ETFs Vs Mutual Funds: Which Type of ETFs Really Are Better?

ETFs vs. Mutual Funds. Some people think that ETFs are the same as mutual funds. They are not the same and there are a few key differences between the two. Both mutual funds and ETFs have listed services that allow investors to purchase units in the ETFs and also have access to the relevant information about the underlying holdings. An ETF is not a mutual fund and as such does not have the same listing rules as mutual funds.

ETFs or mutual funds: One of the first things you should know is that ETFs have significant advantages over mutual funds. ETFs are SEC registered investment vehicles that provide investors with a convenient, cost-efficient means to build a diverse, diversified portfolio. From a broad 20,000 feet view, they might seem very similar. Both are professionally managed by professionals and both offer thousands of different securities.

However, there are several important differences that allow ETFs to have a certain advantage over mutual funds. For instance, ETFs offer higher liquidity. Because ETFs trade on exchanges, their prices are seldom affected by regulatory actions or unexpected news. Additionally, ETFs are exempt from many of the costly and intricate costs that come with dealing in traditional share transactions. Finally, ETFs use a standardized format for issuing shares, making them much more reliable than mutual funds.

However, it is important to realize that no-load mutual funds do have some advantages over ETFs. The biggest advantage to ETFs is that they have lower commissions than most no-load mutual funds. While this can be significant when you’re just starting out – no-load funds cost significantly less to invest – once you’ve got a few years under your belt and have built a substantial portfolio, it’s advisable to move towards an ETF. After all, a large part of the expense of investing comes in fees.

Many people are surprised to see that ETFs actually offer slightly better returns than most no-load funds. The reason is simple: ETFs use a variety of strategies to offset costs. In addition, ETFs limit their trading size, so investor expenses aren’t as large. Lastly, ETFs are exempt from many costly SEC regulations that apply to mutual funds. These, along with other advantages, make ETFs clearly the clear winner when comparing mutual funds vs ETFs.

Of course, not all people are impressed by ETFs. An argument often made against ETFs is that they don’t offer any real liquidity. To be honest, no-load funds do offer some liquidity, but the charges to purchase this “liquid” often outweigh the benefits of the lower costs. As an example, when load mutual funds sell securities they often buy them “hot” or at auction – meaning that the auction price is very high. This leads to an auction mentality, where the Fund Manager will attempt to “buy low and sell high.”

Another objection to ETFs is that they’re difficult to track. While it’s true that many investors are unfamiliar with ETFs, I would argue that this is precisely what investors need to be tracking. With no-load funds, it’s easy to forget where you’ve put your money, allowing your fund to run on auto pilot without any human oversight. By contrast, with most inverse ETFs – EFTs, FOREX inverse ETFs, and gold ETFs for example – it’s quite difficult to find out where your money is.

There’s also one more objection to ETFs. Namely, that they don’t offer the diversification of a true mutual fund. Most ETFs are made up of one or two types of securities – often companies or ETFs that are related to one another, or have an overall common interest. Compare this to a mutual fund, which is designed to offer a comprehensive portfolio of both domestic and foreign securities. While mutual funds do vary widely in their structure and size, the fact is that they offer a wide range of asset types. So, when comparing ETFs against mutual funds, look to the opportunity cost of providing investors with even more diversity.

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Keith Rainz

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