When it comes to exchange traded funds (ETFs) versus mutual funds, the latter is getting their behind kicked, in the race for popularity and assets.So why are mutual funds consistently coming up short? Ron Rowland for Money and Markets explains that there are three areas in which the mutual fund is sorely lacking:
- Liquidity. This area is so limited, since you can only buy and sell at the end of the trading day. You also don’t know the price you paid until the very end – on volatile days, it can be an especially big nail-biter.
- High Fees. An average of 1.5% is being paid out to the advisor or manager. Loads and advisory fees also apply, and this all eats into your returns.
- Lack of Information. The mutual fund has no transparency, so there is no way to tell what you are buying.
The ETF wins because all three problems listed do not apply when it comes to them. Most ETFs are affordable with low fees (but not all of them are inexpensive – be sure to check those expense ratios every time), they are liquid (but be sure to check trading volume and assets), and you always know what you are buying with an ETF. Many ETFs also keep their market prices in line with the value of the actual underlying stocks, so there is no guesswork.
Many ETFs that utilize common mutual fund strategies are coming to market, as well. Actively managed ETFs and hedge fund strategy ETFs are just two examples of this. ETF assets grew in April by 10% from March and currently stand around $540.2 billion.
Which do you choose?
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.