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Investing In An ETF Vs A Mutual Fund

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Differences Between An ETF Vs A Mutual Fund Investment

ETF Vs a mutual fundAn Exchange Traded Funds (ETF) or a mutual fund can be used by investors to invest in stocks or other financial securities.  Both ETF and mutual fund investments reduce investment risk by spreading out an investment amongst a number of stocks or financial securities.  However there are differences regarding an ETF Vs a mutual fund investment.  The answer to the question regarding whether to invest in an ETF Vs a mutual fund depends upon specific investment criteria and an investor’s comfort level with each kind of investment.

There are a number of important differences between an ETF Vs a mutual fund, which need to be considered when making an ETF Vs a mutual fund comparison for investment purposes.  Here are some of the more important ETF Vs a mutual fund comparisons:

  • An ETF Offers Flexibility When Buying and Selling – An ETF fluctuates in value throughout the trading day based on the net asset value of the underlying securities that it owns, and can be bought and sold at essentially its real-time valuation throughout the trading day.  An order to buy or sell a mutual fund must be entered before the market close, and is then executed at the close of the trading day, at price that is based on the closing net asset value of the underlying securities that it owns.  The trading flexibility offered by ETFs means an investor may be able to get into and out of an ETF investment at a better price than a mutual fund, especially in a fast moving market.
  • An ETF Investment Can Be Margined, Shorted and Protected With A Stop Loss – Unlike a mutual fund, an ETF can be purchased on margin and can be sold short (if one has an authorized margin account) to take advantage of opportunities to short overvalued stocks and other asset class.  Additionally, an investment in an ETF can be protected with a stop loss order.
  • An ETF Has Lower Maintenance Fees – Compared to the average mutual fund, an average ETF has lower maintenance fees, due to lower costs associated with the ETF structure Vs a mutual fund’s structure.
  • An ETF Has Lower Capital Gains – The average ETF has lower capital gains than the average mutual fund.  This is due to the fact that ETFs do not buy and sell their underlying securities as often as mutual funds, and ETFs do not have to sell their underlying securities when investors sell and request cash.
  • ETFs Offer Greater Diversification Across Asset Classes – ETFs offer more options when compared to mutual funds for investors looking to diversify their investment portfolio across various assets classes, such as:  stocks, bonds, real estate, and commodities.

Things To Consider When Investing An ETF Vs A Mutual Fund

There are a number of import things to consider when weighing an ETF Vs a mutual fund investment.  ETFs are relatively new financial products when compared to mutual funds. ETFs are often not actively managed by an investment advisor.  Investors looking for safety may be more comfortable investing in a managed mutual fund that has been in existence for decades and is backed by an established investment firm and is overseen by seasoned investment managers.  ETFs can be leveraged; meaning ETFs can use various financial instruments to mimic the move of an index fund by two or three times, which exposes an investor to much higher levels of risk to their investment capital than a mutual fund investment.  ETFs that invest in futures contracts, such as those that invest in natural gas or gold commodities futures, can experience price decay and lose value when the ETFs need to buy more expensive futures contracts from further out months.  The way that some ETFs derive their valuation can be quite complicated.  While most mutual funds simply invest in stocks or bonds, some ETFs can invest in a wide variety of complicated financial instruments that can be difficult for investors to understand, which can lead to unexpected investment outcomes.  An ETF Vs a mutual fund comparison requires careful due diligence to ensure that an investor understands the valuation methods, risks, advantages, and drawbacks associated with each type of investment.

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