The upstart exchange traded fund industry is edging into the mutual fund market space as more investors see the benefits of the flexible, low-cost and tax efficient investment vehicle.
While ETFs are often compared with mutual funds, the two fund structures come with different quirks.
“They’re like kissing cousins in many aspects, and too often people have segmented ETFs and mutual funds and made them sound like they’re completely different investment vehicles and approaches,” Joel Dickson, senior ETF strategist at Vanguard, said in the article. “What underlies both is a diversified, commingled, generally low-cost professionally managed investment portfolio.”
ETFs are bought and sold throughout the day on an exchange like normal stocks. Meanwhile, mutual funds are priced at the end of each trading day.
“You have to be careful with ETFs,” Dickson added. “It gives you a lot more flexibility, but that comes with an additional amount of knowledge that you need to have around how they trade, using limit orders instead of market orders, and what the cost might be.”
Active traders benefit from ETFs’ intra-day tradability to capitalize on movements in a number of market segments throughout normal trading hours.
“If you need to actively trade your investment, either with intraday trades, stop orders, limit orders, options or short selling, you should use an ETF, as these are not possible with mutual funds,” Michael Iachini, managing director of ETF research at Charles Schwab Investment Advisory Inc, said in the article.