Which Is A Better Investment: ETFs Or Mutual Funds?
When someone tells you they invest in the markets, your mind generally jumps to one type of security – stocks. However, there are a lot of different types of financial products when it comes to saving and investing your hard earned money.
You can invest in mutual funds, ETFs, bonds and options among others but today we are going to go over what ETFs and mutual funds are so you can make a better decision on which one fits your personal investment objectives.
How ETFs and Mutual Funds Are Structured
Mutual funds refer to a type of security where investors pool funds which in turn are invested in stocks, bonds and other investment vehicles depending on the fund and its investment objective. The funds are managed by money managers who have the mandate of investing the funds and collecting capital gains.
There are two main types of mutual funds including an open-ended fund and a closed-end fund. Open-ended funds have an unlimited amount of shares that can be issued and are bought and sold directly with the fund company and are much more popular than close-end funds. The funds value is based on the whats called the net asset value (NAV), which is calculated at the end of each day and is based on the market prices of the investments within the fund.
Closed-end funds have a limited amount of shares available and have characteristics more like an ETF or stock where they launch an IPO to raise capital and trade on the open market. The value of the fund is based on the supply and demand of the fund rather than the NAV like an open-ended fund.
Exchange Traded Funds (ETF) are like mutual funds where they invest their capital in certain sectors/industries or even track indexes, but are traded like stocks and are easier to get in and out of the investment. They also usually incur smaller fees than mutual funds and have grown in popularity in recent years because of their flexibility.
One of the biggest considerations for investing in either ETFs or mutual funds are the expenses. Mutual funds are actively managed portfolios and on average incur much higher fees for running the fund. There are three different types of expenses for mutual funds that you need to know about.
There’s what is called a front-end load where the investor pays a commission or fee upfront for purchasing the mutual fund or there are funds that have what’s called a back-end load where you will be charged a fee when you sell the shares. There are also funds that don’t have any fees and these are called no-load funds. Whichever one the fund has, you should know before purchasing so there won’t be any surprises later on.
ETFs generally have much lower expenses than mutual funds but what’s even more appealing is they can be more tax efficient. “ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the ultimate tax bill – after the ETF is sold and capital gains tax is incurred – is less than what the investor would have paid with a similarly structured mutual fund.” – Fidelity
Which One To Invest In?
Both mutual funds and ETFs are great investment vehicles with the potential of providing excellent returns. When it comes to selecting the best between mutual funds and ETFs, it really depends with the investor’s goals and risk profile. Both can diversify your portfolio so you aren’t too focused in any one area which helps minimize risk.
Personally I like the tax advantages and liquidity offered by ETFs but my financial objectives may be different than yours.
There are a ton of different types of ETFs and Mutual Funds that will surely meet your financial objectives so make sure to do your due diligence before investing your hard earned capital!
Have any questions? Let us know in the comments below!