ETFs vs. Mutual Funds – Which Is The Better Fit?

The age of our readers and subscribers is quite vast but one thing we seem to have in common is that we all seem to take more of an active role in our finances and the understand the effect those decisions have on the outcome of our future. Another thing we seem to have in common is regardless of age it seems anyone involved in the market has seen at least one, and perhaps many more market corrections and the severity or opportunity they presented to them at the time. Obviously after being through something like a correction and getting bucked to the ground the challenge is getting back up and start riding again, and moreover choosing which horse to get back on. Well, if you don’t have the time or expertise, and frankly most of us don’t to pick the winning clipper in a sea full of individual stocks, then your choice should be to go with managed money, and that’s usually fits for most portfolios so it pays to know the difference between ETFs and Mutual Funds.


The Similarities

Both mutual funds and Exchange Traded Funds or (ETFs) and hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. They must adhere to the same regulations covering what they can own, how much can be concentrated in one or a few holdings, how much money they can borrow in relation to the portfolio size, and so on. Beyond those elements, the paths diverge. Some of the differences may seem obscure and wonky, but they can make one type of fund or the other a better fit for your needs.

The Differences

When you put money into a mutual fund, the transaction is with the company that manages it the American Funds, Putnam, Vanguards, and T. Rowe Prices, of the world either directly or through a brokerage firm. The purchase is executed at the net asset value of the fund based on its price when the market closes that day or the next if you place your order after the close of the markets. When you sell your shares, the same process occurs in reverse. But don’t be in too great a hurry. Some mutual funds assess a penalty, sometimes 1% of the shares’ value, for selling early, typically sooner than 90 days after you bought in.

Now as in most cases the first and most important question you need to ask yourself is what is your investment objective, how long your time horizon is, and how much risk you are willing to take. Both of these products are going to have funds that run the gambit of very conservative to very aggressive, but over the course of my travels I’ve found that the ETFs seem to have more flexibility to lever, and therefore sometimes have 3x,4x, 5x times portfolio value in the hopes of using that leverage to increase their Internal Rate of Return or Return On Equity. Pay close attention to this before you invest. However in spectrum of investment products these seem to have a place in most portfolios. Diversification is always the key to any successful investment strategy so you wouldn’t have all of your available funds on one fund, nor would you in one stock. So if you’re investing on your own or using an investment advisor, both of these tools can allow you a level of diversification that you would never be able to achieve with having substantial investment capital, and historically that deliver market level returns. This could be the key to keeping on track to meet those investment challenges of the future.



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