Why an ETF is Better than Mutual Funds
There is a long-standing debate about which is better – ETF or mutual funds. They are similar in concept. Both of them do pool fund investing, which allows portfolio diversification with no need to manage single assets. But the similarity ends there. ETFs have been trending since 1993. Up to recent years, most investors prefer these, and with good reason.
There are several advantages of getting exchange-traded over mutual funds. If you are mulling over which one to get, read on.
Passive Management
Mutual funds need a professional fund manager to decide which stocks should be bought or sold for the betterment of the portfolio. Since it is “actively managed,” the investor pays for the services of the manager and results in additional expenses.
An exchange-traded fund or ETF is the exact opposite. It is “passively managed,” which translates to a lower cost of passive index funds. There is no need for a fund manager.
Trading Time
Traditional mutual funds are traded and priced at the end of a trading day. So whether you sell a stock in the morning, you wait just before night time to know how much you were able to sell it for. That also goes for buying stock – you have no way of knowing how much you bought it for until that very last minute of the trading day.
Also, brokerages do not charge commissions for trading an exchange-traded fund, which makes ETF a favourite among investors.
Expenses
Holding a fund is costly. Investors annually pay the right amount to own a fund. But ETFs are somewhat inexpensive, especially when it comes to annual fees. Expense ratios – an indicator of how much an investor should pay each year – are usually low. Mutual funds, on the other hand, have a higher expense ratio.
Tax Efficiency
If sold, securities that have appreciated can create a capital gain tax. Because ETFs are index funds, it accumulates fewer charges as compared to a mutual fund, which is “actively managed.” Just like selling stocks, it is easy to sell an ETF. In mutual funds, you need to sell securities as a fund-raising activity to meet redemption. That is not the case with ETF. In essence, if there is no sale, then no capital gain tax is raised.
Transparency
Mutual fund managers need to disclose the portfolios of their clients quarterly. But for the rest of that quarter, the investors have no clue if there was proper fund allocation. Was it appropriately invested, or did the manager take unwarranted risks?
On the other hand, ETF reports are on public display every day, at any time. There is a high level of exposure for all information, which makes it easier to track the full holdings of the index and your portfolio. And even some ETFs that are “actively managed” must release their complete portfolios daily.
Are you thinking about becoming an investor or stockholder? Then get ready with your budget. Remember that all investment comes with a cost. But an exchange-traded fund is an affordable option that gives the investor a diversified portfolio with excellent market exposure. If you feel there is a need for professional assistance, look for a brokerage firm or an ETF company that can help you achieve your investing and financial goals.