Despite their drawbacks, mutual funds do have a couple of benefits that ETFs can’t match. You can contribute to a mutual fund each month without paying a fee, and dividends or interest can be automatically reinvested, which helps your money snowball.
With an ETF, you pay your broker a commission every time you buy or sell. So if your discount brokerage charges $25 per trade, it makes no sense to buy ETFs every month, since the fees would eat you up. As for dividends and interest from ETFs, they get paid out in cash and just sit in your account.
Until now, that is. In February, Claymore Investments Inc. announced that all of its ETFs now include optional dividend reinvestment plans (DRIPs), whereby payouts are used to purchase additional shares instead of being paid in cash. They’ve also pioneered preauthorized cash contributions and systematic withdrawal plans, which allow investors to buy or sell regular amounts of their ETFs monthly, quarterly or annually without trading commissions. Visit www.claymoreinvestments.ca for details and a list of brokers that support these plans.
Another problem with ETFs is that building a balanced portfolio isn’t really cost-effective unless you have $10,000 or more to invest. If you’re starting out with less, have a look at Claymore’s CorePortfolios (CBD and CBN) and iShares’ Portfolio Builders (XCR and XGR). They bundle several ETFs into a single fund, providing instant diversification for a fraction of the cost.