Since a mutual fund is run by a stock-picking manager, there are management fees. Since most ETFs are passively tracking an index, overhead is not a factor. The only cost consideration of ETFs is the brokerage fees. If an investor is actively trading, every time a trade is made, a fee is charged, similar to a single stock. However, some online brokers let investors trade certain ETFs commission-free.
Another consideration are capital gains distributions. All shareholders in a mutual fund can be hit with these costs whenever another shareholder sells out. Most broad-based ETFs have low portfolio turnover, which helps keep the tax bite low. Also, the “in-kind” creation and redemption feature of ETFs makes them tax efficient.
ETFs are a great investment for budget-conscious investors due to the lower costs and overall flexibility. Over time, the capital saved on fees and capital gains taxes will add up and help investors reach their financial goals.
Tisha Guerrero contributed to this article.
