Mutual Funds
Mutual Funds are pooled investment vehicles. In other words, multiple investors fund a single pot of money and hire a manager to invest it. Each investor receives shares in the fund in direct proportion to the size of their investment. Each fund is a conglomerate of numerous securities. Mutual Funds are priced once a day. The fund’s net asset value (NAV) is calculated based on the value of the underlying securities when the market closes. If you buy the fund after the markets close, you will receive the next day’s closing price.
Investors can diversify their portfolio through mutual funds as they incorporate numerous securities. This diversification reduces your exposure to potential risks of holding a few individual securities. Utilizing professional money management in actively managed mutual funds allows investors to leverage the experience and resources of others to make decisions on what and when to buy and sell. Additionally, Mutual funds provide additional liquidity as you are able to convert your mutual fund investment into cash by making a request in writing or over the phone on any business day.
Exchange Traded Funds (ETFs)
The first Exchange-Traded Fund (ETF) was introduced to the market in 1993 and has exploded ever since. An ETF is structured in almost the exact same way as a mutual fund. The difference is that an ETF trades just like a stock on an exchange. ETFs can be sold short, traded on margin, and bought or sold throughout the day. However, ETFs can trade at a price higher or lower than its NAV, due to supply and demand.
ETFs are generally more tax efficient than mutual funds. When a mutual fund sells securities due to redemptions or some sort of tactical move, capital gains result. ETFs avoid both issues. First, ETFs typically track an index and have very little turnover. Second, the creation and redemption process allow the ETF provider to deliver underlying holdings to the market maker rather than selling them when faced with redemptions, thus avoiding capital gains. The ETF provider can even deliver the shares with the lowest tax basis, leaving the fund with shares that are at or above the current market value. These two features allow many ETFs to pay little or no capital gains throughout the year.
Mutual Funds Vs Exchange Traded Funds (ETFs)
So which investment vehicle is right for you? Retirement Wealth Partners looks at different factors for each of their clients. ETFs may provide additional segmentation of specific industries that Mutual Funds aren’t able to mimic. Additionally, if your investments aren’t in a qualified account, they may provide additional tax efficiency as they typically reduce the ongoing capital gains taxed to you as the investor. We also evaluate the long term performance of ETFs and Mutual Funds to assess how they are performing against different benchmarks. We also assess the impact of the expense ratio between different funds to adjust each clients portfolio.
Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the mutual fund, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Exchange-traded funds (ETFs) are subject to market volatility, including the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.
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