First of all, what the heck are “ETFs”? It stands for exchange traded funds — a marketable security that can track an index, a commodity, bonds, or a basket of assets. An ETF trades like a common stock on a stock exchange, and often experiences price changes throughout the day as the funds are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual funds, making them more attractive for investors.
So, to determine if mutual funds or ETFs are right for you, you need to first decide what type of investor you are:
- Do you want to make your investment decisions all on your own?
- Do you want to work with an advisor?
- Do you want to place your own trades and choose your own investment mix?
- Do you want someone to do the trading for you?
Mutual Funds over ETFs
1) Mutual funds are simple to buy and sell as they are priced once a day. What’s so great about that? This means:
- You don’t have to worry about what the difference between the buy price and sell price is,
- Or whether to buy or sell an order intended to be executed immediately at current market prices,
- Or worry about an order to buy or sell at a specified price or better.
2) You won’t need to rebalance your portfolio yourself as mutual funds are bought through an advisor or direct fund company. Meaning you have someone do all the work for you!
3) You can set up automatic contributions easily, which can often be for as little as $25/month.
ETFs over Mutual Funds
1) You can lower your costs dramatically because ETFs are usually index-based (meaning low management fees). This allows you to create the lowest-cost portfolio possible.
2) If you’re a control freak, ETFs are right for you! They allow complete control of your account.
3) It’s possible that there is potential for favorable taxation on cash flows generated by the ETF, as the capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds.
Hopefully by now you’ve decided what type of investor you want to be.
If you want complete control and direction of your investments, creating and managing all aspects of your portfolio, you’re going to want to choose ETFs.
If you don’t think you’re in a position to manage all aspects of your own portfolio, or just want the responsibility to fall on someone more experienced, then mutual funds are the better option.