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Mutuals vs. ETFs

Mutual Funds vs. ETF’s: Some differences and which is right for you?

With all of the choices that investors have, it’s helpful to look at some of the differences between 2 strategies: ETF’s and mutual funds. There is trillions of dollars invested in each, with mutual funds garnering the lion share since they have been around for much longer. Let’s look at some things to consider:

ETF’s

– ETF’s are priced throughout the day like stocks and fluctuate with a bid and offer price

– Actively managed ETF’s can potentially outperform their benchmarks or indexes

– ETF’s can trade at a premium or discount, unlike mutual funds

– Orders are placed through a brokerage account and you can use margin, limit orders, etc.

– Portfolio holdings are disclosed daily with Optimized Portfolio Values every 15 seconds

– Trading costs are brokerage commissions and any spreads between the bid and the ask

– More tax efficient and very transparent with the holdings

Mutual Funds

– Mutual funds are priced once a day based on their holdings value at the end of the trading day

– Trade at Net Asset Value (NAV), so no premiums or discounts

– Investors normally invest directly with the mutual fund company

– You can buy funds in a brokerage account but it’s not required

– Can’t be bought on margin or with limit orders

– Priced calculated once a day at market close at 4:00 Eastern time

– Holdings usually disclosed monthly or quarterly

– There are no-load funds or commission (loaded) funds

– Not as tax efficient because can have capital gains or income distributions throughout the year

Similarities 

While there are some of the major differences between ETF’s and mutual funds, they do share many of the same benefits. They can provide active portfolio management, different investment strategies, diversification and many objectives to meet most investment goals. While investors should take a long-term view, ETF’s probably would satisfy an investor’s desire for more active trading, the ability to see the holdings daily and potentially better tax efficiency. Traders can also take advantage of discounts or premiums that can occur with ETF’s, and potentially design more shorter-term trading needs. While mutual funds are more appropriate for investors with a long-term trading horizon, don’t want to necessarily be actively involved and are passively inclined. Additionally, mutual funds allow regular or systematic purchases with smaller dollar amounts, which ETF’s don’t. Mutual funds are very common in 401(k)’s, tax-deferred retirement plans and are fairly affordable, which allows investors easy access.

There’s no right or wrong choice as to which is best for an investor. It’s really important to choice the best fit for your needs, or investors can possibly consider using a combination of both. A portfolio that incorporates ETF’s and mutual funds can provide exposure to different assets and strategies while complementing most investment objectives. 

Pat Moran has over 35 years of financial services experience and is a managing partner at Healthier Money. He is independent and specializes in financial education, reducing risks and tax favored strategies. He can be reached at (602) 571-1035 or www. Healthiermoney.com 

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