When comparing exchange traded funds and mutual funds, switching entirely from one to another is not necessary. Investors should educate themselves on the nature of both funds and decide which one will better suit their investment strategy.
The first thing to figure out when choosing a fund is determining what your investment needs and goals are. By knowing what asset classes you want exposure to and knowing what your risk tolerance is, picking the right investment tool is easier, reports Charles Rotblut for American Association of Individual Investors.
If you approach the decision of ETF versus mutual fund with the knowledge of which asset classes you’d like exposure to, the decision of what targeted group of funds will be narrower. Then, comparisons and decisions will be easier. [Money Market Rules May Boost Short Duration ETFs]
For example, a traditional, less seasoned investor that reallocates strategically and not tactically would appreciate the simple use of a mutual fund satisfying, reports Tim Parker for Financial Edge. Individual investors may enjoy ETFs for their ease of use and the ability of these fund to trade throughout the day like a single stock. [Why Are ETFs Cheaper than Mutual Funds?]
Furthermore, institutional investors that use leverage, take directional bets and hedge investments benefit from ETFs because of their lower expense ratio and ability to trade quickly, at any time of day. [ETFs Taking Market Share From Index Funds]
For those investors who are dollar-cost averaging, trading ETFs can be expensive because of the brokerage fees. A buy-and-hold ETF investment can serve as a less expensive way to invest long term, but this does expose investors to tracking error.
The above situations are just a few of the factors that go into the decision-making process. There are numerous choices to make, and plenty of options, but by targeting what asset class you’d like exposure to, a lot of the guesswork is taken out.
Tisha Guerrero 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.