If I want to buy a $10K interest the Vanguard 500 portfolio, I could pay exactly $10K for VFIAX. Or I could pay a bit more for VOO shares representing the same $10K interest in the portfolio because of the added cost of the spread. I'd prefer not to pay more than $10K for $10K worth of securities.
Regardless of how large or small that added cost is, it is a drawback inherent in the ETF design. Though perhaps it is one that you may not personally care about.
Regarding the size of that spread, Ted's 1 basis point spread is more the exception than the rule. For example, CAPE has a typical spread of
15 basis points. Here's Vanguard's
table of spreads on its ETF share class.
With SPY and VFINX Ted is comparing oranges and tangerines (close but still different). The question was what downsides there were to ETFs, not whether ETF 1 was better or worse than OEF 2.
The only way I know to do an apples to apples comparison using concrete funds rather than discussing different attributes of ETFs and OEF is to compare ETF and OEF shares of the
same underlying portfolio. Say VFIAX vs. VOO. Since these are shares of the same portfolio, and since they have the same ER, the only factors affecting performance should be due to the nature of the shares and not of the particular fund.
Here's the
M* comparison over the past ten
years.
As of April 18, 2017, VFIAX'sVOO's cumulative return was 97.23%, while VOO's was 96.59%. That doesn't include dinging VOO for the cost of the spread.
If you add SPY to the M* comparison chart, you'll find its performance was even worse, at 95.66%. But that's because of the design of the fund (
cash drag due to UIT structure plus higher ER). Those additional variables
confound the data.
A tip for the linkster - to link to a M* page comparing funds, one needs to link to the chart page (there's a "share this chart" link there). The only fund that shows up when one links to a M* performance page is the original fund; the compared funds don't get passed through the link.
