ETF vs mutual fund – what’s better?
Looking for diversified assets will lead to comparing ETFs vs mutual funds. Both are a collection of all sorts of assets, such as stocks and bonds. A company may follow either passive or active investment strategies. One might be a better choice depending on your investment objectives.
Mutual funds and ETFs still have major differences, so it’s up to you to purchase the one that matches your financial goals. Fortunately, this guide can help you with that! This is the first thing you should do even before checking the recommended options for each asset. In turn, you will have an easier time picking the ones your portfolio needs.
I’ll go through the similarities and differences between mutual funds and ETFs. These will include their purchasing methods, pricing, tax advantages, and other characteristics. After that, I will discuss the best choice depending on the financial situation. What’s more, I will show you more investment options so that you can build the best portfolio possible!
Here’s a quick rundown of what I will discuss:
- Similarities of mutual funds and ETFs
- Differences between ETFs vs mutual funds
- Choosing between ETFs and mutual funds
- Other assets besides mutual funds and ETFs
What makes ETFs and mutual funds similar?
Before I compare ETFs vs mutual funds, I will first discuss what makes them similar. That way, it will be a lot easier to see what sets each of them apart.
As I said, ETFs and mutual funds invest in various assets, such as stocks, bonds, consumer staples, and even currencies. The newest and hottest ones have cryptocurrencies!
The first US Bitcoin ETF came from ProShares, and it had a booming start. Within a few months, that one’s value went up by 549%! Of course, you can choose ones with safer assets.
This freedom of choice is another great thing about mutual funds and ETFs. You could choose ones that contain assets or sectors you prefer. The options don’t stop there, though.
You may select either passively or actively managed ETFs and mutual funds. Passive management means it follows a certain market index, such as the S&P 500 or the Dow Jones.
Market indexes usually contain shares from major firms like Apple. These companies often perform well, making passive ETFs and mutual funds a safe bet.
On the other hand, active management has a team that doesn’t stick to such investment strategies. Instead, it builds a mix of assets that should make a lot of money.
In other words, actively managed mutual funds and ETFs try to beat the overall market. This increases the rewards and risks for their investors.
If you choose these types of assets, make sure to get them from investment firms with proven track records. Otherwise, poor management could send the fund crashing down.
Lastly, both can be a source of fixed income because some of them pay dividends. This means they are also subject to capital gains taxes, expense ratios, and other expenses.
Read More: The Best Dividend ETFs To Invest In
What sets apart ETFs and mutual funds?
Now, let’s compare ETFs vs mutual funds. You should first know that ETFs are like stocks while mutual funds aren’t. This sets them apart in a lot of ways.
People trade ETFs in stock exchanges, much like how you buy and sell shares in the market. This means their market price moves like stock prices too.
Their value moves up and down several times during a trading day. This allows you to execute the market orders often found in the stock market, such as limit orders.
As a result, you could buy an ETF for a low price, then sell it later when the value is higher. Sadly, it doesn’t allow automatic investments and withdrawals.
On the other hand, mutual funds have these features, but you might have a harder time buying them. Unlike ETFs, they are not as accessible as shares in the stock market.
Mutual fund prices remain constant throughout a trading day. If you place a purchase order, you won’t know the price until the day ends.
This means you can’t just wait for a few hours for the value to dip a bit. If you compare the investment minimums of ETFs vs mutual funds, the latter often has the higher ones.
In other words, you will have to pay much more to buy your first mutual fund shares. Yet, mutual funds could give money’s worth better than ETFs.
You might have to pay higher expense ratios or the fees paid for fund management, but you get better service. Unlike most ETFs, mutual funds have phone support and free fund transfers.
Also, mutual funds have a low limit for leverage. Borrowed funds are used to gain more from assets potentially. Sadly, this also exposes an investor to greater risks. Also, mutual funds have a low limit for leverage.
Unlike ETFs, mutual funds cannot accept much risk. This is good news if you want a relatively safe investment. You don’t have to pay commission fees as well!
How can I choose between ETFs vs mutual funds?
Your pick between ETFs and mutual funds will depend on your investment goals. If yours matches the following criteria, then the former might be a better choice:
- As I said, ETFs are like stocks, so the ETF creator will not need to redeem the shares each time an investor wants to sell. On the other hand, mutual funds have to change their asset mix as investors buy and sell. Each time they do this, shareholders will have to pay for additional taxable events.
- Because ETFs are like stocks, you can “buy low and sell high” much easier than trading mutual funds. Even better, online brokerage accounts make it even more convenient than ever. They have mobile apps that let you buy and sell on the go.
In other words, ETFs are an ideal choice if you want tax efficiency and trading convenience. Meanwhile, here are the instances when mutual funds are likely a good choice:
- You might have to pay more, but mutual funds often provide better service than ETFs. As I said, they have a phone service that is always ready to address shareholder concerns. What’s more, they allow fund transfers at no cost.
- Mutual funds have lower leverage than ETFs, meaning they cannot perform riskier trades. While leverage can bring huge returns, they also pose greater risks for shareholders. You might want to choose mutual funds for a safe, diversified asset.
Other investment options
Of course, you shouldn’t limit yourself to just two types of assets. A good portfolio should have a healthy mix of various types. Here are the other ones you might like:
- Stocks – Instead of paying a company to invest your money in all sorts of assets, you could just do it yourself. For example, you could choose stocks from the most promising companies and sectors. Also, you might want to buy the ones that pay dividends.
- Bonds – Companies and governments sell debts in the form of bonds. These are like “IOUs” that bring dividends and gains after a few years. Most people think they’re a safe investment, but it might not be because of the looming threat of hyperinflation.
- Money market funds – You could think of these as mutual funds that contain only low-risk debt securities such as treasury bills and certificates of deposit (CDs). They also provide a constant flow of dividends, and they let you withdraw funds easily.
- Real estate – You could choose more conventional options like properties. Thanks to crowdfunding, it’s a lot easier to start investing. However, this might not be the right time, as the market values may return to pre-pandemic 2022.
- Cryptocurrencies – If you don’t mind many risks, why not try the hottest digital asset right now? Note that crypto prices move wildly, so make sure you look into them carefully before investing. This might be the right time to invest in cryptocurrencies as more people use them worldwide.
I’ve just compared ETFs vs mutual funds, but it’s up to you which one’s right for your portfolio. Note that this article is not meant to share financial advice.
Plan your investments yourself, and pick your assets based on your goals. If you need guidance, speaking with a financial advisor is the best thing to do.
If you just want general info about the various assets out there, you could just read other Inquirer USA articles. They will also tell you about the latest trends around the world!