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Investment Tip of the Day
ETFs or Mutual Funds?
Exchange-Traded Funds (ETF) are investment funds that trade just like stocks on stock exchanges. Like Mutual Funds, ETFs contain a basket of securities such as bonds or stocks, but for the most part ETFs commonly track an index like NASDAQ. ETF combines the valuation feature of mutual funds with the trading style of closed-ended funds, trading throughout the intraday at a price that may not reflect its underlying net asset value. Mutual funds transactions are settled at the end of the day price with the fund company.
ETFs have always been exalted for their extensive flexibility and cheap alternative to mutual funds. Although most mutual funds are actively managed, which contributes to their higher fees, when one were to take that into consideration ETFs still are much cheaper to own. Mutual funds are likely also to include trailer fees which are commissions paid by fund companies to brokers/dealers as compensation for their advice and distribution channels.
Although ETFs unquestionably have lower fees they do however have to deal with brokerage commissions any time they are bought and sold whereas mutual funds are not dealt this way. So if you are an active trader then these constant trade commissions for buying/selling ETFs can add up tremendously throughout a year and might out way any savings you may have had over mutual funds.
ETFs carry better tax benefits. Because they do not comprise actual shares of the underlying stocks as mutual fund units do, ETF shares are acquired by authorized reps in exchange for its stock basket which then get distributed as ETF shares on the open market. This simplified process makes selling of ETF shares not involve the selling of its underlying stock. When mutual fund units are bought/sold underlying shares of stock are also bought/sold and a taxable event occurs. This type of structuring reduces taxes but also reduces the amount of potential capital gains for ETF shareholders.
So when you look at both types of funds you can understand why the two exist. They both have their advantages and disadvantages. If you are still having a hard time deciding then we recommend you seek out a financial advisor to determine which type is best for your needs.