Commission fees are also a consideration when filling out an investment portfolio. If an individual were to diversify with a basket of various stocks, commission fees could add up. Funds provide an easy access point to a diversified portfolio, but mutual funds also come with minimum investments. ETFs do not have minimum investment fees, but they also incur trading commissions like stocks – some brokerage platforms, though, offer commission-free trades on ETFs. [Assessing the Total Cost of ETF Ownership: A Real World Example]
With funds, investors will also be exposed to fund fees or the expense ratio that pay for operating the fund. Mutual funds typically come with higher fees of over 1% in annual expenses as many are actively managed. On the other hand, index-based ETFs come with much cheaper fees, with the cheapest ones showing a 0.04% expense ratio.
Moreover, the ETF structure is touted as a tax-friendly investment vehicle since investors do not have to pay taxes on capital gains until they sell the position. In contrast, mutual funds incur capital gains spread among all fund’s investors, and the funds may even issue a capital gains tax bill during losing years if the fund is forced to sell positions to raise cash. [How ETFs Are Traded]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.