Mutual Funds vs ETF's
Mutual Funds vs. Exchange Traded Funds (ETF’s)
Recently we have received some questions about the difference between mutual funds and exchange traded funds (ETF’s). While they are both similar in many ways there are some subtle differences between the two we’d like to highlight for our clients.
Mutual Funds
Mutual Funds have been traditionally used for a number of years. The mutual fund usually has a manager or team that actively manages the pool of investments. Though not always the case there is generally a minimum investment requirement. Mutual funds can also only be traded after the market has closed and its price for the day has been determined.
ETF’s
ETF’s are passively managed accounts that generally track a particular index or sector. Since they track a specific index or sector, they are considered to be passively managed and hence generally have lower fees than mutual funds. Unlike mutual funds ETF’s trade-like stocks meaning they are bought and sold during the trading day.
Why ETF’s are Gaining Popularity
One big reason ETF’s are gaining steam is the low minimum requirements required to start investing. Many mutual funds have a minimum balance requirement to open while most ETF’s do not have such a requirement. So ETF’s are a great place for beginning investors who want to start saving in market based investments.
Since ETF’s are passively managed they tend to have lower fee structures than traditional mutual funds. Retail investors have also been drawn into being able to trade these like stocks.
One reason long-term investors may want to consider ETF’s are for its potential tax advantages. Of course, this wouldn’t apply to retirement accounts but for investors who traditionally invest in mutual funds in non-retirement accounts they may want to consider looking more closely into ETF’s.
Passively managed funds tend to see fewer capital gain realizations since there are fewer trades within the fund. Actively managed funds see more potential for capital gains since they are traded more frequently. ETF’s tend to see capital gains/losses only when the fund is bought or sold. This puts the investor more in control of potential taxable events whereas with mutual funds investors could be getting hit with annual capital gains distributions.
While it is super important to consider such things as cost, performance, and management of your investments – we have found over the last 25 years that having a long term strategic financial plan and the resilience to tune out the noise of the moment (AI, MEMME, CRYPTO); keeps one leveled into a groove of consistent long term growth along with the peace of mind in knowing that Iwill attain my goals and have everything I need into the future.
We are here at Ocean Wealth Group to answer any other questions you may have about Mutual Funds and ETF’s. Please don’t hesitate to reach out if you’d like us to review your situation to find out what works best – or talk about how your long term financial plan is going to be there for you when you need it most.