Mutual funds can be purchased without trading commissions, but in addition to operating expenses they may carry other fees (for example, sales loads or early redemption fees.
ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.
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Mutual Funds
A sale of securities within a mutual fund may trigger capital gains for shareholders—even for those who may have an unrealized loss on the overall mutual fund investment.
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How to choose ETFs vs. Mutual Funds
ETF or mutual fund? Which is right for you?
That all depends on your goals and the type of investor you are.
Consider an ETF, if:
You trade actively
Intraday trades, stop orders, limit orders, options, and short selling—all are possible with ETFs, but not with mutual funds.
You're tax sensitive
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds.
And, in general, ETFs tend to be more tax efficient than index mutual funds.
Consider an index mutual fund, if:
You invest frequently
If you make regular deposits—for example, you use dollar-cost averaging—a no-load index mutual fund can be a cost-effective option, and it allows you to fully invest the same dollar amount each time (since mutual funds can be purchased in fractional shares).
Similar ETFs are thinly traded
When you buy or sell ETF shares, the price may be less than the net asset value (or, NAV) of the ETF. This discrepancy (aka: the "bid/ask spread") is often nominal, but for less actively traded ETFs, that might not always be the case.
By contrast, mutual funds always trade at NAV, without any bid/ask spreads.
Consider an actively managed mutual fund, if:
You're looking for a fund that could potentially beat the market
People invest in actively managed mutual funds in hopes they'll surpass their benchmarks.
Also, actively managed funds acquired as part of a specific strategy may complement index funds in a portfolio, and help to reduce downside risk and mitigate market volatility.
Some markets are "highly efficient"—which means they’re so popular, there isn't much opportunity to add any real value via active portfolio management.
But in less efficient markets–like high-yield bondsoremerging markets–there may be greater opportunities through active portfolio management.
ETFs and mutual funds, at a glance:
ETFs and mutual funds, at a glance:
ETFs and mutual funds at a glance
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Passive ETFs
Passive ETFs
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Active ETFs
Active ETFs
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Index Mutual Funds Tooltip
Index Mutual Funds Tooltip
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Actively Managed Mutual Funds Tooltip
Actively Managed Mutual Funds Tooltip
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Expense Ratio (OER) Tooltip
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Passive ETFs
Generally lower than actively managed mutual funds.
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Active ETFs
Generally higher than passive ETFs; on par with a mutual fund’s institutional share class.
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Index Mutual Funds Tooltip
Generally lower than actively managed mutual funds.
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Actively Managed Mutual Funds Tooltip
Generally higher than passively managed, index-tracking funds
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Performance
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Passive ETFs
Performance generally seeks to track a benchmark index
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Active ETFs
Performance seeks to outperform a benchmark index.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000, or MSCI EAFE (hence the name). Because there's no original strategy, not much active management is required and so index funds have a lower cost structure than typical mutual funds.
The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.
Unlike ETFs, mutual funds can be purchased in fractional shares or fixed dollar amounts. ETFs typically have lower expense ratios than mutual funds because they offer minimal shareholder services. Though mutual funds may be slightly more costly, fund managers provide support services.
Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
There are 2 basic types of dividends issued to investors of ETFs: qualified and non-qualified dividends. If you own shares of an exchange-traded fund (ETF), you may receive distributions in the form of dividends. These may be paid monthly or at some other interval, depending on the ETF.
For some, switching to ETFs makes sense because the expenses associated with mutual funds can consume a portion of profits. Also, if you prefer an investment that will grow in value over time without increasing your tax liability each year through capital gains distributions, ETFs can be beneficial.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.
ETFs expense ratios generally are lower than mutual funds, particularly when compared to actively managed mutual funds that invest a good deal in research to find the best investments.
ETFs are bought and sold on an exchange throughout the day while mutual funds can be bought or sold only once a day at the latest closing price. Many online brokers offer commission-free ETFs regardless of the size of the account. Some mutual funds require a minimum initial investment.
ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.
Introduction: My name is Nathanael Baumbach, I am a fantastic, nice, victorious, brave, healthy, cute, glorious person who loves writing and wants to share my knowledge and understanding with you.
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