Description ETFs and Index funds
In the last years ETF:s has gained in popularity and become one decent alternative to the average investor. In the simplest terms, Exchange Traded Funds (ETFs) are funds that track indexes like the S&P 500, Dow Jones, OMXS30, etc. When the investor buy shares from an ETF, you're buying shares of a portfolio that tracks the return (Yes, yield as well) from that certain index fund that the ETF are replacating. ETFs are traded exactly like an equity investment, as stated you're buying shares in an portfolio.
In other words index ETFs are not trying to beat the market, they're trying to be the market or the index.
Index funds on the other hand is passively managed mutual funds, made to mirror the performance of a market index (i.e S&P 500, Dow Jones, OMXS30), which in other words is almost the same. Index funds compared to actively managed mutual funds has two primary advantages:
1. Lower management cost is the first one, which means the guys behind the fund takes less from you for the service of managing the fund. This is often around one-half to two-thirds less than actively managed mutual funds.
2. On average the index fund has gained the investor more return than actively managed funds, in other words a lot of experts has a problem to outperform the market (index). Of course there are some actively managed funds that have generated significantly higher returns than index funds.
ETF versus Index funds
ETFs has some advantages which comes with the flexibility the investor has since they are traded as equity on the stock exchange, this means they could be bought and sold instantly, which means you could close the position any time. This compared to the index funds, when you get the end price of the day. The rules out from this is if you're an active investor the ETF will suit you better. Passive normal investors will on the other hand love the index funds for their simplicity, no need for brokerage account.
Dividends are often payed out on index ETFs, which is the opposite compared to a normal index fund where they keep the dividends within the fund. This has both advantage and disadvantage. For a long-term investor I would say that keeping the dividends within the funds is better (You dont need to pay comission when you need to re-invest the dividend again).
1. Lower management cost is the first one, which means the guys behind the fund takes less from you for the service of managing the fund. This is often around one-half to two-thirds less than actively managed mutual funds.
2. On average the index fund has gained the investor more return than actively managed funds, in other words a lot of experts has a problem to outperform the market (index). Of course there are some actively managed funds that have generated significantly higher returns than index funds.
ETF versus Index funds
ETFs has some advantages which comes with the flexibility the investor has since they are traded as equity on the stock exchange, this means they could be bought and sold instantly, which means you could close the position any time. This compared to the index funds, when you get the end price of the day. The rules out from this is if you're an active investor the ETF will suit you better. Passive normal investors will on the other hand love the index funds for their simplicity, no need for brokerage account.
Dividends are often payed out on index ETFs, which is the opposite compared to a normal index fund where they keep the dividends within the fund. This has both advantage and disadvantage. For a long-term investor I would say that keeping the dividends within the funds is better (You dont need to pay comission when you need to re-invest the dividend again).
Whats the best is hard to answer and I will say as so the journalist says; it depends.
Hope you enjoyed the text and it was meaningful.
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Eighth wonder investing
