The Top 5 Reasons Why Investors Choose ETFs Over Mutual Funds
ETFs and mutual funds are stock market vehicles that enable an investor to spread their risk across a number of assets, such as listed companies, bonds or commodities. This strategy provides a route to stock market investment without the need to micromanage a portfolio of individual assets on a daily basis. Exchange Traded Funds, or ETFs, are an increasingly popular choice to employ a low-risk investment plan. Analyzing why some investors choose ETFs over Mutual funds provides critical information that highlights the differences between the two types of investment vehicle.
When making an investment decision it is important to know as much as possible about the subject in order to choose the type of fund that’s right for you. Looking at the top 5 reasons why an investor may pick an ETF rather than a mutual fund gives you a solid platform of information to discuss with your financial advisor.
1. Performance Profit
Investors want to make money. Sounds like an obvious statement, but to maximise any profit, savvy investors look at benchmark figures to see how types of funds perform. It is widely known that the majority of mutual funds underperform the benchmark index relating to the fund’s portfolio. For example, nearly 84 percent of mid-cap fixed income and U.S. equity funds in the S&P Mid Cap 400 failed to meet the benchmark over a three year period to 2011, according to data presented by Oliver Ludwig in an article for the “NASDAQ” in February, 2011.
Unlike a mutual fund, you can buy or sell an ETF at any time during stock market trading hours. An ETF contains a portfolio of tradable assets just like a mutual fund; however an ETF provides the ability to trade the investment vehicle like a stock. The ETF’s price typically represents the net asset value of the portfolio.
3. Redemption Fees
ETFS do not apply the type of early redemption penalties that a mutual fund may impose. Commonly, mutual funds levy a fee if you want to take your investment money out of the fund early. Due to the nature of ETF trading, early redemption fees do not apply.
4. Hidden Costs
Mutual funds incur the inflow and outflow of investor monies throughout the year that force the fund to buy and sell tradable assets within the portfolio. In this respect a mutual fund suffers the potential disadvantage of increased trading during times when it may not be beneficial to the fund’s value to trade. This inherent problem creates associated trading costs that may reflect negatively on the net value of the fund.
An ETF is a transparent investment vehicle. The listed assets in the portfolio are available to see after each trading day. Mutual funds on the other hand are under no obligation to list the portfolio daily, and tend to reveal the asset structure in quarterly reports.
ETFs offer a diverse range of sectors, indices, bonds, commodities and exchanges to spread investment risk. The ETF market attracts many types of investors including intraday, short and long-term traders. Mutual funds have more reliance on long term investors in order to reduce redemption costs that can negatively impact on a portfolio value and profit. ETFs provide a transparent, low-cost and flexible route to stock market investment that many investors want in modern trading markets.