We’ve reached the final post in our mini-series comparing ETFs and index funds, so it’s appropriate to consider which tracker makes ongoing maintenance such as dividend reinvestment in your portfolio less painful.
And it’s fair to say that index funds win out over ETFs when it comes to important investor duties like rebalancing and reinvesting.
Both tasks are easier to perform with index funds than with ETFs.
Trading ETFs in small amounts to rebalance your portfolio comes a cropper due to the high dealing fee factor for ETFs.
Index funds that don’t attract dealing fees neatly sidestep any such worries.
Dividend reinvestment made easy
There’s more! Most index funds are available in accumulation and income varieties. Accumulation units automatically reinvest your dividends back into the fund, whereas income units hand them over to you.
Far fewer ETFs are available in dividend reinvestment flavour 1. As a result, you will incur costs on reinvesting the dividends from your ETFs.
What’s more, if your dividends are paid out as cash then you must also confront the demon temptation of not reinvesting your dividends at all, but instead spending them on having a good time!
You decide what matters most for you
This table below shows the results of our ETF versus index fund face-off. Click the links to read any articles you missed:
| ETFs | Index funds | |
| Simplicity | Winner | |
| Costs | Winner | |
| Tracking error | Draw | Draw |
| Choice | Winner | |
| Control | Winner | |
| Reinvestment | Winner |
Only you can know how important each of these factors is in your decision to choose between index funds or ETFs – or indeed to choose a mix of fund types.
I’d suggest you pick what works for you. The differences between the two tracker types are in some cases fairly technical but, on a personal level, I find index funds to be much more straightforward.
Plus I draw a good deal of comfort from their long, scandal-free track record!
Take it steady,
The Accumulator
- Reinvesting ETFs are termed as capitalising in ETF circles[↩]
3 Comments
Very informative series of articles. Having a core of index funds with additional ETFs to diversify the limited selection of index funds currently available to UK investors, seems like a sensible strategy.
My personal favourite is keeping it simple. Following the passive investor’s dictum of not looking at your investments too often, you won’t come to rebalance each year and wonder “what’s going on here?…”
Have a look at this Motley Fool article on income investing.
http://www.fool.co.uk/news/investing/2011/11/18/11-years-of-income-investing.aspx?source=uoofolrf0010002#comment3
It contained the nugget:
“HYP1’s [the reference dividend portfolio] capital value has risen to £114,218 — an increase of 52% on the original £75,000 purchase cost.
By contrast, over the same period the FTSE 100 has declined 12% from 6,275 to 5,545.
@MoneyMan — Not knocking that article as that author has been very candid about his portfolios aims and aspirations over the years, but it’s worth stating a vast amount of that gain is down to just two shares!
Ignorance really would be bliss if you were the owner of that portfolio (which was his stated ideal — it was a setup and forget job for grannies)
Not sure of the relevance to this post, anyway? 🙂