WHAT IS THE DIFFERENCE?
Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. A key difference is that most ETFs are index-tracking. Mutual funds can track indexes but most are actively managed.
Like a stock, ETFs can be sold short. ETFs offer tax advantages to investors. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ETFs are more tax efficient than mutual funds because of the way they are created and redeemed.
Mutual funds trade at the end of the day, while ETFs trade intra-day. Stock orders can be made with ETFs but not with mutual funds. ETFs often have lower expense ratios than mutual funds.
ETFs do not charge load fees. Instead, investors pay broker commissions when they buy and sell shares. Like trading stocks, these fees are fixed at certain dollar amounts, usually around $8 to $10. (it differs country to country) If you purchase a large stake and hold onto it, however, ETF investments are much cheaper than mutual funds.
Pros and Cons of ETFs
You can utilize ETFs for short-term trading, long-term trading, or a combination of both. Here are the advantages and disadvantages of including exchange-traded funds in your investment strategy.
- Increased flexibility for trading
- Price disclosed daily giving more transparency
- Typically low expense ratios
- Lower minimum startup investment
- Higher commissions when buying and selling
- No option to reinvest dividends
- Typically passively managed
- Not as many funds to choose from
Pros and Cons of Mutual Funds
Buying a mutual fund is a relatively simple process. Banks and brokerage firms often have their own line of in-house options and include a wide range of asset classes and strategies. Here’s an overview of the pros and cons to consider with mutual funds.
- Actively managed by a skilled investment professional
- Traded without paying commission
- Large selection of funds available to invest in
- Automatically reinvested dividends
- Not as tax-efficient as ETFs
- A higher cost of entry
- Too much diversification can lead to poor returns
- Subject to often higher capital-gains tax
SO, BEFORE YOU START INVESTING KNOW THE DIFFERENCE AND CHOOSE WHAT IS BEST FOR YOU.
Don’t forget the dividends – Exchange-traded funds (ETFs) pay out the full dividend that comes with the stocks held within the funds. To do this, most ETFs pay out dividends quarterly by holding all of the dividends paid by underlying stocks during the quarter and pays them to shareholders on a pro-rata basis.
We believe PSEi will soon draw out more ETF in coming years for the benefit of investors.
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Article by: Ashok – Strategic Coach & Mentor – Philippine Stocks