In this course
1 Introduction
2 What Are Exchange-Traded Funds?
3 How Do ETFs Work?
4 The Pros of ETFs
5 The Cons of ETFs
6 Are ETFs for You?
7 Do ETFs Perform Better?
8 Conclusion
Quiz
Course Catalog
Course 403: Exchange-Traded Funds

Do ETFs Perform Better?

This is the ultimate question, isn't it?

Theoretically, ETFs should perform better than similar funds. Because investors do not buy or sell shares directly from the ETF, ETFs shouldn't suffer from having to keep cash on hand to meet redemptions, or from being forced to sell stocks into a declining market for the same purpose.

That said, not all index funds and ETFs are created equal. Barclays' iShares haven't been around long enough to draw meaningful comparisons with index mutual funds, but Vanguard 500 Index has soundly beaten Barclays' S&P 500 index mutual-fund offering over the years. The iShares S&P 500 offering could fare better--after all, it won't have to cope with cash inflows and outflows. Nevertheless, it tries to exactly replicate the index, while the Vanguard offering uses futures to boost its returns. If it persists, Vanguard's superior performance could easily outstrip the iShares' expense advantage over time.

Next: Conclusion >>
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