Posted on 26 April 2012.
An 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:
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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