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I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

Comparing ending balances of two index funds with different fee structures http://assets.basicallymoney.com/questions/955/ComparingTwoFundFees.png

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx

I ran your assumptions through a similar spreadsheet I put together. Here's a chart:

The assumptions I used were:

• Fund 1, a mutual fund, having 1.00% MER and no commission to buy.
• Fund 2, an ETF, having 0.17% MER and $5.00 flat commission to buy.
• 12 purchases per year, each of $1000 gross (i.e. $995 net purchase in the ETF case.)
• A gross rate of return of 7.00% per year. Returns net of fees were therefore 6.00% for the mutual fund and 6.83% for the ETF.
• Ignoring taxes; i.e. assuming both are in sheltered accounts.

After 30 years, the mutual fund balance was $977,159 and the ETF balance was $1,131,304. i.e. +15.8% in favor of the ETF. However, I really wanted to stress the ETF results, so I also ran a few alternate scenarios to see how it would hold up if the purchase frequency were increased, or commissions increased:

• Increase to 120 purchases @ $100, and the ETF still wins: $1,080,140 vs. $977,159. +10.5%
• Increase commission to $30.00, and the ETF still wins: $1,102,879 vs. $977,159. +12.9%
• Increasing commission to $120.00 (anybody use a full service broker?), and the ETF still wins: $1,000,550 vs. $977,159. +2.4%. Note: The mutual fund had the lead until year 26, at which point the ETF moved ahead.

If I had to conclude anything from the above, I'd say it's very hard for a mutual fund to beat an ETF, even with a relatively high purchase frequency or a relatively high commission on the ETF. Rather, fund expenses eat substantially into returns. Minimizing the purchase frequency or purchase commission isn't necessary to make a good case for ETFs over mutual funds.

There's also a case to be made against minimizing the purchase frequency too much: You're losing out on some dollar-cost-averaging benefits. Consider that monthly purchases average you in at more prices throughout the year (12) than semi-annual purchases (2).

UPDATE: My sample Excel 2007 spreadsheet is here: ComparingTwoFundFees.xlsx