Choosing Between an ETF and Mutual Funds

If you are considering an ETF, mutual funds are another option that may come up. Both ETFs and mutual funds are very similar investment types. However, they each have certain aspects that may make them better for you as an individual investor. In order to decide which investment is best for you, you will have to weigh the benefits of each type. Here are a few things to consider about ETFs and mutual funds. 

Mutual Fund Advantages

  • Regular investments- Many people invest in different manners. Some like to actively trade while others prefer to use a dollar-cost-averaging approach and just buy shares frequently. When you choose mutual funds, you can actually find them that have no-load and no transaction fees involved. This can save you substantial amounts of investment capital as you go. When you buy an ETF, you will have to worry about commissions just as if you were buying a stock. This can eat into your capital substantially.
  • More choices- With mutual funds, you have a vastly larger selection to choose from. By comparison, you have a little over 800 ETFs to pick from. With an actively managed mutual fund, you have over 6000 different options. This gives you a wide range of choices as an investor. This will allow you to find a mutual fund that matches your unique investment needs.
  • No trading issues- Mutual funds are one of the easiest things to trade in the market. If you want to buy a share, you simply put in your order and at the end of the trading day, the transaction goes through at the net asset value of the fund. When you trade an ETF, it is much like trading a stock. Therefore, if there is not much action in trading the ETF, your liquidity could suffer. You could have problems with random bid/ask spreads and other liquidity issues. With a mutual fund, you never have to worry about that. 

ETF Advantages

  • More trading flexibility- With the ETF, you have unmatched trading flexibility. Therefore, if you are the type of investor that likes to trade actively throughout the trading day, an ETF could be for you. You will be able to trade them just like stocks on a stock exchange. You can buy them long, sell them short, and even take out options on them. This will allow you to be an active trader without the big risk of stocks.
  • Niche choices- Mutual funds typically cover a very broad spectrum of investment vehicles within the fund. An ETF can actually focus on a particular niche. This allows you to invest in a specific industry or even a section of an industry. For example, you could buy an ETF that covers the healthcare industry. You could also buy one that specializes in cardio devices. This will allow you to focus in on a particular area that you enjoy without taking on a high-risk futures contract.
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