Comments on: ETFs VS Index Mutual Funds: The Ultimate Battle!

By: Customers Revenge

Customers Revenge — Fri, 08 Apr 2011 15:08:25 +0000

Someone explain how ETFs reflect value? They are traded on the market. Therefore the value is the last bid. There is no true link between the market value of an ETF and the market or “true” value of the underlying stocks. There might be arbitrage opportunities because of that.

I know how mutual funds work. It is not a Ponzi scheme, it is just managed money. ETFs do not seem to me to be the same thing because the valuation of a mutual fund is just the market value of the holdings divided by the number of units. How to ETF valuations tie to the holdings?

Also, stocks without dividends are worthless to the average retail investor. You just hope they appreciate. The company is worth something, but the buyer has no control and no prospect of cash. Eventually the company must pay dividends to be worth something, so the valuation is the hope of dividends in the future.

By: Idiot Stock Investor

Idiot Stock Investor — Fri, 08 Apr 2011 02:46:51 +0000

IS and others are right, many ETFs do pay dividends.
Mutual Funds lost more people more money in the last crash AFAIK. IMHO Mutual Funds were created to steal from people like CR, they make a lot of commissions for a lot of people which is why bank/finance people keep pushing them.

I am not in this industry (Finance) at all but I would not recommend Mutual Funds.
ETFs are far superior to Mutual Funds and they leave you more options and control than Mutual Funds.

The way CR describes Mutual Funds sounds like some kind of Ponzi scheme (not to say anything bad about CR) but to me this illustrates some of the dangers of Mutual Funds.

ETFs are traded like normal stocks because they are basically a portion of stock holdings the ETF holds. This means you can always monitor their status and guarantee you won’t have a loss after you have a gain (use Stop Limit orders to virtually make it impossible to lose, Mutual Funds can’t ever do that for you). You could wake up one month and find all of your money has been lost which is what has happened with many who invested into Mutual Funds especially during October 2008.

You get paid out by some with quarterly or even monthly (REIT ETFs) dividends, and you to really cash out, sell your ETF after the stock has appreciated well enough.

I think ETFs are more transparent and far more beneficial for all people (but use the real stock when you can afford it, the dividends from actual blue chip stocks are far higher).

By: IS

IS — Sun, 03 Jan 2010 22:58:26 +0000

Hey Customers Revenge,

First off, many ETF’s do pay dividends. You can usually find ETF’s that pay dividends or ones that automatically re-invest them (depending on your tax situation, you will prefer one or the other).

But if we take the case of an ETF that does not pay dividends… Actually, value of a stock is the PV of cash flows

That would also be equal to: PV of dividends + Current Value

It is similar to buying a stock of Google which does not pay dividends and probably will not for many many years. Is the stock worthless? No. But you do need to use a different way to value it.

For example, you could value it according to earnings, instead of dividends.

By: Customers Revenge

Customers Revenge — Sun, 03 Jan 2010 22:50:26 +0000

Hey FP, thanks for the response of: “you won’t get the dividend from the stocks representing the index. But since the company issuing the ETF’s actually buy the stocks, the value of the ETF will increase according to the market. This is why you are able to sell it at a higher price if the market goes up.” but that is the source of my confusion.

If ETFs NEVER pay out a dividend then why are they worth anything? We both probably learned from MBA finance that the value of a stock is just the PV of the expected dividends … of which ETFs apparently have none???

By: daddy paul

daddy paul — Sun, 03 Jan 2010 01:10:49 +0000

“Several investors see the ETF’s endless trading options as a great advantage. However, if you are not an experienced advisor, you might concentrate and take high risks for nothing. Based on the stats that 7 professional portfolio managers out of 10 don’t beat their reference market, how, as a simple investor, you would be able to select the right sectors and beat the market?”
I could not say it better

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By: The Financial Blogger

The Financial Blogger — Sat, 17 Oct 2009 18:07:32 +0000

CR,
you won’t get the dividend from the stocks representing the index. But since the company issuing the ETF’s actually buy the stocks, the value of the ETF will increase according to the market. This is why you are able to sell it at a higher price if the market goes up.

I hope this helps!