ETFs Vs. Mutual Funds



An expense ratio is the annual fee that all mutual funds or ETFs charge their shareholders, including 12b-1 fees, management fees, administrative fees, operating costs and all other asset-based costs incurred by the fund. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

For example, in rough markets, active managers can play defense by selling more speculative or risky assets and adding more conservative investments. ETFs also tend to be more tax-efficient than mutual funds due to their low turnover, which minimizes taxable capital gains distributions.

On the other hand, ETFs are traded like stocks (during the day, not after the markets close). Most ETFs track market indexes, whereas mutual funds are more likely to be actively managed. As a self-directed ETF investor, you might need to take a more active role in monitoring, reviewing and potentially rebalancing your portfolio.

Since most retirement investing is done through monthly contributions, those operating and transaction fees can quickly eat into your returns if you're charged every month you add to your investment. As products are rolled out, investors tend to benefit from increased choices and better variations of product and price competition among providers.

As a result, ETFs usually feature lower expenses than mutual funds, which can result in higher after-tax returns. ETFs offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.

As a result, ETFs tend to be more tax-efficient. Actively managed ETFs are not based on an index. Index (passively managed) mutual funds: If actively managed funds and ETFs had a baby, it'd be index mutual funds. Educational articles geared toward teaching investors on the basics of ETFs and mutual fund ETF investing.

Some funds are constantly traded, with tens of millions of shares per day changing hands, while others trade only once in a while, even not trading for some days. Let these answers guide you as you compare ETFs vs. mutual funds. Mutual funds, by contrast, do not charge commission, although front-end or back-end loads paid when buying or selling can work similarly to a commission.

So it is very important to understand the investment vehicle before you trade it. Multiple holdings, by buying many bonds and stocks (which you can do through a single ETF or mutual fund) instead of only 1 or a few. When it comes to tax efficiency, ETFs and index mutual funds are virtually on equal footing, as both provide distinct advantages over actively managed funds.

On the other hand, ETFs are traded like stocks (during the day, not after the markets close). Most ETFs track market indexes, whereas mutual funds are more likely to be actively managed. As a self-directed ETF investor, you might need to take a more active role in monitoring, reviewing and potentially rebalancing your portfolio.

That's also when mutual fund prices - net asset value, or NAV - are set. The first and most popular ETFs track stocks. Time-intensive, as investors must research and follow each individual stock in their portfolio. In fact, BlackRock projects that smart beta ETFs will grow at a 20% annual pace to $1 trillion in assets under management by 2020.

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