Why Not Invest Entirely With ETFs?

I’m still pondering my portfolio options (one, two, three), but a good question is why I’m not looking more seriously into using ETFs instead. To be sure, there are plenty of good reasons to go with either mutual funds or ETFs. Besides wanting to dollar-cost-average, I’ll admit that I have another reason against ETFs that isn’t fully logical, but is still important to me. I’ll throw it out here and see if I’m the only one.

Here it is: If I’m going to put a huge hunk of my money at a financial institution, I want it to be at a dependable place that I feel comfortable with. That’s why I like Vanguard and Fidelity. They have many differences, but they are both dependable companies that I feel are solid and have provided me with excellent customer service up until now.

For me to go with ETFs, to avoid commissions affecting my returns, I would want to go with a discount broker. But there are so many discount brokers out there, and what is a good broker today could merge with a horrible broker tomorrow. For example, BrownCo merged with E-Trade. Ameritrade already ate up National Discount Brokers back in 2001. Now TD Waterhouse merged with Ameritrade. Who’s to say tomorrow we won’t have TD-Amer-Etrade, along with E-Trade’s horrible customer service?

I’m happy with my Ameritrade I-Zone broker right now with their $5 trades, but that’s because I only have $5,000 in there. I can’t speak to a human with them, and that is unacceptable for large amounts of money. If they merge with E-Trade, I’m running the other direction no matter what.

It’s one thing to move some cash in between banks, but I plan on keeping hundreds of thousands of dollars in my main broker, and I want them to be around when I actually do retire. So that’s why I am most likely going to stick with Vanguard. Every time I call them, even with a stupid question, I get an educated person who picks up in less than 5 minutes and helps me. Is this worth any potential gain from using ETFs? Or am I just being a old fart?


  1. The only time paying a commissions makes sense to me is when you expect the return to sufficiently outperform the market as to make the commission you payed insignificant.

    When investing for the long term, I do not believe this will be the case with ETFs, when compared to no-load/no-fee mutual funds, as I do not believe they will do sufficiently better then mutual fund with the same investment philosophy. (Think S&P 500)

    For short term investment I treat ETFs just like stocks. Which means if there is a company or sector I think is getting hot, I will buy a stock or ETF, with the intention to sell it after I think the run is over. (Think Apple: 2004-2005, Energy 2005)

  2. I’m strongly against mutual funds, even the ones mentioned by your previous commentor. They perform so poorly (overall) that most of them aren’t worth the effort it takes to direct deposit your money.

    ETFs are mixed, from my experience. But I am happy with my Vanguard REIT Vipers which has done well and has a great dividend. Consumer staples has lost money.

    The question is – are you going to reach your goals most efficiently with ETFs?

  3. Anonymous says:

    I’m not a Fidelity shill, but I do have all my money with them: a 401k, Roth, and brokerage. Once you have over $50k in household assets they charge $11/trade which is comparable to other discount brokers. Money is kept at their broker-dealer subsidiary NFS, so essentially Fidelity is responsible for your money not some random .com company that didn’t exist 15 yrs ago. Vanguard may also offer brokerage accounts…not sure.

  4. ETF’s are the best choice for me for the following reasons:

    –I’m a do it “yourselfer” by nature and ETF’s let me do that.
    –I distrust mutual funds, whichever fund we are talking about (but the same can be said of ETF’s).
    –I have never had a problem with etrade, datek, or ameritrade. To your comment about picking up the phone: why would you call them if you can chat or email? Your a technocrati and you call to speak to a CSR?
    –I like the idea of tax harvesting for a loss
    –with an ETF you are less likely to have “classification/style drift”

    As a prior post suggested: which one will help you meet your goals [and sleep better]?

  5. Why not investing in Vanguard ETFs then?

  6. I to have jumped off of the mutual fund band wagon with the latest scandals in the MF community. ETFs are what I will go with in place of these mutual funds. I recall a post about Amerivest by ameritrade and curious to know if you gave that some thought. The fee structure is as such;

    Below $20,000 account value $25 per quarter so $100 per year
    Above $20,000 its like… 1/2% up to a point then changes again above $100ish thousand.

    Account minimum is $2,000 to open. Now that $25 per quarter is a flat fee, there are no other fees for purchases. If you invest automatically 2 times per month thats 8 purchases per quarter saving you on comissions. My reservation at this point is, say a little guy like me only has 2,000ish and only invests say $50 to $100 once per month, thats almost a 5% hit in the beginning stages of this. That decreases with each monthly investment, but still its up there in the beginning stages. What say you?

  7. Mutual funds and ETF’s can emmulate various index funds. It seems there is very little difference on the maintenance fee between mutual funds and ETF’s tracking indexes.

    I genrally like the ease and convinence of purchasing ETF’s. As Wes stated classification/style drift is a concern with mutual funds.

    It seems some people equate index funds to S&P 500. Obviously there are large, mid, small, micro, domestic, international, emerging markets, growth, value, and any combination thereof. It can make for a very well diversified, risk reduced, and maximum gains portfolio.

    The ease with which I can stack up various ETF’s based on asset allocation using a brokerage account that charges no fees makes it worthwhile for me.

  8. Anonymous says:


    Take a look at closed end funds. They seem to provide great yield. Might be worth looking into them.

  9. I’m taking advantage of some ETF’s that pay a pretty healthy dividend, but on top of that, they pay their dividend monthly. So you’re compounding your dividend 12 times per year instead of just 4.

    ETF’s like CLM, CRF, HYF all produce a healthy dividend that pays monthly.

    Check them out, as well as others at etfconnect.com.

    A word of caution though, ETFs such as CLM and CRF (they’re essentially the same fund) return a constant dividend, but if the fund is not doing well, it’s actually a “return on capital” vs. an actual dividend. There is a big difference, so be careful.

    ETF’s and Mutual Funds are great options for a lot of people, but it really depends on what your goals are for your money.

    Hope that helps! -Grant

  10. Another of many excellent threads on this blog!

    Personally, I haven’t researched this ETF vs. index funds issue beyond the basics, but as someone who feels he’s already paying very little for index funds at Vanguard I’m not exactly burning to switch. I’ve had in the back of my mind to switch to the equivalent VIPER ETF’s once I’ve reached a certain threshold for the brokerage fees to be worthwhile, which if I understand correctly is not a taxable event if done within Vanguard.

    A couple comments above from the pro-ETF/anti-index-fund crowd on this thread got me thinking on a couple of things. I apologize in advance if these are newbie questions – hopefully someone here can clarify them for me:

    1. Wes mentions tax-loss-harvesting as an advantage of ETF’s. Can’t you also tax-loss harvest with mutual funds (as long as the new fund is not so similar that it’s a wash sale)? For example, if a 500 index fund tanks this year, can’t you just sell it, on the same day buy another fund that tracks a different large cap index, and then claim the loss on Schedule D just like you would with an ETF?

    2. Isn’t indexing what eliminates the “style drift” problem that was mentioned? So, that would be an argument not for ETF’s specifically but for indexing with mutual funds as well, right?

    3. A comment was made regarding the performance of ETF’s versus mutual funds. I’ve never seen anything stating that ETF’s outperform equivalent index funds. In fact, aren’t Vanguard VIPER’s just a different class of the same fund, guaranteeing the same return (other than ER and fees)? Can the pro-ETF crowd please elaborate on the performance comparison?

    Thanks in advance!

  11. Let me make clear that I am in no way an ETF expert, that’s why I’m asking.

    Scattered thoughts ahead:

    I’ve found companies that don’t answer their phones also have horrible e-mail turnaround time. Customer service attitude spans all mediums.

    I also don’t understand how index mutual funds and index ETFs have to worry about any scandals or style-drift. Theses scandals deal with either market-timing securities or undisclosed fees, right? I’ve never heard Vanguard being mixed up with either of these things.

    From my reading, I have garnered that simply due to the different rules governing mutual funds and ETFs, ETFs are able to be more tax-efficient and have lower expense ratios. This would explain why basically the same investment in ETF form has a lower expense ratio. Example – VEIEX vs. VWO.

    What’s weird is that VWO keeps trading at a premium above NAV.

  12. Tarek Adnan Hoteit says:

    I think ETF is a smart instrument to invest in emerging & international markets (eg: EEM, an emerging markets ETF & ILF, a Latin America ETF.) High growth though risky especially when foreign markets’ currency depreciates against the Dollar. But recently it’s a positive growth, and so far its seems to be less costly then mutual funds or single international stocks.
    I also think that ETF is a fun to trade with. You treat it as a regular stock and at the same time a trader, at least me, would imagine oneself buying or selling a “country” or a “region” sort of speak when trading with country-based ETFs like Brazil, Latin America, Asia etc. Remember the game “Risk” 🙂

    However I don’t think it is wise choice to use ETF as replacement to local (US) mutual funds or company stocks because many times one would rely on experts (knowelegable investor or smart fund managers) for investments and not solely depend on market movements which ETFs tend to depend on.

  13. I don’t think there’s a tax advantage for VIPER’s over the equivalent Vanguard index fund since it’s a share class of the same fund. The index fund benefits tax-wise from the existance of the ETF class. But for other ETF’s that are completely independent from any index fund, yes that would be an advantage.

    As far as I can tell, the decision between ETF and index funds boils down to the reduced ER vs. any additional brokerage expenses. If you’re making lots of regular contributions, the brokerage expenses will probably outweigh the ER benefit.

  14. Wouldn’t the Vanguard S&P 500 ETF be pretty much the same as the Vanguard 500 Index Fund? There may be some minor differences (i.e. taxes, commissions, and fees), but isn’t the ETF supposed to be managed pretty much the same way as the 500 index fund?

  15. If I compare an ETF such as QQQ to its index its supposed to track on a site like bigcharts.com or something, why does the ETFs return mirror the changes but BELOW the % change in the actual index?

  16. I personally don’t like mutual funds, I think they are flawed by nature. Fund managers make money based on the money that flows into them and not necessarily on the gains they make. The more money you take on, the harder it is to outperform (Warren Buffet gains about 4% a year because he manages so much money). For this reason, I do my own stock research and buy stocks I like….but that’s not for everyone.

    As far as a discount broker that answers the phone, Scottrade has so many branches, getting someone on the phone is easy and they only charge $7 per trade but they don’t offer dividend re-investing which sucks.

  17. Nathan Whitehead says:

    Just to reply to a couple points raised in the discussion: ETFs are slightly more tax efficient than index mutual funds. It has to do with deferring capital gains. The mutual fund will buy and sell its stocks as people enter or leave the fund, triggering capital gains which are passed down to fund holders. Mutual funds also trigger capital gains when rebalancing (however often they do that). ETFs only trigger capital gains when rebalancing, not when people buy or sell it. The difference is small, but with enough money invested it can add up to real money.

    I personally don’t care about customer service. If I ever have a problem with a broker, I convert everything to cash and transfer it to my next choice for discount broker. Yeah it’s a slight hassle, but having problems with brokers is a rare occurrence (for me at least). Perhaps the most important thing is to only invest for the long term. You should never be in a position where you have to access your investments right away, or buy or sell something soon. It should never be a big deal to wait several months to access your investments or make changes. If that’s not true, you’re doing something wrong.

  18. Re: tax loss harvesting. I’m assuming that you are holding the mutual fund through the mutual fund and not through a brokerage account. With ETF’s I can sell my IWN for a loss and buy IJS – both small cap value.

    As for style drift I was thinking of what they just did with their Life Fund (adjusting the mix). I also think “style drift” can happen in ANY index fund. Yes, they are supposed to track an index – but they each do it differently using statistics of their choosing.

    As for customer service I could care less. In the bast 10 years I had to call my fund/brokerage CSR’s perhaps twice and those werre for change of address problems. Other than that everything can be handled via email. This is a non-issue.

  19. I am also of the opinion that mutual funds or ETFs are not necessaily the way to go when investing your capital. Numerous studies have shown that “professional” money managers (90% of them!) and mutual funds underperform the indexes in the long run. For a fun read on this and other topics, you should pick up David Dreman’s book, Contrarian Investment Strategies.

    One good use of ETFs could be if you want to get some exposure to emerging markets. Then an ETF like EEM might be an interesting pick.

    I realize most of us are busy with our full-time jobs and we may think we do not have the resources or expertise to make sound investment decisions. But I think with a bit of work and discpiline you can make it happen and not pay fees.

    I think it was Warren Buffett who said (and I paraphrase) that investing in mutual funds is OK as long as you are happy with matching market indexes, at best. Many of these funds are just too big to deliver superior returns.

    Over the last 2 to 3 years, I have begun educating myself on the discipline of value investing. Investing has a lot to do with psychology, being patient and having conviction. For a free education, I encourage you to read Warren Buffett’s letters to his shareholders.

    There are other books that I recommend. you can check them out on my blog at:


    What I would advocate is you forgo paying money to the so-called professionals, build a concentrated portfolio of high-quality stocks and don’t trade too much. And if you have done your homework and the stock declines, continue to add to your holdings. A time-tested strategy by investment gurus such as Buffett, Bill Miller and numerous others. Bill Miller’s Legg Mason Value Trust has beaten the S&P500 for 15 consecutive years. As he says, “Lowest cost average wins.”


  20. Wes,

    Thanks for the info and example. You assumed correctly that I do buy directly from the fund companies – specifically Vanguard and Bridgeway.

    I’m new to this stuff, so forgive me if this is a dumb question. Couldn’t you tax-loss harvest with index funds exactly like your example using the small value ETF’s IWN and IJS?

    For example:
    * Sell VLISX (or any other large blend fund) for a loss
    * Same day, buy BRLIX (or any other fund tracking a different large blend index) and not miss a day of exposure to the LC market but claim the loss

    BTW – I used large cap instead of small value per your example because my small value fund is in my Roth, which I guess wouldn’t be necessary with more tax-efficient ETF’s.

    Don’t get me wrong – I like the idea of ETF’s! But as far as I understand right now, it seems that the majority of the ETF advantages listed here actually apply equally to low-cost index funds: tax loss harvest potential, low expenses, avoiding crappy management and style drift, etc. I don’t think the recent Target fund change applies to this discussion, because it’s an all-in-one fund and I can’t imagine why an all-in-one ETF (if there was one) wouldn’t be subject to the same sort of change.

    I could be wrong, but so far it seems like the choice simply boils down to the modest brokerage expenses of ETF vs. slightly higher ER of index funds. (Not a bad deal either way.) Am I missing anything else of importance?

    Thanks in advance,

  21. Dan – totally agree with you about your example. I was foolishly assuming that all the funds would be with one fund family.

    I’ll have to consider mututal funds next time I rebalance in a major way.

    That would certainly remove any temptation I have to buy a company on hunch/hot tip in my brokerage accounts.

    I guess the conclusion is that if you’re into the efficient frontier then either ETF’s or certain mutual funds will do you just fine. As, long as you can find funds that match your asset class you should be OK. e.g. what if you need to invest 2.5% in Northeastern European/ex-Soviet-Bloc/excluding-Poland/Ukraine/Lithuania? Will vanguard have that or will an ETF?


  22. The thing is, if you want the flexiblity to buy any mutual fund you want, you’ll most likely be paying the same or greater commissions as a stock trade. The benefit of staying within one fund family is the lack of transaction costs (and there the ability to DCA easily), at the sacrifice of that flexibility.

    I was also reading today about the ability of ETFs to pick specific tax lots when selling shares in order to save on taxes, something that mutual funds are not able to do. I am thinking of keeping my taxable funds in ETFs, and the tax-deferred in mutual funds…

  23. Jonathan,

    I called Vanguard and asked specifically about selling specific tax lots for the purpose of tax loss harvesting a few months ago. They said they’ll let you do it if you provide a written request, and of course their “Cost Basis” feature would no longer be valid after such a transaction. (They don’t mention the specific shares option on their website though – probably makes their job more difficult so they don’t advertise it.)

  24. Dan – Regarding that, I actually meant that the ETF holder like Vanguard or iShares, when needed to redeem the ETF and sell shares to the underlying companies to produce cash, can actually choose which specific stock to sell. This is separate from an individual choosing which ETF cost basis to sell from their own shares. I’m still not writing it clearly, but I hope you understand. I read this while browsing a book by Ferri in Barnes & Noble, so I’m not the best source. Basically ETFs can really minimize any capital gains distributions due to their structure if you simply hold the ETF, unlike open-ended mutual funds.

    But in fact, you’ll note that Vanguard is even holding VIPERs inside their own mutual funds now, in order to take advantage of this fact. Check out the Top 5 holding of VTTHX in this link

    Vanguard has a lot of neat little things on their website. Did you know that for mutual funds like their tax-managed ones, the early redemption fee does not apply to those shares bought by re-invested dividends? The site actually keeps track of how many shares are not subject to fees. I didn’t know that until I read that in the Diehards forum.

  25. Jonathan – wow, didn’t realize you could do THAT with ETF’s! Thanks for the info!

  26. Well, we can’t, but they can… it’s part of the reason why ETFs always have very little capital gains distributions compared to mutual funds.

  27. Hi,
    I am new to investing and after some deliberation bought S&P500 ETF (IVV) and Extended market VIPER (VXF)on Etrade on May 8 this year. Today they are down 6%!! Is that normal? This is part of my retirement plan and to be held for 15-20 years.
    Thanks for all the information. It was interesting reading about everyone’s experiences.

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