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.
7. You can play asset classes that weren’t available before. If you’re a retail investor, no question that ETFs have widened your world. In an inexpensive and convenient package, you can now get exposure to currencies, commodities and fixed-income in ways that you never could even a decade ago. [7 Commodity ETFs You Should Know More About.]
8. You can get easy diversification. In one purchase, you can own an ETF that has 25 stocks, 500 stocks or even a few thousand. While this doesn’t give you the same exposure as a single stock would, diversification like this has its own benefits: you can play an entire sector instead of trying to guess what the one outperforming company will be and owning multiple stocks spreads your risk. [Mutual Funds, Step Aside.]
9. You can tailor your portfolio to your risk appetite. If you want a lot of risk, you can invest in narrowly-focused ETFs and even a few leveraged funds. If you want less risk, you can choose from the many broader funds available and incorporate some steady Treasury bond funds.
10. You can’t beat ’em. ETFs may not overtake the mutual fund industry anytime soon, but more investors are discovering their merits and, as a result, shifting their assets from mutual funds over into them. Some have called ETFs the most important financial innovation in decades, and we couldn’t agree more. [The ETF Investor’s Survival Guide to Trendless Markets.]
For more stories about mutual funds, visit our mutual fund category.
Tisha Guerrero contributed to this article.