ETF Vs. Mutual Funds



So it is very important to understand the investment vehicle before you trade it. Multiple holdings, by buying many bonds and stocks (which you can do through a single ETF or mutual fund) instead of only 1 or a few. When it comes to tax efficiency, ETFs and index mutual funds are virtually on equal footing, as both provide distinct advantages over actively managed funds.

Generally, ETFs have lower fees and higher daily liquidity compared to mutual fund shares. Mutual funds and exchange-traded funds are sold only by prospectus. With an actively managed mutual fund, a fund manager makes choices about how to allocate fund assets as opposed to assets being purchased simply to track an index.

That's also when mutual fund prices - net asset value, or NAV - are set. The first and most popular ETFs track stocks. Time-intensive, as investors must research and follow each individual stock in their portfolio. In fact, BlackRock projects that smart beta ETFs will grow at a 20% annual pace to $1 trillion in assets under management by 2020.

Most Mutual Funds have a minimum expense specified. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds that track the same indexes. ETFs are index funds, but they're index funds with a twist: They're traded throughout the day like stocks, with their prices based on supply and demand.

As a result, ETFs usually feature lower expenses than mutual funds, which can result in higher after-tax returns. ETFs offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.

Others look at taxes, reserving the ultra-tax-efficient ETFs for taxable accounts and using mutual funds in tax-deferred accounts. Once you're set there, feel free to dedicate 5% or 10% of mutual fund fees your portfolio to stock trading for a little thrill. Investing in ETFs means taking on that duty or outsourcing it to a financial advisor or robo-advisor.

By contrast, you can only buy or sell index funds once per day, after the close of trading. While the absence of a load fee is advantageous, investors should beware of brokerage fees, which can become a significant issue if an investor deposits small amounts of capital on a regular basis into an ETF.

That said, according to Morningstar, the average ETF expense ratio in 2016 was 0.23%, compared with the average expense ratio of 0.73% for index mutual funds and 1.45% for actively managed mutual funds. ETFs are more tax efficient than mutual funds because of the way they are created and redeemed.

Exchange Traded Funds track an index, i.e., it tries to match the price movements and returns indicated in an index by assembling a portfolio which is similar to the index constituents. From the perspective of ordinary investors, one of the biggest differences between mutual funds and ETFs is how they are purchased.

General Illiquidity: While exchange-trading sounds great, not all ETFs are as tradable as you think. The stop price triggers the order; then the limit price lets you dictate exactly how high is too high (when buying shares) or how low is too low (when selling shares).

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