Mutual funds vs. ETFs (Exchange Traded Funds), what’s the deal?…
A few reasons can enlighten you as you consider buying or selling exchange-traded funds or mutual funds.
The Tax Benefits
One advantage an ETF has over a mutual fund is the taxation. Due to their construction, ETFs only incur capital gains taxes when you sell the fund. In a mutual fund, capital gain taxes are incurred as the shares within the fund are traded during the life of the investment.
When filing taxes, this can help keep your tax bill low, especially if you’ve made large gains in your mutual fund portfolio.
Simplicity of ETFs
When you buy or sell an ETF, you do so at one price with one easy transaction. Just like stocks, you can buy or sell any time during market hours. There are also brokers who’s ETFs you can trade after hours. Some even 24 hours a day!
With mutual funds buying and selling is done after the market closes, shares in the asset are constantly being traded to hit a target price and seek desired performance. Multiple trades and multiple prices can lead to multiple fees and commissions.
As well as being simplistic investments, ETFs are also more cost-effective than mutual funds. Mutual funds may have large management fees regardless of investment objectives. ETFs generally have comparably low fees, although specialized ETFs may have larger than expected fees.
Fund managers need to charge for their time and expertise. With an ETF, it’s one simple transaction, like purchasing a stock. This cuts down on fees and commissions. You might have multiple commissions associated with a mutual fund due to its activity and volume.
With more and more ETFs being released every day, investors have new options to target a specific trading strategy. Commodity ETFs, style ETFs, country ETFs, even inverse ETFs. There are so many types of ETFs for investors, tracking the performance of a certain index or achieving a specific financial goal may be more attainable than with a mutual fund.
Some mutual funds track the same types of assets, but with the popularity of new ETF innovations, you may have even more ETF options in the future. 401Ks have been moving to ETFs as better and cheaper options.
Liquidating a portfolio’s mutual funds may increase risk, increase commissions and fees, and incur early capital gains taxes.
With an ETF, the transfer is clean and simple when switching investment firms. They are considered a portable investment, which offers a nice advantage.