Mutual-Funds-Advisor.com » Exchange-traded fund (ETF) Guides » ETFs vs Mutual Funds

ETFs vs Mutual Funds

If you are looking for an inexpensive and fast way to invest in the market, exchange-trade funds (ETFs) are the answer to your quest. They represent index funds that are traded in the same way as stocks. Their major advantage is their focus on asset classes.

The Dow Jones Industrial Average, Standard & Poor's 500 Index and NASDQ Composite are some of the indexes on which most ETFs are based. You can find ETFs for:

  • Large US companies
  • Small US companies
  • Real estate investment trusts
  • International stocks
  • Bonds
  • Gold

Almost all asset classes are represented by an ETF. If not, someone perspicacious enough will soon offer it.

Even though ETFs and mutual funds have many similarities, some differences can also be observed. For example, mutual funds receive orders during the trading hours of Wall Street. However, the real transactions happen when the market closes. The sum of the prices of the stocks that make up the mutual fund represents the price of the fund. On the other hand, ETFs are traded immediately during the day. This gives investors the opportunity to lock in a price for the stocks that are included in the ETF.

ETFs are recommended if you prefer to buy and hold investments, meaning that you are more focused over the long term. Additionally, ETFs are more beneficial as compared to mutual funds in terms of annual fees, since they have significantly lower ones. However, you should have in mind that a commission to the brokerage that executes the transaction is paid, but the amount of this expense is significantly decreased when the trades are of a large size.

As for taxation, ETFs are beneficial since they show good performance on after-tax terms. Additionally, ETFs allow for margining and investors are provided with the opportunity to apply different defensive and even speculative investing strategies to increase their assets.

ETFs enjoy the same safety as stock certificates. However, you should have in mind that the internal structure of ETFs is more complex that the one of mutual funds. This complexity is well managed by a number of specialists such as brokers or money managers.

ETFs are generally classified as a class of mutual funds. This means that they are liable to the regulations of the SEC (Securities and Exchange Commission). However, since they differ from traditional mutual funds in their structure, there are additional rules that apply for their trade.

In order to apply better trading strategies upon ETFs you should become well-acquainted with indexes, because in their essence ETFs are index funds. However, the strategy that should be applied to ETFs need not be a passive one that includes the purchase of an ETF and its holding over longer periods of time. ETFs have gained popularity among hedge funds and day traders, both of whom prefer the frequent executions of transactions.

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