ETFs vs. Mutual Funds - Which Is Better for You?
ETFs and mutual funds are two different types of investment products. But is one better than the other?
// TIMESTAMPS:
00:00 - Similarities
01:21 - Differences
03:42 - Which is Better?
// SUMMARY:
An ETF - or Exchange Traded Fund - is simply a fund that trades on an exchange like a stock. A popular example is VOO from Vanguard, which is an index fund that seeks to track the famous S&P 500 index. ETFs can also be actively managed, such as ARKK, or track a proprietary index, such as SWAN. The first ETF launched in 1993.
Mutual funds are a much older investment product than ETFs. The first mutual fund launched in 1924. Mutual funds and ETFs have a few very similar characteristics. They can both be actively managed or track some index, and they both hold individual securities inside them. As such, the term index fund can describe an ETF or a mutual fund.
Mutual funds tend to be actively managed. ETFs tend to passively track some index. Because of this average difference in management style, mutual funds on the whole tend to have greater fees, called the expense ratio, than ETFs.
ETFs can be bought and sold throughout the day during market hours, and their intraday prices can thus fluctuate based on supply and demand. As such, an ETF’s price can differ from its NAV, or net asset value. Mutual funds are bought and sold once per day after the market closes when their NAV is set. This greater flexibility and liquidity of ETFs may be valuable to the investor who wants more control.
Mutual funds typically have a minimum initial investment requirement of $1,000 or more. ETFs have no such requirement and can be bought for the price of a single share, or even fractional shares with some brokers. Consequently, ETFs are much more accessible to new, young investors.
The last major difference between ETFs and mutual funds relates to tax-efficiency. ETFs usually have lower turnover (less trading) and generate fewer capital gains for investors throughout the year compared to mutual funds. The unique ETF creation and redemption process also gives it a tax advantage over mutual funds.
Given the above considerations, ETFs are quickly replacing mutual funds, and ETFs are probably going to be the better choice for most investors due to their greater liquidity, tax advantages, and lower fees on average.
An important caveat to note is that you’ll only find mutual funds in an employer-sponsored plan (ESP) like a 401k, so you may not be able to avoid them even if you want to.
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#investing #mutualfunds #etfs
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Disclaimer: This is not financial advice, investing advice, or tax advice. The information presented is for informational, educational, and entertainment purposes only. Investment products discussed are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here: https://www.optimizedportfolio.com/te...
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