Which is better, a mutual fund or an ETF? What are the pros and cons of each?

Answer 1

Mutual Fund
Some or most mutual funds do not allow you to enter or exit except after the close of the trading day.

In mutual funds, unless you give the orders, it is always "in" the market. Some are limited to how many times you may trade in and out.

You have no idea whom is managing your money, and have no guarantee from past performance.

A mutual fund will rarely outperform, or match the performance of the S&P or Dow because of their fees.


ETF's
It will take you hours of searching to find a mutual fund cheaper than investing in ETF's. An ETF has no loads or fees except for the commission, like any stock. In general, ETF's are much cheaper to trade.

An ETF will exactly match the index it is tied to, minus commission cost, which is negligible.

You can short the market with an ETF (betting on the market going down), which you cannot do with a mutual fund.

There is no "short-selling rule" like there is with stocks.

I can't imagine why anyone would pay someone you don't know to keep you in the market at all times, when you can do the same thing yourself a lot cheaper, and get out when the markets get risky, like at failures at old all-time highs, like now.

The best way to do anything yourself is to learn something about it first. You'd be surprised at the thousands of books available on this one subject at your local library.

But most people spend more time deciding the color of their new car, than they do on a mutual fund advisor, for example.

Are you really wanting to do this yourself, or are you asking about someone who is an expert who can do it for you?

If you invest in the stock market right now, or just buy into all the ETF's you can afford, it's a crap shoot, like rolling the dice, and the odds are probably not in your favor, whether you have an expert fund manager or not, because mutual funds are always "in" the market.

They say "Buy and Hold" for the long term is better, but that depends on when you get in, and what your definiton of "long term" is. The phrase "Buy low and sell high" infers that you buy after a decline; decidedly not the case here.

The Dow has approached all-time highs last seen in Jan 2000 and failed, so if your long-term definition is more than seven years, then you won't mind waiting another seven years for a profit.

In my opinion, the name of the game is capital preservation. When the risks are high, like right now, you get out of the stock and bond markets and park your cash in a interest bearing money market fund or CD or Treasury Bill.

This is simply not a good entry point for investors. Be patient, wait a few months, and you'll be able to buy much more stock a lot cheaper, the risks will be lower (even though they will seem higher), and your chance of success greater.

If you wish to research the “Buy and Hold Strategy” further, or perhaps trade yourself, I recommend two book titles. One is called "Which Is Better, Buy-and-Hold or Market Timing?" The other is "Do You Have What It Takes to Be a Market Timer?" They will give you plenty to think about.

Answer 2

There is no right or wrong, or better or worse. Choosing a mutual fund you look for a manager who has consistently outperformed the index.
An ETF is the index. The advantage/disadvantage is that it is traded as any other stock and you buy it at a given point in time and pay a commission.
You may also buy a mutual fund of the index. If you buy one with low expense, no front or back load you may do better than the cost of buying an ETF. The mutual fund is bought at the net asset value of the index at the close of business that day.
You are, therefor, not subject to the spread inherent in buying the ETF.

Answer 3

It is more of a question of which is appropriate instead of better.

The choice more depends on liquidity/concentration/ and fees. Mutual funds do not trade in the active market, trades are settled at the end of the day not in real time like an ETF, these securities have daily liquidity and trade actively all day.

MF's have more hidden costs that ETF's and are harder to peg. They include turnover trading fees, 12b5-1 fees, annual management fees, a possible load on the transaction and depending if you are in a managed program a wrap fee. ETF's trade like stocks and are charged a commission to buy/sell and have much lower expense ratios for the most part than mutual funds.

ETF's have transparency in all the securities that they hold so you can see what securities you hold at all times, they also typically have a larger concentration in fewer securities. Mutual Funds typically hold more positions than an ETF and it is next to impossible to consistently follow what is being held in the fund at all times.

ETF's are newer and there are fewer of them out there compared to mutual funds, in addition to having less assets under management...this will not be the case forever though, ETF's are growing at a breakneck speed.

When making a decision between the two on which is more appropriate for your needs, it will depend on your current asset allocation and you level of net worth. Mutual Funds have breakpoints as you increase your position in them for fees, ETF's do not. On the other hand though ETF's have a better trading strategy associated with them that helps them to avoid taxable events while moving securities in and out of the fund, this is not the case with mutual funds.

A lot to think about, hope it helps

Answer 4

All the above answers are valid, except they all left out ONE KEY POINT.

If you're not into day trading or short term trading ( which I don't think you're into since you're talking MF )....ETFs are BETTER than MUTUAL FUNDs in one key aspect.

With ETFs you have control when you sell it - You don't need to ever sell it. BUT, this is not the case with Mutual Funds -

Because, by law, the Fund Manager's are required to distribute the earnings at the end of every year - thus generating CAPITAL GAINS and hence CAPITAL GAINS TAX for you. - whether you wanted it or not.

This is not so with ETFs.

You may want to consider this too, along with other answers when choosing between MF and ETF

Answer 5

ETFs are better simply because you can get in and get out at intraday price. With mutual funds you can not take advanatage of intrada changes, you will buy and sell at day close value.

Answer 6

Mutual Fund.

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