Exchange-traded funds versus mutual funds
Part 2 of 2
Mutual Funds allow you to trade without paying commission:
Because ETFs are traded like stocks, you typically pay a commission to buy and sell them. There are some commission-free ETFs available, but they may have higher expense ratios to recoup money lost from being commission-free. Mutual funds, by contrast, do not charge commission, although front-end or back-end loads paid when buying or selling can work similarly to a commission. There are, however, many no-load mutual funds that can be bought and sold with no broker commissions. Investors who plan frequent transactions, such as investors using dollar-cost averaging, may be better off with a mutual fund that does not charge a broker commission for each trade.
Mutual Funds are more likely to be actively managed:
Most ETFS are index funds, which track market indexes. While there are some actively managed ETFs, these tend to have higher prices. While some mutual funds are passive index funds, there are far more actively managed mutual funds than actively managed ETFs. With an actively managed mutual fund, a fund manager makes choices about how to allocate fund assets as opposed to assets being purchased simply to track an index. Active management can be a good thing if the fund manager is talented and is able to outperform the market. However, not all fund managers are good ones — and you’ll still likely pay higher costs for a poorly managed mutual fund than for passively managed ETFs.
Are ETFs or mutual funds right for you?
Both ETFS and mutual funds provide an easy way to invest in stocks and build a diversified investment portfolio. Ultimately, you’ll need to consider a variety of factors including your tax strategy, the amount of money available to invest, and your overall investment strategy in order to determine which option is right for you. Good luck.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].