Your Guide to ETFs and Mutual Funds
Your Questions Answered
Exchange-traded funds (ETFs) have become increasingly popular of late, although they've been around for about 25 years. Mutual funds have been available for much longer, with the first modern-type mutual fund dating back to 1924 with Massachusetts Investors Trust. Many investors embraced mutual funds for their high returns back in the '80s, but these days you'll hear ETFs being touted as cheaper, better alternatives.
People often ask, is an ETF really better than a mutual fund? You'll get a different answer depending on who you ask, but once you understand the differences, you can form your own opinion based on which instrument fits your needs best. Each investment type has its own merits, and you can make an educated financial decision that will have a positive impact on your portfolio or investing strategy once you get to know them.
What Are ETFs and Mutual Funds?
It’s important to understand how ETFs and mutual funds work before you can decide which is a better fit for your portfolio. Exchange traded funds or ETFs follow indexes—up, down, and all around. But they act more like equity investments. Mutual funds allow a group of investors to pool their money and hire a portfolio manager.
Should You Pick an ETF or a Mutual Fund?
When you have a better understanding of the two investments and how they function, it’s time to decide which is the right asset for you. These articles might be beneficial for your decision-making process because they literally give a perspective from both sides of the investment coin.
The Advantages of ETFs and Mutual Funds
Both investments have pros and cons, as do all investments. But sometimes it’s beneficial to focus on the advantages of each type of fund to see what can really work for your particular investment strategy.
The Disadvantages of ETFs and Mutual Funds
Pros are good, cons are bad. Risk management is too important to ignore, so understand the disadvantages of both funds before you make them part of your investing arsenal.
ETF and Mutual Fund Investment Strategies
Now that you know all about ETFs and mutual funds, how do you use them? Both products fit into many investment strategies. It’s just a matter of deciding which ones can work best for you.
The Tax Implications of ETFs and Mutual Funds
Then there’s the biggest question of all: How will investing in ETFs and mutual funds affect your tax situation? Tax rates will vary depending on the fund, as well as on where you invest and when you close your position. It's important to know how each investment will impact your finances come tax time.
The Bottom Line
Are ETFs right for you? Are mutual funds the better choice? It's always a case-by-case answer, but now you have the information you need to make the right decision.
You might still have questions and concerns, and that's OK. Consult a financial professional such as your broker or financial advisor before making any trades. No investment is without risk, and ETFs and mutual funds are no exception. Be sure to conduct thorough research before you hit the market.
Good luck with all your trades when you're armed with all the data you need.