When you’re planning for retirement and looking to diversify your investments, you’re typically choosing between two main options: ETFs (Exchange Traded Funds) and mutual funds.
Recently, while transferring my old 401(k) to an IRA with Vanguard, I faced a significant decision. I could go with their familiar low-cost mutual funds or opt for commission-free ETFs. With six figures in retirement savings, this choice was critical. Picking the right funds could save me a lot in future expenses and avoid problems when it’s time to make withdrawals.
Having invested in mutual funds for over a decade, I was curious about ETFs. They seem to be the hot topic in financial magazines and early retirement forums. But ultimately, I decided to stick with mutual funds, and here’s why.
Firstly, mutual funds have a long history. They’ve been around for nearly 100 years, with some Vanguard funds dating back to the Great Depression. This extensive history provides a wealth of data, which is important for a long-term investor like me. ETFs, on the other hand, are relatively new, with their market expected to grow significantly. However, it’s uncertain if they will stand the test of time like mutual funds have.
Secondly, there’s the issue of the bid-ask spread with ETFs, which is the difference between the selling and buying price. Even though ETFs have a net asset value (NAV), the actual price can be lower, depending on the market. This could mean selling at a discount, which is not a concern with mutual funds as they are traded once daily at their calculated value.
Lastly, expense ratios and commissions are worth considering. ETFs charge a commission with every trade, similar to stocks. Fortunately, my Vanguard account allows commission-free ETF trades due to my investment level. While ETFs often have lower expense ratios, mutual funds offered by Vanguard also have low expense ratios. In my case, this difference wouldn’t result in significant savings over time.
While ETFs are promising financial products due to their low costs and index-like structures, I prefer the reliability of mutual funds for my retirement savings. In the future, I might incorporate ETFs more into my portfolio, but for now, I’ll stick with what I know best: mutual funds.
