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 [1] against index funds on the basis of:
- Simplicity [2]
- Costs [3]
- Tracking difference (aka tracking error) [4]
- Choice [5]
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 [2], 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 [6]
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 [7] 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 [8] well under control.
Next: For our final match-up, we’ll return to fees to consider the issue of ongoing investing costs. Subscribe [9] to ensure you get this last installment!
Take it steady,
The Accumulator
- I say theoretically because previously during distressed market conditions [14] the prices of a select number of ETFs have decoupled significantly from their true worth (as measured by NAV). [↩ [15]]