When it comes to investing, the number of options can be overwhelming. In this blog post, we’ll look into some of the reasons why using Exchange Traded Funds (ETFs) continue to outpace mutual funds.
What is an Exchange Traded Fund (ETF)?
An ETF is a type of investment fund that holds a diversified portfolio of stocks, bonds, commodities, or other securities. They trade like stocks, and can be bought/sold throughout the day. Mutual funds trade once per day after the markets close ETFs offer a number of advantages over traditional mutual funds, including lower costs, tax efficiency, and flexibility.
Diversification
Similar to mutual funds, ETFs provide investors with a diversified portfolio of assets. A single ETF could hold hundreds of stocks, which means investors are not as exposed to the risk of any one stock going down in value.
Lower Cost
Most ETFs are passively managed, which means they track a benchmarked index and do not try to beat the market. This is in contrast to actively managing funds, which try to outperform the market or provide alpha via risk adjusted returns.
As a result, ETFs typically have lower expense ratios than actively managed funds because of the lower overhead costs and computer based management.
Tax Efficiency
ETFs are known to be more tax-friendly when compared to mutual funds because:
- Capital gains are only realized when you sell your ETF shares, while mutual funds distribute gains to shareholders on a regular basis, even if you don’t sell your shares.
- ETFs have low turnover, which means fewer stock sales of stocks that have risen in price.
As a result, ETFs allow you more control on when and how you pay your taxes.
Flexibility + Transparency
With an ETF, you get a higher degree of flexibility because they trade throughout the day. This makes it easier for investors to enter and exit positions quickly, which helps them manage their portfolio more effectively. Holdings are also disclosed daily which many investors prefer seeing.
Wide Range of Options
Similar to mutual funds, ETFs also cover just about every area of the market one could want. Depending on investors specific goals or risk tolerance both ETFs and mutual funds have this covered.
Bottom Line
Exchange traded funds (ETFs) have similar advantages as mutual funds. Their ability to control taxes better, trade intra day, with lower costs seems to give them the edge. These factors are important when building a portfolio paired to your goals. The ability to customize a portfolio based on your life is easier today (our opinion) with the use of ETFs.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Disclaimer/Sources
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice.
