4 Reasons an ETF Is Better than a Mutual Fund

When looking at the ETF and mutual fund, you will see several of the same features that are available for investors. While these types of investments are very similar, they have a few key differences as well. Here are a few reasons that the ETF is better than investing in a mutual fund.

1. Liquidity

One of the biggest reasons that ETFs are better than mutual funds is that they are highly liquid. When you want to buy shares of a mutual fund, you are going to put in your order with your broker and it will be processed at the end of the trading day. They are going to calculate the net asset value of the fund and then determine the share price. This means that you do not necessarily know how much you are going to have to pay for the shares when you place your order. When you sell your shares, you are also not going to know how much you are going to get for them. You will know the approximate value, but you will not know the exact value.

With ETFs, you are going to be able to know exactly how much you are paying for the shares when you order them. ETFs are traded on the stock exchange which means that you will be able to buy and sell them immediately. This can also be good if you know that you need to sell your shares quickly. For example, let's say something happens during the day that you think is going to impact the value of your shares. With an ETF, you can sell immediately. With a mutual fund, you have to wait until the end of the day.

2. Sector Investment

If you have the desire to invest in a particular sector, you are most likely going to be able to find an ETF that tracks that sector more easily than you would with a mutual fund. Most mutual funds are not specialized enough to track an individual sector. With ETFs, you could potentially invest in the healthcare sector, or the oil sector. ETFs are going to make things a lot easier on you in this regard.

3. Tax Implications

Another reason that ETFs are better than mutual funds is because of the tax implications. ETFs are passively managed and are simply designed to track a particular index. Some mutual funds are managed actively. When a mutual fund is managed actively, they are going to potentially be creating capital gains for the investors. If you are worried about having to pay capital gains taxes frequently, you will benefit from ownership in an ETF. The fund managers of ETF are not going to create nearly as many capital gains for you as a mutual fund would.

4. Lower Costs

ETFs are also superior because they allow you to invest without paying as many costs as you would with a mutual fund. The expense ratios are quite a bit lower and this is going to allow you to keep more of your profit.

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