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.
1. Tax Benefits
The biggest advantage an ETF has over a mutual fund is the tax benefit. 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.2. Simplicity
When you buy or sell an ETF, it is done at one price with one transaction. You are 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 a desired performance. Multiple trades, multiple prices.3. Cost-Effectiveness
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 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.4. Investing Flexibility
With more and more ETFs being released, 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.5. Transferability
Whenever a managed portfolio is switched to a different investment firm, complications 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. 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.
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.
