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This is somewhat of a follow up to my other question on ETFs vs Mutual funds for the long term investor, but appropriately a different question.

From the basic research I have done, it seems that ETFs are superior to no-load, low-fee, passively manage mutual index funds for the long term investor engaging in the buy and hold, dollar-cost-averaging strategy. Both of these types of investment vehicles track an index of funds which diversifies your money and seeks to obtain the average market growth. However, for ETFS:

  1. The expense ratio is lower.
  2. The tax advantages are better.
  3. There are no commission fees on ETFs as long as you purchase your broker's ETFs.

The logic behind this sounds solid to me, but I would like to see some long term empirical evidence to back up the proposition that the lower expense ratio and tax advantages of ETFs maximize your return as opposed to mutual index funds. Specifically, are there any studies that attempt to match index funds to ETFs which track identical indexes over some long period of time (10+ years, or even all the way to 1993 would be nice), as there are many studied which track no-load, low-fee, passively managed mutual index funds compared to loaded, high-fee, actively managed mutual index funds?

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  • efficientfrontier.com/ef/104/stupid.htm would seem to have the other way around as an answer but hey maybe more current data would change things though don't forget there is also the question of fractional shares in your computations here too.
    – JB King
    Jul 12, 2014 at 22:36

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Why don't you look at the actual funds and etfs in question rather than seeking a general conclusion about all pairs of funds and etfs? For example, Vanguard's total stock market index fund (VTSAX) and ETF (VTI). Comparing the two on yahoo finance I find no difference over the last 5 years visually. For a different pair of funds you may find something very slightly different.

In many cases the index fund and ETF will not have the same benchmark and fees so comparisons get a little more cloudy. I recall a while ago there was an article that was pointing out that at the time emerging market ETF's had higher fees than corresponding index funds. For this reason I think you should examine your question on a case-by-case basis. Index fund and ETF returns are all publicly available so you don't have to guess.

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  • Hey @farnsy, would you know how to compare a mutual fund and an ETF directly in the same chart? Or did you plug in one for the mutual fund on one window, and one for ETF on the other window?
    – Matthew Moisen
    Jul 16, 2014 at 20:31
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    Start at finance.yahoo.com. Search for VTSAX. Click the graph. Then right above the graph there is a link called "compare." Click that and enter VTI. It will add VTI to your VTSAX graph. Alternatively, you can download the historical price for each, put them in the same spreadsheet, compute the returns for each, and compare directly.
    – farnsy
    Jul 17, 2014 at 19:36

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