Those who follow the stock market have likely noticed exchange-traded funds (ETFs) gaining in popularity. In principle, ETFs operate much like mutual funds. Both ETFs and mutual funds pool money from investors to essentially buy and sell stocks, short-term debt, and bonds in bulk. The key difference between the two is that ETFs buy and sell assets on the open market, just like a regular stock. As an investor you can buy at low prices and sell at higher prices throughout the day. By contrast, mutual funds are priced just once each day before the market closes. This also means that ETF fees differ from mutual fund fees. Here’s what to know about ETF fees vs. mutual fund fees.
ETF fees are generally lower than fees for mutual funds. However, there is evidence that the gap may be narrowing, as mutual funds compete with the popularity of ETFs. Even better? The average fees associated with both types of investments have been slashed by roughly 50% over the past 20 years.
One key reason for the discrepancy in prices is the result of how each fund is managed. Active management of mutual funds typically requires more human capital. For example, a mutual fund may have multiple managers buying and selling stock regularly. ETFs on the other hand are managed passively, following a benchmark index. Buying and selling is only done to mimic index changes.
Mutual funds also charge annual 12b-1 fees. These fees (which are passed on to shareholders) pay for advertising and marketing the mutual fund. There are no 12b-1 fees charged on ETFs. Mutual funds also charge a set commission, and there are no automatic commission fees for investing in an ETF.
In addition to low ETF fees, investing in an exchange traded fund may offer tax benefits. Since ETFs are bought and sold like stocks, it doesn’t matter if one investor sells their shares to another. The fund is not impacted. By contrast, when those who own mutual funds sell their shares, they are paid from the fund. When this happens, the fund may have to sell assets, to pay out the seller.
The sale of assets can trigger a capital gains distribution to all shareholders. This income generated by way of capital gains is subject to income tax.
There is no evidence that mutual funds always perform better than ETFs, or vice versa. But it is true that because ETF fees are lower than mutual fund fees, the overall return for investors may be greater. Be sure to speak with your financial advisor about historical performances of mutual funds vs ETFs if you’re considering a significant investment into either, or both.
If you’re ready to diversify your portfolio, Finley Davis can help. Since 2003, our team of knowledgeable, experienced financial advisors and wealth managers have helped countless Oregonians plan for secure financial futures. We accomplish this by using a variety of vehicles such as ETFs, mutual funds, life insurance, and more. To schedule a portfolio analysis, contact us today by calling 541-342-2224.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest ETF Exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.