ETFs and Mutual Funds Explained
I am excited to continue the investing series in my podcast today with a discussion around ETFs and Mutual Funds. In the previous episodes of the investing shots series, we discussed Investing Like A Professional, Asset Types, Asset Allocation, and Risk Management. Wendy and Eric of DIY Fund join me again to give more clarity on the similarities and differences of these two investment options.
Before I became a financial advisor, I had no idea what the difference was between ETFs and Mutual Funds other than fees, and if you’re like I was, you are not alone. I hope that this episode clears things up for you and helps you feel more confident selecting the best investment option for you.
- Before Shannon became a financial advisor, she had no idea what an ETF was.
- ETF stands for exchange traded fund, which allows you to buy a basket of stocks, like a mutual fund.
- ETFs were born from Index Funds.
- Where ETFs and mutual funds differ is that ETFs are not actively managed, and therefore, have lower fees.
- There are now managed ETFs that have higher fees than regular ETFs, but the fees typically are still lower than the fees of a mutual fund.
- If you have a view on something, you can probably find an ETF based on that sector.
- Shannon advises not to search your investment firm’s options for ETFs first, but to search Google for lists of ETFs.
- The site Morningstar shows how all the ETFS are structured, what fees they charge, and what they are trying to invest in and do.
- Not every investment company has every ETF available to you.
- Another difference between ETFs and mutual funds is their structures.
- When you buy an ETF, you are buying a representation of what the ETF says it mimics, and you are not actually buying individual stocks.
- A mutual fund actually owns what it says it owns, so when you buy a share of a mutual fund, you are an owner of that fund’s holdings.
- Shannon suggests ETFs for stock and MFs for bonds.
- You really need to understand what you are buying before you buy.
- But, if you are confused at the end of the day, buy a mutual fund despite the higher fees because it is actively managed.
- The holdings of ETFs don’t have capital gains or capital losses, which are taxes that you’ll see in mutual funds.
- It’s important to note that ETFs are considered tax-efficient compared to mutual funds, and only if you own them outside of a retirement account or a 529 account.