ETF Basics

ETF’s vs. Mutual Funds

In today’s article we discuss the basics of both exchange traded funds and mutual funds as well as the advantages of both types as funds. As explained in recent articles ETF funds are simply investment portfolios that consist of multiple securities that trade like stocks. These securities are designed to track the performance of an index such as the S&P 500. The ETF market has grown considerably since introduction into the market back in 1992 and there are currently over 1,000 ETF funds available. The silver ETF , the gold ETF , the agriculture ETF and the currency ETF , just to name a few, are all available for trading. This market continues to grow and is a great market for investors who are looking to invest in more specialized securities.

Mutual funds are simply a collection of investments designed to reflect the performance of the underlying holdings, they may have widely contrasting portfolios and may not track a specific index. The main difference between mutual funds and exchange traded funds is that mutual funds only trade once a day whereas exchange traded funds continuously trade like stocks all day while the markets are open. Also, their fee structure is different. ETFs are more straightforward while mutual funds have numerous ways to charge the investor.

Advantages of Exchange Traded Funds Include:

  1. Liquidity – this is liquidity is due to the fact that they can be traded like stocks multiple times throughout the day, also allowing limit and stop loss orders.
  2. Tax Advantage – ETF funds are capital gains tax friendly, often never even issuing a capital gains distribution, unlike mutual funds. When they due issue a capital gains distribution they are typically minimal.
  3. Low Ownership Costs – the recurring fees are very low due to their structure.
  4. Options – more sophisticated investors buy puts and calls or create spreads to hedge their investments on the corresponding options.
  5. No Minimum Investment – many mutual funds require a large sum of money as their minimum investment where ETFs do not and you are only limited by your own financial limitations and the price per share.

Advantages of Mutual Funds Include:

  1. Dividend Reinvestment – dividends for mutual funds can be set up so that they automatically reinvest back into the fund unlike exchange traded funds.
  2. No Commissions – there may only be an initial fee and you can make purchases without being charged like you would if you were buying an ETF or stock.
  3. Pricing Surprises – there can be surprises with exchange traded funds since the share price may fluctuate throughout the day whereas with mutual funds, there is one price at the end of each trading day.
  4. Share Classes and Breakpoints – there are different share classes such as front-load and back-load that allow flexibility in how the funds are purchased (for those investors who do invest in load funds). Breakpoints are also on fees that have a certain amount into one specific fund company.

Read about Japanese Candlesticks as well which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis . It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical analysis indicators, such as the moving average , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or ETFs.