ETF vs. Mutual Funds
Choosing the right way for you to invest money is not easy because of the choices you have. To get you a glimpse of choices, here are some comparisons that could get you some insights in choosing the best one. Lets review the differences between Exchange-traded funds (ETFs) and Mutual Funds, so you can make the right investment decision.
The legal aspect
Mutual funds are separated into the following two types: a) Open-Ended Funds, which is basically the one where you as an individual can purchase or sale assets to increase the volume of shares issued within the fund. If a new investor is going to buy into the fund, that means more shares are issued. The good thing about this is that no matter how many shares are outstanding in the fund; your shares value is not affected by them. b) In the other hand, the Closed-End Funds are the ones issuing a certain amount of shares, and theres no chance for new investors to enter the fund.
The ETFs are separated in the following three types:
- Exchange-Traded Open-End Index Mutual Fund, where all dividends are reinvested as soon as they arrive and paid to shareholders in cash four times a year.
- Exchange-Traded Unit Investment Trust, where investment of dividends is limited to a 25% or less and dont reinvest dividends automatically, even though they are paid in cash every quarter.
- The Exchange Traded Grantor Trust is similar to a Mutual Fund (because its composition doesnt change). This type of EFT allows investors to be the owners of the underlying shares in companies that the EFT is invested. Shareholders get the dividends directly, because they are not reinvested.
How Trading Works And How Much it Costs?
If you want a hassle-free trading experience, ETFs are the winners. Whether youre purchasing or selling an ETF, youll deal directly with the rest of investors and the fund itself. In the case of a Mutual Fund, youll be required to liquidate the funds portfolio, leaving an open door for possible commissions and fees increases, or capital gain taxes. ETFs is more cost-effective than Mutual Funds. Only one transaction is required when selling an ETF. That doesnt happen with Mutual Funds. After all, there are Funds Managers charging a fee for the time theyre investing. Not only that, since the Mutual Funds has a larger (and increasing) number of assets, its commissions and fees are proportional to its size. As we discussed in previous paragraphs, ETFs dividends are not automatically reinvested, meaning they have a lower chance of being subject to capital gain taxes (because that money is not kept within the fund but is distributed in cash to its shareholders). Which one has better liquidity?
Liquidity is normally expressed in the number of daily traded shares. If theres a small portion of shares traded per day, theyre illiquid and most likely to become volatile. ETFs dont have that problem, since their liquidity is not measured by the number of shares traded. The liquidity of the stocks within the Fund is the one measured..
Take your time to analyze their differences before you invest. Be wise and be open to new opprtunities and knowledge to help you on deciding which process to choose. Doing so will pay you more dividends at the end.