ETFs Vs. Mutual Funds: The Battle Continues

Mutual funds vs. ETFs, the war wages on. Which is the better investment? There’s no clear-cut answer, but understanding the risks and benefits of each asset will allow you to pick the best investment that fits your strategy. Here are five reasons to consider buying or selling an exchange-traded fund in lieu of a mutual fund. Be aware, though. While there are some pros to investing in an exchange traded fund over a mutual fund, there are, of course, some cons as well.

The Tax Benefits of ETFs

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The biggest advantage an ETF has over a mutual fund is the taxation. Due to their construction, ETFs only incur capital gains taxes when the fund is sold. In a mutual fund, capital gain taxes are incurred as the shares within the fund are traded during the life of the investment. So come April, this can help keep your tax bill low, especially of your on the profit side of your P&L.

Simplicity of ETFs

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When you buy or sell an ETF, it is done at one price with one easy transaction. You are always a trade away from opening or closing a position. With mutual funds, shares in the asset are constantly being traded to hit a target price and seek desired performance. Multiple trades, multiple prices, which can lead to multiple fees and commissions.

Cost-Effectiveness of ETFs

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As well as being simplistic investments, ETFs are also more cost-effective than mutual funds. Since shares in a mutual fund are actively traded and the fund itself is actively managed, they sometimes rack up large management fees. Fund managers have to charge for their time after all. With an ETF, it’s one simple transaction. Just like purchasing a stock. This cuts down on fees and commissions. There will be multiple commissions associated with a mutual fund due to its activity and volume, and that can add up to your total bill.

Investing Flexibility of ETFs

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With more and more ETFs being released every day, investors have more options to target a specific trading strategy. Commodity ETFs, ​style ETFs, ​country ETFs, even ​inverse ETFs. There are so many types of ETFs for investors, tracking the performance of a certain index or achieving a specific financial goal may be more attainable than with a mutual fund. And the way things are trending with new ETF innovations, there are going to be even more options in the future as well.

Transferability of ETFs

Whenever a managed portfolio is switched to a different investment firm, complications can arise with mutual funds. Sometimes the fund positions have to be closed out before a transfer can take place. That can be a major headache for investors, being forced to make unwanted or untimely trades. Liquidating a portfolio’s mutual funds may increase risk, increase commissions and fees, and incur early capital gains taxes. With an ETF, the transfer is clean and simple when switching investment firms. They are considered a portable investment, which is a nice advantage.

So, Who Wins the Battle?

Are ETFs better than mutual funds? There's no set answer to that question since too many factors are involved. However, if you are faced with an ETF vs. mutual fund dilemma, consider the disadvantages of mutual funds and the advantages ETFs bring to the table. And as with any investment, a company stock, mutual fund, an ETF, Index or otherwise, please make sure you thoroughly research any exchange traded fund or any financial asset before making any trades (long or short). Conduct your due diligence, watch how funds react to different market conditions, take a look under the hood and see what is in the funds. And if you have any questions or concerns, make sure you consult a stockbroker, a financial advisor, or another financial industry professional. While ETFs have many advantages, they have many disadvantages as well (as does any investment). So it is very important to understand the investment vehicle before you trade it. But once you have a full understanding on these ETFs, you can consider adding either or both to your portfolio. And good luck with all of your trades!