The mutual fund industry dwarfs the exchange traded fund (ETF) industry. But judging by the trillions held in mutual funds, there are millions of investors who haven’t yet made the switch. Perhaps these reasons will convince them to take the first step.
1. ETFs are like mutual funds…but also like stocks. ETFs are baskets of stocks that, for the most part, passively track an index. But they’re also priced all day long, meaning they can be bought and sold like a stock.
2. ETFs are cheaper. An average actively managed mutual fund expense ratio is approximately 1.5% while an index fund is about 0.19%, but a typical ETF expense ratio is only about 0.13%. [Where You Can Find Cheap ETF Trades.]
3. ETFs are more tax efficient. ETFs are also far more tax efficient than mutual funds because you don’t get the capital gains and income hits that you can get from a mutual fund. [5 Things to Know About ETFs and Taxes.]
4. Short selling without the hassle. You can buy short ETFs without opening a margin account. Leveraged and inverse ETFs are risky, of course, but they’re much easier to use. [Leveraged ETFs Take the Spotlight in Turmoil.]
5. Flexibility in trading. ETFs can be traded with stop orders, limit orders, market orders. You can trade immediately or name the price at which you want to trade and wait until it’s found. [Factors in the Cost of ETF Ownership.]
6. You have choices galore. There are now more than 1,000 exchange traded products in the United States alone. The offerings now range from core ETFs that track indexes like the Russell 2000 and the S&P 500 to ETFs that follow niches like global airlines and luxury retail.