Beginner or advanced investors looking to enter the exchange-traded fund (ETF) space may have also crossed paths with mutual funds through their own research or maybe an advisor mentioned them as an option. It may be because mutual funds have been around since the 1920s, but really rose to prominence in the 1980s and 1990s, while the rise of the ETF has taken place in just the past 10 years.
A prospective investor deciding whether to allocate his or her capital into an ETF over a mutual fund may depend on the specific individual’s investment goals–each fund will allow an investor to reap its benefits of each as long as it’s aligned with the right goals. As such, here are three reasons an investor may want to choose an ETF versus a mutual fund.
1. Adaptability in Short-Term Trading
ETFs can be bought and sold like stocks at an exchange–their price is also determined by the supply and demand for that particular ETF. Because ETFs trade like stocks, it makes them suitable investments for short-term traders looking to profit from holding assets for a limited amount of time, whether it’s a few months, a couple of weeks, a day or 30 minutes.
Depending on the liquidity of the ETF–it’s ability to be converted to cash quickly–traders can enter and exit ETF positions quickly. Mutual funds simply can’t be traded at the requisite speed of ETFs that some short-term traders desire.
“Traditional open-end mutual fund shares are traded only once per day after the markets close,” noted Fidelity Investments. “All trading is done with the mutual fund company that issues the shares. Investors must wait until the end of the day when the fund net asset value (NAV) is announced before knowing what price they paid for new shares when buying that day and the price they will receive for shares they sold that day. Once-per-day trading is fine for most long-term investors, but some people require greater flexibility.”
Furthermore, investment firms have a wide variety of ETFs an investors can choose from if he or she wants to corner a specific area of the capital markets, such as stocks, bonds or commodities. There are even thematic ETFs that invest in environmental, social and governance (ESG) issues.
2. Daily Transparency
Just like it’s important for a stock investor to know a company’s fundamentals, such as its revenue, earnings and expenses, an ETF investors wants to know what holdings that particular fund comprises. It’s akin to a sports fan wanting to know which players are on the roster of their favorite team.
Key regulations that govern mutual funds–the Investment Act of 1940, the Securities Act of 1933 and the Securities Act of 1934–require mutual funds to disclose their holdings on a quarterly or monthly basis. In between those reporting periods, the roster of companies the mutual funds invests in could have changed dramatically given the current market conditions and goals of the fund.