There’s been a lot of information on the pros and cons or similarities and differences between exchange traded funds (ETFs) and mutual funds recently. It’s such an important topic that there can never be too much information about it. Consumer Reports has an excellent article on this in its September 2007 issue:

ETF Pros

  • ETFs are typically cheaper than mutual funds because they cost less to operate. Mutual funds have a fund manager involved that must be paid; most ETFs passively track indexes.
  • ETFs tend to be more tax-efficient than mutual funds. Mutual funds make capital gain distributions at the end of the year that can give investors unpleasant, unexpected tax obligations.

ETF Cons

  • ETFs must be bought through a broker, and broker fees must be paid.
  • If investors invest or withdraw small amounts of money regularly, it can detract from their returns.
  • Some mutual funds are cheaper than ETFs. For example, the Fidelity Spartan International Index (FSIIX) has an expense ration of 0.1%. The iShares EAFE Index (EFA) has an expense ration of .35%.

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.