If you’re acquainted with mutual funds and frustrated, there’s an easy solution: exchange traded funds (ETFs). This conveniently accessible investment tool offers all the benefits of mutual plus some other added perks.
Think of ETFs as mutual funds, but better. Youssef Mzaoui provides some reasons on why investors should invest in ETFs instead of mutual funds; we especially liked these points and added a few of our own, as well:
- Biased or inexperienced. Large and established mutual funds have experienced managers who lean toward specific products and companies. Meanwhile, more inexperienced managers are still proving themselves, which may not translate to strong returns for an investor. ETFs, on the other hand, try to reflect the performance of an underlying index. [10 Reasons to Trade ETFs (and Ditch That Mutual Fund).]
- All day, every day. If you don’t already know this, mutual funds are only priced at the end of each trading day. ETFs, like stocks, may be traded throughout the day.
- Taxes. Mutual funds may incur short-term gains that create higher tax burdens. Additionally, end of the year capital gains distributions may also be applied, even if the investor wasn’t an original share holder. ETF traders are taxed by the frequency they trade or hold their positions, which means there are no unexpected capital gains distributions.
- Options. There are no options for traditional mutual funds, but ETF investors may write option contracts on any ETF.
- Stop-loss or limit orders. As mentioned before, mutual funds can only be traded at the end of the day. ETFs may be traded like any stock on an exchange, which also means an investor may place stop-loss or limit orders. [5 Ways to Cut Investing Costs.]
- Short. Unlike mutual funds, ETFs can be margined, sold short or utilized to hedge risks.
- Expenses. ETFs have low fees due to its passive nature to try and reflect an index without the help of active managers. Furthermore, investors won’t see hidden charges like 12(b)-1 fees. On the other hand, mutual fund fees are generally much higher due to active management.
- Easy. ETFs are so easy to use and, for the most part, easy to understand. You may need a little more education when it comes to quant ETFs, commodity funds or leveraged/inverse ETFs, but by and large, ETFs are easily incorporated into any portfolio or strategy.
- Trend Following. ETFs are a natural fit if you’re using a trend following strategy. Mutual funds have early redemption fees and only trade once a day, making them difficult and expensive to unload when you need to. [How to Follow Trends.]
For more information on trading ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
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.