Posted on 03 August 2012.
Since Exchange Traded Funds (ETFs) have become hot investment vehicles in recent years, many investors are left wondering how to properly compare Exchange Traded Funds Vs Index Mutual Funds. There are a number of metrics that can be utilized to do a comparison of Exchange Traded Funds Vs Index Mutual Funds.
The most important difference between Exchange Traded Funds Vs Index Mutual Funds is the annual management fees. Exchange Traded Funds generally have lower annual maintenance fees, because many Exchange Traded Funds are passively managed and have lower cost structures than mutual funds. This is especially true of Exchange Traded Funds that invest in a stock market indexes, such as the Dow Jones Industrial Average or NASDAQ 100 Index. Index related Exchange Traded Funds simply buy the stocks in the underlying tracking indexes, and make adjustments as the indexes make changes.
Other differences to consider when comparing Exchange Traded Funds Vs Index Mutual Funds are:
- Exchange Traded Funds can be brought and sold during the regular trading day, whereas mutual funds can only be purchased or sold at the end of a trading day.
- Exchange Traded Funds trade in the same manner as stocks, which means they can be sold short, brought with margin, and be brought and sold using limit and stop limit orders (both buy and sell).
- Exchange Traded Funds that are held for a long period of time incur less capital gains for the holders of the Exchange Traded Funds than mutual funds because Exchange Traded Funds do not have to buy and sell their underlying assets as often as mutual funds.
Ultimately, investors want to know which type of investment, Exchange Traded Funds Vs Index Mutual Funds, is going to provide the best long term return on investment. Many investors are not concerned with the other benefits Exchange Traded Funds provide, and want to know whether Exchange Traded Funds or index mutual funds are better investment vehicles for making long term broadly-based stock market index investments.
Ultimately, both Exchange Traded Funds and Index Mutual Funds should track their underlying indexes very closely over long periods of time. However, the difference in management fees charged, even if they are only one-quarter to one-half of one percent less for Exchange Traded Funds, can make a big difference when money is held in index related Exchange Traded Funds over a long period of time. When considering Exchange Traded Funds Vs Index Mutual Funds it is important to consider the effect that fund management fees have on long term investment gains. Small differences in returns each year can add up to significantly higher rates of return, if an investment is held for many years.
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