ETF vs Mutual Fund: Which One Should You Choose?
You worked hard for your money and you want it to work hard for you. You know you need to invest it wisely but figuring out the right investment tool can be overwhelming – there are dozens of options and knowing where to start is tough. When you want convenience and diversity, you should be considering an ETF vs mutual fund.
There are a lot of investment tools available – some of them require an intricate knowledge of the stock market, while others make it easy for the average person to invest. However, deciding between an ETF vs mutual fund requires a small time commitment and a plan for seeing your investment grow.
ETF vs Mutual Fund: Similarities and Differences Between an ETF and Mutual Fund
An ETF – or exchange-traded fund – and a mutual fund are both investment products that group together shares of stocks and bonds in a convenient portfolio. This makes it easier for people to invest in stocks or bonds that are otherwise unattainable due to their minimum investment requirements. It also means more people can diversify their investment portfolios.
Similarities Between an ETF and Mutual Fund
The basic principle of both ETFs and mutual funds is the same – offer a collection of stocks or bonds to potential investors. An investment expert manages the individual stocks and bonds in the mutual fund or ETF and they are measured by the performance and the complete number of shares in the stocks or bonds. ETFs and mutual funds range from relatively low-risk to riskier, high-yield collections, depending on your financial goals.
Differences Between an ETF and Mutual Fund
With an ETF, you can purchase them through your investment broker during the day. The price varies with the market, and the minimum to enter the fund is one share in an ETF. Mutual funds must be purchased through a fund company and the purchase price is based on the net asset value. You typically need anywhere from $3,000 to $50,000 to invest in a mutual fund.
ETF vs Mutual Fund: Pros and Cons of Investing in These Financial Products
While both ETFs and mutual funds make it easy to invest in multiple stocks or bonds at once, there are pros and cons to investing in these financial products.
Pros of Investing in an ETF vs Mutual Fund
The biggest advantage of investing in an ETF is how little you need to purchase to start building your wealth. Being able to purchase just one share gives more people the chance to invest. Additionally, because ETFs trade on the stock market, you can leverage your purchasing power throughout the day. ETFs also have annual fees that are relatively low, generally below 1%. ETFs also don’t typically create capital gains, which means you’ll have a lower tax burden.
Mutual funds tend to be more actively-managed than ETFs. A mutual fund’s value is critical, so fund managers have a vested interest in maximizing the portfolio’s long-term potential. You also don’t have to pay any commissions with an ETF.
Cons of Investing in an ETF vs Mutual Fund
In addition to annual fees, you’ll have to pay commission on ETF trades. That means if you are actively trading your ETF shares to maximize your portfolio value, you’ll have to pay your investment broker for every transaction, contingent on your particular agreement. ETFs may not have the same long-term goals as a mutual fund.
Investing in mutual funds comes with a couple of potential setbacks. First, you generally need a large investment to open an account. You’ll also be more likely to receive capital gains from a mutual fund, which means you could be subject to capital gains taxes. Depending on where you live, these taxes can be high. Mutual funds also charge higher fees than ETFs – you may see fees that range from 3% to 6% either when you invest or when you withdraw.
ETF vs Mutual Fund: Tips for Making an Investment Decision
Even with a thorough overview of an ETF vs mutual fund, making the decision to invest can be intimidating. Fortunately, with a few simple guidelines, you can make smart investment decisions that inspire confidence in your financial future.
Follow these tips to make your investment decision a little bit easier:
Research all of your options: Rather than choosing the first ETF or mutual fund you find, research a few options to find the best management team and lowest fees.
Determine what level of risk you can take: To make the right investment decision, you need to know how much risk you can afford to take.
Consider working with an advisor: An investment professional can help you make the best investment decision and maximize your income potential.
With a little bit of time and planning, you can figure out if an ETF vs mutual fund is the most appropriate investment decision for your money.
Want to know more about investing in ETFs and mutual funds? Contact Mooney Lyons to find out about your investment options.