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Are mutual funds better than ETFs?
Not necessarily. Each financial product has its strengths and
weaknesses. Any fair comparison should be done in the context of not
just performance, but tax efficiency, fees/total ownership costs,
risks, structural differences of each product and if the fund
objectives match the financial objective(s) of a particular investor.
Always refer to a prospectus for detailed information before
investing.
Are mutual funds less risky to own than exchange
traded funds?
Not necessarily. ETFs, like mutual funds, come in a variety of shapes
and sizes. The level of risk in an ETF or mutual fund is often
determined by the portfolio holdings within the fund. Both mutual
funds and ETFs can track a variety of indexes and sectors. Some
indexes or sectors will be more risky and volatile than others.
However, there's no substantiated research to prove that ETFs are any
more or less risky compared to mutual funds.
How are mutual funds and ETFs different?
ETFs offer investors intraday liquidity and are bought and sold with a
brokerage account. Mutual funds are priced at the end of the day and
cannot be bought or sold during regular trading hours. Also, ETFs are
traded on a stock exchange, whereas mutual funds are bought and sold
directly with the fund company or through a mutual fund trading
platform.
How does the cost of mutual funds compare to
ETFs?
Generally, investors buying or selling ETFs will pay a transaction
commission to a broker, whereas investors buying or selling no-load
mutual funds directly from a fund company pay none. However, some
brokers impose a commission to buy or sell no-load mutual funds. Other
so-called "no transaction fee" mutual funds don't charge a commission
to buy, but often carry higher expense ratios. Also, ETFs do not
impose back end redemption charges like many mutual funds.
Ultimately, any fair cost analysis between ETFs and mutual funds
should look at the total spectrum of expenses - not just the
transaction fee to acquire the ETF or mutual fund. Pay close attention
to the expense ratio, portfolio turnover, and tax efficiency of a
mutual fund versus an ETF. Always refer to a prospectus for detailed
information before investing.
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