Expert: Gina Boykin - 10/7/2007

Question
Hello!

I am 32 and have began to invest for retirement.

I have a couple questions if you don’t mind:

1)   I plan to start an 403B and an IRA. I have some investments in mind (eg: Int value funds, U.S. Value funds, S&P 500 index funds etc).

Now my question is to fit these investments I have in mind, should I choose Mutual funds or ETF’s?

2)   I noticed that when I go to buy a mutual fund through a broker, I am charged a transaction fee (say $20). I heard that if I buy that same mutual funds directly through the company that offers it I pay no transaction fee. For example, if I want to buy a Vanguard Large Cap Mutual Funds from Scottrade I would pay say $20 in fees. But If I bought that fund directly from Vanguard there would no fee.

So if this is the case, then why do people buy mutual funds through a broker vs directly from the company.

Thank you


Answer
You are correct!  It is better to buy a mutual fund directly from the company that manages the fund.  There are some mutual funds, though, that have fees even with the fund manager.  These are loaded funds. Stay away if you can!

Vanguard, Fidelity, etc. have minimum investments that are required.  If Scottrade allows you to invest with a lesser amount, it becomes attractive to someone who cannot afford to invest with the minimum required.  Others may pay the transaction fee due to simple ignorance.

ETF's and index funds are similar. ETF's have an actual price (just like a stock), so you can trade them throughout the day.  However, they also have commissions - just like a stock.

Index funds are priced based on the NAV, which is determined every day at the closing bell. So if you place a trade, it will not post until the end of the day.  However, they have no commissions (unless you do the transaction fee like you mentioned above).

Here is the rule of thumb on ETF's and index funds.  ETF's have lower management fees than an index fund, so they are better if you plan to invest a lump sum.  Index funds have no commissions. If you plan to do dollar-cost-investing (invest each month/quarter/week), it will be more cost effective to have an index fund.

Since you will be investing through your 403(b), I assume you will be investing each pay-period.  Therefore, the index funds (or other mutual funds) may be a better choice.  If you still desire the ETF, you could make a one-time transfer each year to the ETF from your mutual funds.