ETFs and mutual funds are more similar than different. After all, they are both good ways to invest in index funds. So when does it make sense to invest in an ETF? Here are four questions that can help you decide:
Are you seeking an actively managed or indexed strategy?
- While mutual funds offer both actively managed and index fund strategies, a majority are actively managed and seek to outperform a stated benchmark.
- Most ETFs are passively managed strategies that seek to mirror holdings of indexes such as the S&P 500 and Dow Jones Industrial Average.
How much flexibility and control do you want?
- Mutual funds can be traded once a day. The attractiveness of this option is simplicity. All trade orders receive the same daily price calculated at end of the trading day.
- ETFs, conversely, offer the flexibility to be traded throughout the day when the market is open. This intraday liquidity offers flexibility and greater control over the timing, and potentially, at what price you trade ETFs.
Is your desired mutual fund available through your brokerage account?
- Depending on what funds are offered on your brokerage account platform, your mutual fund options can vary, and sometimes widely.
- In contrast, because ETFs trade on exchanges, just like stocks, any investor with a brokerage account can buy or sell virtually any ETF.
How long do you plan to hold the investment?
- ETFs don't have restrictions on frequent trading like most mutual funds. If you're planning on investing for a short period—for example, within two months for purposes such as tax loss harvesting—ETFs may be a better choice.
Do you prefer a lower investment minimum?
- You can buy an ETF for the cost of a single share, which can be as little as $100.
- The minimums to invest in a mutual fund are typically higher, frequently starting at $1,000 or more.
Because ETFs and mutual funds are more similar than different, focusing on your investment objective, flexibility needs and the total cost differences of either vehicle, can help you make an educated decision.
Want more information? You can find more on the differences between ETFs and mutual funds in the following table.
|Management||The majority of ETFs are indexed, or passively managed funds.||Mutual funds can be actively or passively managed, but the majority are actively managed.|
|Trading & pricing||You can trade ETFs on the major stock exchanges anytime during the trading day. ETF prices fluctuate throughout the day just like stocks.||Mutual fund shares are priced once a day after the markets close.|
|Transaction costs||You typically pay standard commissions, but some brokerage firms provide zero commission ETF options. There's an unavoidable cost when trading individual stocks, bonds, and ETFs known as the bid-ask spread.||You typically pay standard commissions, but some brokerage firms provide zero commission mutual fund options.|
|Minimum investment||You can buy an ETF for the cost of a single share, which can vary throughout the trading day.||Mutual Fund minimum investments vary, but you can frequently invest with as little as $1,000.|
Editor's Note: This is a paid post from Vanguard.
All investing is subject to risk, including the possible loss of the money you invest.
©2017 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor of the Vanguard Funds.
The Motley Fool has a disclosure policy.