Is it better to invest in the S&P 500 or ETFs?

[ScrimpAndSave]

It is much cheaper to manage ETFs, right?


Sorry if this is in the wrong spot...

[jIM_Ohio]

Your question is incorrect.

You cannot directly invest the the S&P 500. You would need to buy all the stocks individually, own a mutual fund or purchase ETFs.

ETFs may have lower ERs than funds, but the ETFs probably cost you for EVERY transaction (buy/sell) where as most index funds would NOT have that expense.

[ScrimpAndSave]

Jim, thank you. I was assuming that this is part of a mutual fund.

[wincrasher]

Suze Orman is recommending ETFs these days as well as index funds. She says the fees are very low on ETFs and you buy them like stocks.

[MonkeyMama]

Can't you buy an ETF (or a mutual fund) that tracks the S&P 500? You can do both really. IT's not an "either or" question.

Question is probably should you buy a mutual fund or an ETF. I don't have an answer there.

[jIM_Ohio]

SnS- how often would you be purchasing the investment?
How often would you be selling?

[Skooby]

The ETF "SPY" tracks the S&P 500.

[Broken Arrow]

SnS- how often would you be purchasing the investment?
How often would you be selling?

Yes, that's what we really need to know.

S&S, there are both passive mutual funds and ETFs that are based on (but is not) the S&P500. So, what is ideal for you really depends on your investment style and strategy.

[meaghanchan]

It depends entirely on how often you invest. If you invest large amounts of money a couple times a year, it is better to invest in the SPY ETF. If you invest small amounts of money every other week, it is better to invest in an S&P 500 mutual fund.

Compare, for example, the Vanguard S&P 500 Mutual Fund (VFINX), with an expense ratio of 0.15, to its ETF equivalent, (not quite an S&P 500 fund, but pretty close), Vanguard Large-Cap ETF (VV), which has an expense ratio of 0.07.

On an investment of $10,000, you'll pay $15/year in expenses with the mutual fund, and $7/year with the ETF. Not really much savings to write home about, and one commission at $9.95 reduces the ETF's advantage to nothing.

Now, on an investment of $100,000, you'll pay $150 a year in expenses with the mutual fund, and only $70 a year with the ETF. But if you make 8 transactions a year at, say, $9.95 a transaction (depends what broker you use, that'll change your numbers somewhat), your expenses plus commissions on the ETF would add up to $150.

Once you start getting to $1,000,000 invested, obviously the ETF makes more sense. The difference in expenses is now $1500/year vs. $700/year. Even investing biweekly- never mind that at many brokerages you would get about 25 free trades a year- the ETF makes more sense.

On an investment of $100,000, if you make fewer than 8 transactions a year, obviously the ETF makes sense; more than 8 transactions a year and the mutual fund makes more sense. At smaller amounts of money the mutual fund makes more sense, and at larger amounts invested, the ETF makes more sense.

Now, this is in some ways a simplification, because ETFs and mutual funds have other differences. Many ETFs are designed to be more tax-efficient than their mutual fund counterparts; only time will tell whether this actually proves to be the case. Also, of course, ETFs can trade during the day. This may or may not be important to you. Also, this disregards the fact that with the larger sums of money in the mutual fund, you'd be eligible for what Vanguard calls 'admiral shares' (don't know if other companies have an equivalent). The expense ratio on admiral shares is only one to three basis points higher than on an ETF. The other advantage to mutual funds is that you can rebalance without paying commissions. On an ETF portfolio, to rebalance, you might have to pay for several trades, adding up to significant amounts of money, especially relative to a smaller portfolio.