Exchange traded funds (ETFs) have grown exponentionally in both assets and number over the past few years because of their usefulness for investors who trade frequently.
Not only do active traders benefit from ETFs, but buy and hold investors do, too, through the cost advantage of using ETFs over mutual funds.
Most actively managed stock mutual funds charge around 1% for fund expenses, as compared to about 0.25% in annual expenses for many ETFs. Many advocates of mutual funds say that this cost discrepancy is made up by switching to index mutual funds, however, investors may be able to save even more by switching to index ETFs, states Motley Fool Champion Funds.
The low-cost investment provider Vanguard offers several index ETFs which contain the same stocks as their corresponding index mutual funds at a significantly lower annual expense. For example, the Vanguard Mid-Cap Value ETF (VOE) charges annual expenses of 0.13% as compared to the 0.24% charged by the Vanguard Mid-Cap Value Index (VMVIX).
Investors must also be mindful of extra charges that ETFs bear, such as brokerage fees every time new ETF shares are purchased and the difficulty and costliness of reinvesting dividends distributions, which are much easier to reinvest with mutual funds.
Overall, ETFs are a great way to reduce investing expenses and definitely should be considered to leave an investor with more money in his portfolio. Expenses have a way of eroding returns over time, so the lower, the better.