My Comments: Chances are you’ve heard of ETFs (Exchange Traded Fund). They are not to be confused with EFTs (Electronic Fund Transfers). Though I suppose it’s possible to have both involved in a given transaction.
Given that most of us now realize that fees imposed by Wall Street firms, and non-Wall Street Firms, can be, and are, an existential threat to our future financial security, ETFs are an example of how we now get to invest in the markets and keep those fees to a minimum.
I don’t begrudge anyone the opportunity to make a living providing professional advice, or providing a forum in which others can grow their money. But I do have a problem with unimpeded greed that has the potential to suck the life out of those whose financial literacy is lacking. All I can do these days is make an effort to improve your financial literacy to increase your chances of success in your financial life.
by Jilly Pretzel \ January 24, 2019
What is an ETF?
ETF stands for exchange-traded fund. This means that ETFs traded on a major stock exchange like the New York Stock Exchange (NYSE) or the NASDAQ, etc. just like a regular stock
The “fund” in ETF, means that unlike a single stock or bond, an ETF is made up of a combination of different stocks or bonds. The number of stocks and bonds a fund contains varies from tens up to in some cases thousands.
Benefits of ETFs
ETFs can be less work because they are a pre-selected group of stocks and bonds. As long as you have reviewed the stocks and bonds that it contains and you feel that the ETF’s aim matches your investing goals it can be an easier way to invest without worrying about managing the stocks or bonds individually.
Are ETFs Risky?
The answer is that it depends on the type of ETF. Generally, bond ETFs are more stable that stock and real estate based ETFs. However, even when dealing with bond ETFs the long term bonds are more volatile than the short term bonds. Also, with regard to stock-based ETFs, those that are dealing with larger US companies tend to be less volatile. So, in short, it really depends on what the ETF is made up of.
What is a Mutual Fund?
A mutual fund is a collective pool from investors, operated by money managers who create a diverse portfolio with the funds. Think of it as people coming together to put their money together for stronger investments and lower risk.
The risk is lower because funds are invested in various securities (such as stocks and bonds) so if one investment does poorly, another investment will likely do well and even it out. This means the investors will have lower risk and (hopefully) high reward.
The manager of the mutual fund is usually hired by a board of directors and is a partial owner. Because an expert is in charge of the funds, investors enjoy the benefit and convenience of a professional devoting their time to researching where to allocate funds, without having to actively stay up on the market.
Mutual funds can only be traded once a day at the Net Asset Value (NAV) price, which is the value of fund assets, minus the liabilities, divided by its number of shares.
What Are The Differences Between Mutual Funds and ETFs?
Mutual funds and ETFs are similar in that they both involve pooling money to create a fund invested in a diverse portfolio of securities. However, there are important differences between the two.
- One important difference is that ETFs are usually more financially accessible.
For one thing, ETFs usually have a lower expense ratio than mutual funds.
Expense ratios pay for management fees and other expenses and these rates are usually higher for mutual funds.
In 2017, the average expense ratio of actively managed mutual funds was 0.59 percent while the average expense ratio for ETFs was 0.21 percent, according to the Investment Company Institute.
This means that for every thousand dollars you have invested in a mutual fund, you’d pay $5.90 a year, while with an ETF, you’d only pay $2.10 a year. This may not sound like a lot, but these fees can really add up.
Also, while many mutual funds require hefty minimum investments, ETFs have no minimums which allows you to buy as little or as much as you want. You can even start out with a single share.
While it may be cheaper to get started with ETF, mutual funds don’t have the same fees ETFs do when trading. Because ETFs are traded like stocks, you should expect to pay a commission when buying and selling.
Another difference is while mutual funds can only be traded at the end of the day at the NAV price, ETFs can be traded throughout the day like stocks.
Finally, while mutual funds are usually actively managed, with a fund manager working to allocate funds in the most financially beneficial way, ETFs are purchased simply to track an index. With an actively managed mutual fund you get the benefit of a professional devoting time to find the best opportunities. However, this does make room for human error and if a fund manager isn’t great, you might be better off with the ETF.
Is an EFT right for you?
Knowing whether an ETF is right for you depends on your financial situation and your investment goals. Some major advantages of an ETF are that there are no minimums and generally smaller fees, so it won’t cost you very much to get started in the market. Plus, ETFs provide more flexibility for trading.
However, going with a mutual fund might be worth the extra expense because for the benefit of a professional to manage the funds. It’s a great way to passively make your money grow and could mean big earnings in the future.