4 Signs It’s Time to Switch to ETFs

Are mutual funds becoming antiquated? Some investors are beginning to think so and they are considering more contemporary options like exchange traded funds (ETFs).

Mutual funds are falling short when compared to ETFs in the areas of taxes, performance and expense, reports Charles J. Farrell for InvestmentNews. So how are ETFs more appealing?

• You Want Bargains. ETFs provide investors with lower investment costs of at least 0.5% to 0.75% in comparison to mutual funds. By tracking established market indexes, ETF turnovers are generally lower, so the annual distributions would be small and there would be no legacy tax costs, which means higher net returns.

• You Want to Know What You Own. In times of economic uncertainty, traders are looking for qualities such as transparency and low tracking errors that broad-market ETFs provide. This also help advisers know which investment tool is right for a portfolio.

• You Dread Tax Time More Than Usual. Substantial trading due in part to mutual fund turnovers, which many exceed 100% of their portfolios each year, increases capital gains distributions that eat away returns. On top of turnover costs, investors can also be hit by legacy costs, or incur taxes on gains that a person never received after suddenly jumping into a managed fund.

• You Want Something Better. It is calculated that around 68% of actively managed, large-cap mutual funds performed worse than the S&P 500 last year. In addition, many distinguished funds with praiseworthy records fell apart in the second half.

To be fair, note that investors should look at the cost, because not all ETFs are cheaper than all mutual funds. Do a quick comparison to see if this is the case with a fund you’re considering purchasing.