What is better an ETF or a Mutual Fund?

Question

For example: A DIA ETF beats a Dow Jones Index Fund because they have less fees and are easily tradeable... Which is better in general a ETF or a Mutual fund? Thanks

Answer 1

Mutual funds are appropriate for some and the wrong investment for a growing number of people.

For me, I would NOT invest in mutual funds if it weren't for having a 401K.

Overall, Mutual funds are not good (once you're educated in investing) and many people should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).

Here's why.

First of all, mutual funds exist to take average person's money.

Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of the mutual funds out there can't even outperform the market (CNBC just reported the current # was 72%). That's VERY SAD!

Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually.

Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT "losing" you lots of money. That way you stay with them and they continue to collect their fees.

Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.

Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.

Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).

Convinced yet? Need more?

Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc. or right now, Brokers/Dealers, Retail, and insurance!

Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like Times Warner, Microsoft, home depot, cisco, ebay which have been sideways for years? I think not.

A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but with much less overhead!

See Amex.com (american stock exchange) or ishares.com, holders.com for more info.


You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many).

Let me know if you have further questions.

Best of luck!

Answer 2

you're badly fallacious in case you think of the Gold ETF "constantly strikes up and delivers a earnings." have you ever looked on the ETF image GLD contained in the previous 2 weeks? A gold ETF is only an investment that strikes up OR DOWN with the fee of gold. while you're evaluating GLD with a effective metals mutual fund, they're very diverse. GLD owns easily actual gold, the place premiere metals mutual money very own gold mining shares which will or would possibly no longer music the fee of gold precisely. An ETF and mutual fund are greater or much less the comparable element. An ETF is an replace Traded FUND - a mutual fund that's traded like a inventory. The tax implications are precisely the comparable as paying for and merchandising a inventory, there are short term and/or long term capital beneficial factors to be bothered approximately. i think of you may desire to achieve this plenty greater analyze till now you make investments.

Answer 3

That depends on the freqency of trading you plan to do and how much money you have to invest. For the majority of us, mutual funds are simpler to deal with at tax time, have the same growth (or loss) potential, and require less money to get started. You can buy a mutual fund with as little as $50/month direct debit to the brokerage you open the account with.

ETFs or Exchange Traded Funds act like stocks and their price fluctuates intraday. There are transaction fees each time you buy or sell an ETF so unless you have a lot of money $50k or more, and don't plan to trade frequently, then this may be a viable option. Otherwise, the transaction fees will erode your gains and it wouldn't be worth the hassle.

Answer 4

well for starters you cant trade directly in an index like DJIA. The diamonds ETF emulates it but too pricey for me.

I own both ETF and mutual. The ETF is subject to wilder swings and most ETFS have lower expenses than the comparable mutual. Despite the annoying transaction fees with the ETF (thus teh cheaper broker you find the better in most cases) I have made more money with ETFS than i can with mutuals.

Mutuals have been under the gun of Spitzer and company because of market timing. That is one advantage of ETF they trade like stock.

But it really depends on you how much risk are you willing to take?

Answer 5

I like etfs but - as there are brokerage commissions - that is an extra expense not found in a no load mf. ETF internal fees lower although Vanguard & Fidelity Spartan index funds about as low. Because managers do not have to deal with inflows/outflows with etf they should perform better.

Answer 6

I think it depends on your situation.

A ETF has more flexibility, lower fees and supposed tax advantages.

If you can find a good mutual fund manager, then probably your mutual fund would out-perform an ETF.

I currently have only mutual funds and no ETFs.

Answer 7

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Answer 8

Hi, I’m Tricia, Growth and Marketing Associate at Betterment.

First developed in the early 1990s, ETFs now account for more than $1.9 trillion in assets in the United States, and are in the process of finally surpassing index mutual funds.

What has been causing such rapid growth in ETFs? Here are some of the advantages that ETFs have over mutual funds:

Low cost
Most ETFs are index funds, aiming to deliver the performance of a stock, bond or commodity index, minus fees—no more, no less. These funds don’t have managers who are paid to “deliver alpha” or market-beating returns. Instead, ETF portfolio managers are quantitative disciplinarians with a laser-like focus on hugging the index. The cost of an ETF covers licensing the index from a data publisher, paying administrative fees (lawyers, trusts, exchanges) and compensating the managers, who tend to work on multiple ETFs at once. All of this is bundled together into what is known as the expense ratio.

In contrast, many mutual funds—particularly those that are actively managed—add costs through distribution agreements with brokerage platforms or financial advisors, and some are only available direct from the manager. With ETFs, the gatekeepers (and toll takers and middlemen) have been marginalized, allowing greater benefit to accrue to the end investor—you.

For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds. Consider the price difference between Vanguard’s Total Stock Market ETF (VTI) and equivalent mutual fund (VTSMX). They both follow the same CRSP U.S. Total Market Index, but there is a significant cost difference. VTI has an expense ratio of 0.05% and VTSMX has an expense ratio of 0.17%.

For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds.


Diversified
Most exchange-traded funds—and all ETFs used by Betterment—are considered a form of mutual fund under the Investment Company Act of 1940, which means they have explicit diversification requirements. They do not have any over-concentration in one company or sector, unless called out specifically in the fund offering prospectus. Diversification, both within a fund and throughout a portfolio, has been said to be the “only free lunch” in finance.


Tax-efficient
All mutual funds are required to distribute any capital gains to their investors at the end of the year, regardless of individual trading activity or the timing of a purchase—these are distinct from capital gains you would realize from selling the share of the fund itself. That means you could buy a new fund in December and receive a taxable distribution just a week or two later! But when it comes to tax efficiency, ETFs have two jewels in their crown.

First, most ETFs already have the tax efficiency of index funds—which don’t tend to generate internal capital gains due to churning (frequent buying/selling of stocks and bonds due to investor or manager movement).

Second, the two-tiered market by which shares of ETFs are transacted isolates investors from additional tax consequences and limits capital gains from accumulating within the fund.

When large investors or market makers, known as authorized participants, notice an imbalance between the price of the ETF and the aggregate of the prices of the underlying securities the ETF tracks (or they need to fill a large order of ETFs for a customer), they essentially swap the underlying stocks or bonds for shares of the ETF, or vice versa. This transfer in (or out) of the fund is known as “in-kind” and limits the tax consequences for the fund by allowing it to constantly raise its cost basis of individual securities by swapping out the securities with the largest built-in gains first (swaps as opposed to sales don’t realize the gains.) In the event that the fund needs to sell securities themselves, having a high basis would limit its tax liability. Non-ETF mutual funds don’t have this luxury.


Flexible
ETFs are the duct tape of the investing world.

They can be accessed by anyone with a brokerage account and just enough money to buy at least one share (and sometimes less—at Betterment we trade fractional shares, allowing our customers to diversify as little as $10 across a portfolio of 12 ETFs.) While most ETFs are straightforward in their exposure, they are used in so many ways, that they have become an essential tool for all kinds of investors—short-term traders and long-term investors alike. This versatility as an investment vehicle helps keep ETF pricing true to the price of the underlying assets held by the fund.


Sophisticated
ETFs take advantage of decades of technological advances in buying, selling and pricing securities. Alongside their modern structure sit myriad data points watched by investors and advisors who are constantly analyzing the funds and their investments to make sure that the fund prices stay true. They are looking at what they know about the portfolio, what is happening in the market, and how the ETF is trading throughout the day. The net effect: multiple market forces keep the ETF trading in-line with the underlying holdings.

I have been investing for a while and it’s one of the reasons why I joined Betterment.

I hope this helps!