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.

PODCAST NOTES

  • 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.

Do you prefer to invest in ETFs or Mutual Funds? What funds do you own or would you suggest?