Yes, we know we sound like a broken record, but we can’t say it enough: Exchange traded funds (ETFs) have several advantages compared to mutual funds. Here’s another quick overview highlighting similar valid points that Gary Gordon of ETF Expert makes:
ETFs are cheaper than mutual funds.
Because mutual funds are actively managed, the money manager has to do a lot of work juggling all the stocks to keep the fund at its peak. That translates into more money you have to pay him or her. ETFs, on the other hand, follow an index, which means they’re passively managed. The money manager has less work, which means you pay a lower fee.
ETFs outperform mutual funds.
The market tends to be efficient. This means that although the money manager gives his or her all to have the mutual fund yield a rock-star performance, in the long-run, an ETF that passively tracks an index should beat the mutual fund and do it with less risk.
You know what you’re paying with ETFs.
With ETFs, everything is handled out in the open. You know exactly how much they cost. You’re in control. With mutual funds, you’re left in the dark. The prices are set after trading hours, and you never know exactly the contents in your mutual fund basket.
ETFs are more tax efficient than mutual funds.
As previously noted, to keep the mutual fund at its best performance the money manager is working hard buying and selling stocks within it. At the end of the year when distributions are made, you still have to pay taxes even if you didn’t receive any personal gains. Because ETFs rarely change their holdings and track indexes, they rarely have distributions, which means less tax payments for you.
Transparency: You know what’s in your ETF.
Again, the beauty of ETFs is that what you see is what you get. You know exactly which stocks and how many are in your ETFs. At any time you can go to a financial website and look up your ETF’s performance, its holdings and the holdings’ weights. With mutual funds, you get quarterly reports of what’s in your fund, but by the time it reaches you, the holdings could be totally different.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.