ETFs Vs. Index Mutual Funds



Mutual funds are generally bought directly from investment companies instead of from other investors on an exchange. More employers now offer access to them as part of their retirement packages along with mutual funds, and retail investors trade them with increasing regularity.

ETFs also have a slight advantage when it comes to minimum investments. That can add up. Assume someone invests $500 on a biweekly basis in both an ETF and a mutual fund. Neither mutual funds nor ETFs are perfect. Let's imagine, for instance, two products that are designed to track the S&P 500: an ETF and a mutual fund.

We believe that the tax efficient equity strategies we build for our clients should include both active and passive investment vehicles because different circumstances indicate different solutions. Typically trade only once per day, after the market closes. According to the Investment Company Institute (ICI) , the average expense ratio of index ETFs is 0.21% while the average expense ratio of actively managed mutual funds is 0.78%.

At Vanguard, we offer more than 75 ETFs and 140 mutual funds. For example, the SPDR, or spider” ETF, which seeks to track the S&P 500 stock index, invests in most or all of the equity securities contained in the S&P 500 stock index. And if your broker gets paid by the load, don't be surprised if he doesn't recommend ETFs for your portfolio.

An ETF or a mutual fund that attempts to beat the market—or, more specifically, to outperform the fund's benchmark. 48 49 The rebalancing problem is that the fund manager incurs trading losses because he needs to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio.

You can set up automatic investments and withdrawals into and out of mutual funds based on your preferences. When buying ETF shares, you'd typically set your stop price above the current market price (think "don't buy too high"). So when you buy shares in a fund, you are effectively buying the shares or investing in the debt of hundreds, or even thousands, of different companies.

Mutual funds can often be purchased at NAV, or stripped of any loads , but many (they are often sold by an intermediary) have commissions and loads retirement associated with them, some of which run as high as 8.5%. ETF purchases are free of broker loads. Investing in mutual funds allows you to gain exposure to a large number of companies, which can increase your portfolio's diversification and exposure to different markets and sectors.

When constructing an investment portfolio, you'll probably include a variety of stocks and bonds among the securities you purchase. Because ETFs are traded on the exchange, there is always an ask price (buyers get this price) and a bid price (sellers get this price).

Both mutual funds and ETFs can vary in terms of their legal structure. Diversification is important in investing, and products like mutual funds and Exchange Traded Funds (ETFs) are popular, simple ways to incorporate diversification into a portfolio. A collection of resources, Q&A Interviews with industry pros, and ETF categories to help investors research, gain industry insights and evaluate ETFs.

ETFs are subject to market volatility. You can open a brokerage account and buy or sell an ETF whenever the markets are open,and prices fluctuate throughout the day. A mutual fund may not be a suitable investment. You are investing in a less efficient part of the market.

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