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Exchange Traded Funds (ETFs) Investment Suitability

If you are facing the dilemma of whether to invest your money in a mutual fund or an exchange trade fund, you should have in mind that there are substantial differences between the two. Even though in most cases mutual funds represent a better option, ETFs represent a better choice in some situation due to their specific character.

Consider the following situations in which we recommend the investment in an ETF.

  1. Lump Sum Investment

    Even though mutual funds provide you with the opportunity of investing in them without incurring trading cost, in the case of a large sum of money it will be better to invest in an ETF. If the amount of money you have allocated for investment is as small as $200, a fee of $15 may be of significance. However, in the case of a lump sum of money, such as $200,000, a fee of $15 will not make any difference.

  2. Taxation Regulations

    By law, mutual funds are required to pay distributions to their investors at the end of each year, which represent a taxable event. On the other hand, ETFs are more beneficial since it eliminates this requirement. This is so, because ETFs are traded as stocks. However, in case you decide to sell the ETF, you will be required to pay capital gains taxes, which are determined by the regulations of the IRS.

  3. Timing the Market

    Due to the possibility of intra-day trading, ETFs provide greater opportunities to market timers than mutual funds do. Additionally, they have the advantage of trading within industries, indices and countries that other wise, thorough stock and mutual fund markets will not be so widely available.

    There are many examples of misuse of market timing of mutual fund investors that have resulted in big scandals. This has led to the imposition of many regulations and penalties by the mutual fund companies. This was done in order to prevent future misuses and short-term trades. However, these limitations can be easily eliminated by the purchase of ETFs.

    On the other hand, you should carefully consider the available opportunities of mutual funds, since some of them allow for intra-day trading. This is done by the offering by some companies of such index funds, which provide for these actions.

Conclusion

Even though ETFs are more suitable in the previously mentioned situations, mutual funds provide greater financial opportunities to their investors. Therefore, before setting your mind on an exact investment, consider the available alternatives and make the choice that best fit your and the market's conditions.

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