We’ve reached the final post in our mini-series comparing ETFs and index funds, so it’s appropriate to consider which tracker makes ongoing maintenance such as dividend reinvestment in your portfolio less painful.

And it’s fair to say that index funds win out over ETFs when it comes to important investor duties like rebalancing and reinvesting.

Both tasks are easier to perform with index funds than with ETFs.

Trading ETFs in small amounts to rebalance your portfolio comes a cropper due to the high dealing fee factor for ETFs.

Index funds that don’t attract dealing fees neatly sidestep any such worries.

Dividend reinvestment made easy

There’s more! Most index funds are available in accumulation and income varieties. Accumulation units automatically reinvest your dividends back into the fund, whereas income units hand them over to you.

Far fewer ETFs are available in dividend reinvestment flavour ¹. As a result, you will incur costs on reinvesting the dividends from your ETFs.

What’s more, if your dividends are paid out as cash then you must also confront the demon temptation of not reinvesting your dividends at all, but instead spending them on having a good time!

You decide what matters most for you

This table below shows the results of our ETF versus index fund face-off. Click the links to read any articles you missed:

Only you can know how important each of these factors is in your decision to choose between index funds or ETFs – or indeed to choose a mix of fund types.

I’d suggest you pick what works for you. The differences between the two tracker types are in some cases fairly technical but, on a personal level, I find index funds to be much more straightforward.

Plus I draw a good deal of comfort from their long, scandal-free track record!

Take it steady,

The Accumulator

1. Reinvesting ETFs are termed as capitalising in ETF circles[↩]

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?