Exchange Traded Funds vs Mutual Funds
Exchange Traded Funds (EFTs) are gaining more prominence in investor’s portfolios. Mutual funds are expensive to own or to trade when compared to an EFT since average mutual funds have a 1.5% management fee attached.
Bi-yearly, mutual funds are required to inform investors of their holdings. For the most part, mutual fund purchasers are not aware of what they own.
The history of Exchange Traded Funds goes back to the first such instrument created, the S&P Depository Receipt known as SPDR. The shorthand symbol is SPY and is composed of the 500 companies that make up the S&P 500.
ETF’s stay very close to their inherent net asset value. If values drift too far, professional arbitrage traders will soon bring values into line. It is entirely self-policed by these mechanics.
ETFs behave just like a stock. You can enact stops, limit order and view everything in real-time if you choose.
The management fees for EFTs dwarf those of mutual funds. SPY, for instance, SPY has an annualized net expense of 0.09 percent.
Unlike a mutual fund, with an ETF you know exactly what that index is composed of. There is no mystery.
If there is a choice between mutual funds or ETFs, one should be aware of fund management past history and direction. How do they do in a bear market? How do they perform in a bull market? Do the beat the ETF for the same investment area?
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