on control, too.

Whether such trading is useful for passive investors is another matter entirely!

ETFs put you in control

We’ve seen that for a simple life you should buy index funds, not ETFs.

But the counter-punch to this simplicity is that index funds are a blunt instrument in comparison to ETFs:

• You can buy and sell ETFs in real-time on any trading day.

• In contrast, index funds only trade at a single time of the day.

• You can watch the bid-offer prices of ETFs zig and zag just like any other share that trades on the stock exchange, and buy and sell accordingly.

• In contrast, with an index fund you’re flying blind. You won’t know what the trading price is until the next valuation point (normally 12pm). Generally prices don’t fluctuate so wildly that this is a major issue but theoretically you have a greater measure of control with an ETF if markets are in a tailspin.1

If maximum trading flexibility matters to you, then ETFs clearly win over index funds.

…but do you really want to trade ETFs?

It’s a passive investing maxim that nothing benefits your investments like neglect.

Ignoring your portfolio for months at at time is better for your psychological well-being. More important however from the perspective of maximising your returns, an attitude of benign neglect also means you’re less likely to be tempted to trade.

All the evidence from researchers suggests that the more the average investor trades, the worse their annual returns. Therefore, the ease with which you can trade ETFs could be considered a flaw in the products as much as a boon, unless you have your psychological biases well under control.

Next: For our final match-up, we’ll return to fees to consider the issue of ongoing investing costs. Subscribe to ensure you get this last installment!

Take it steady,

The Accumulator

1. I say theoretically because previously during distressed market conditions the prices of a select number of ETFs have decoupled significantly from their true worth (as measured by NAV). [↩]

I suspect The Iron Lady – a biopic of Margaret Thatcher’s rise and fall – will be as divisive as her career, even among Monevator readers (and writers!)

I am a political pariah among my family and most of my friends in thinking the woman did the right thing for Britain, albeit in brutal fashion at times.

Nobody under 30 can imagine how economically crippled this country was in the 1970s, when it was known as the sick man of Europe (though looking at Italy today might give you a clue). Bodies of the dead piled up in the streets was perhaps the most famous incarnation of a Britain that was truly bust.

Thatcher didn’t just confront the ability of organised Unions to cripple the country on a whim – maybe motivated by their own ultra-leftist ideals as much as to achieve anything for members.

Ironically, she also did more for social mobility than Labour achieved in its decade in power (or that Cameron and Co will begin to achieve today) by freeing up enterprise and working against the clubbable nature of 1970s corporate Britain.

Countries like France and Germany can still only look on enviously at our entrepreneuralism – or their young can move here, of course.

Margaret Thatcher the milk snatcher

On the other hand, I’d agree insufficient attention was given to the likely impact of shock and awe Thatcherism on industrial and mining communities in, for example, Wales and the North of England.

Proud traditions in those areas had served Britain well for generations, and after decades of difficult, dangerous work they deserved more notice than they got from London-centric, market-obsessed Whitehall.

Remember, these were working communities then, not the early retirement homes for the 40-year old perma-jobless that some have now become.

I’d agree their subsequent marginalisation is partly down to the political element of Thatcherite restructuring, though to some degree it would surely have happened regardless (consider similarly moribund industrial areas of the US).

Even in London – where the right wing’s laissez-faire attitude towards free financial markets in the 1980s was eventually embraced by Labour – the so-called Big Bang of deregulation and the subsequent banking bonanza helped blow up the economic system a quarter of a century later.

So her record is mixed, but ultimately I admire Margaret Thatcher and her achievements, and I think Britain is better for them. I miss the politics of conviction, too – on both sides of the political spectrum.

What do you think? Will you be taking popcorn into the cinema to see The Iron Lady come January – or sneaking in a bag of rotten tomatoes?

Great reading from around the web.

Europe hasn’t bothered me much these past few years – unless you count my terror this summer when I was quizzed by a tussle-haired French waiter in jeans (even scarier than the old-fashioned variety) in a hip Parisian eatery1.

No, I’ve carried on investing despite more prophecies of doom than you’ll find in a Tolkien trilogy.

That’s not to say Europe’s problems aren’t immense. However:

• I wasn’t surprised by them, because I never supported the Euro. It’s the flaws of the original currency union – not the particulars of any one country – that are ultimately threatening Europe.

• I believe it’s in Germany’s interest to save the Euro, and that it can do so.

• I can’t do anything about it, anyway.

But my measured bonhomie towards Europe’s woes was pushed to breaking point this past week.

First Italy’s Silvio Berlusconi turned away the IMF because the restaurants in Rome were full (really). Then he didn’t quit when I bet he’d have to. Next Italian bond yields soared after margin requirements by a key broker were increased – and the ECB at first stood by and did nothing. Finally, numerous ECB officials ruled out intervention by Europe’s Central Bank.

Meanwhile the idea of Greece leaving the Eurozone began to be discussed as a plausible option by the core decision makers. Greece doesn’t matter much – it amounts to 1% of European GDP, and most of its debt has already been written down – but the dangers of precedent setting loomed large.

I was so bothered that I finally sold out of some of my defensives in the trading portion of my portfolio on Tuesday. They are well up over six months and didn’t look likely to go much higher in a surprise rally, and I wanted some cash to buy bargains in a rout.

Happily, however, Europe, the ECB, and me all stepped back from the brink.

Berlusconi got the boot in Italy, austerity measures were approved, and a new technocratic government is on the way. Germany’s big bluff against Greece worked, too – it called off its referendum and it’s getting a wise council of wonks to push through reforms.

Best of all, the ECB stepped back into the bond markets and pulled the Italian 10-year bond rate well under 7% again. Having proved it can do it once, the clamour for it to do so again will surely be irresistible.

On Friday morning I bought back in with the cash I’d raised, roughly equal on the deal and without tax consequences thanks to glorious ISA protection.

I still believe market timing is a mug’s game, incidentally, even though being more active has helped me over the past 3-4 years. Regular meddling looks clever until a big surge one way or the other wipes out the profits you made (after expenses) by fiddling – and that’s assuming you’re even good at it in the short-term, which most people aren’t.

I far prefer to remain invested at all times (though I actively tinker with asset / geography / sector allocation, even in my passive portfolio). My going part-liquid on Tuesday was a measure of how much risk Vs. reward had finally tilted for me.

Now I’m back to a watchful vigilance. While I read as much about Europe as the most avid doomster, I still believe this sort of drama is more likely to yield opportunities for equity investors with a sufficient time horizon. Time will tell.

[continue reading…]

1. Sorry, there is no other word for this place. [↩]