Mutual Funds vs. ETF's

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yousha
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Mutual Funds vs. ETF's

Post by yousha » Sat Aug 11, 2018 9:14 am

The other day, I read in a financial column that ETF's are preferred if you intend to keep those assets for longer than 4 months as opposed to having a mutual fund. I always thought that ETF's were mainly short term and used by many who wanted to trade frequently. Anyone, please clarify.

PFInterest
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Re: Mutual Funds vs. ETF's

Post by PFInterest » Sat Aug 11, 2018 9:19 am

yea thats not a thing.

Silk McCue
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Re: Mutual Funds vs. ETF's

Post by Silk McCue » Sat Aug 11, 2018 9:21 am

I link to the article would be helpful.

Otherwise, there are many existing posts on this board regarding this subject that have explored this general question in depth.

Cheers

retiredjg
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Re: Mutual Funds vs. ETF's

Post by retiredjg » Sat Aug 11, 2018 9:23 am

yousha wrote:
Sat Aug 11, 2018 9:14 am
The other day, I read in a financial column that ETF's are preferred if you intend to keep those assets for longer than 4 months as opposed to having a mutual fund.
This idea is nuts in my opinion. What was the reasoning behind that?

I always thought that ETF's were mainly short term and used by many who wanted to trade frequently. Anyone, please clarify.
Frequent traders may like ETFs better because they can sell them during the trading day instead of the sale going through after hours for a mutual fund. But there is no reason an ETF has to be short term. Keep them forever if you want.

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

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jeffyscott
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Re: Mutual Funds vs. ETF's

Post by jeffyscott » Sat Aug 11, 2018 9:42 am

retiredjg wrote:
Sat Aug 11, 2018 9:23 am
Frequent traders may like ETFs better because they can sell them during the trading day instead of the sale going through after hours for a mutual fund.
Also no frequent trading restrictions with the ETFs, so they may be preferred if you are planning to hold for only 4 months or less.

Can't see any reason why mutual funds would be preferable, if you intend to keep for under 4 months. Seems like it would be pretty much the opposite if anything, don't buy a mutual fund unless you plan to keep at least 4 months, as there might be a frequent trading restriction or fee.

And actually you probably ought to not buy either with a 4 month time frame, unless it's something like a money market or ultra short term bond fund.
press on, regardless - John C. Bogle

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iceport
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Re: Mutual Funds vs. ETF's

Post by iceport » Sat Aug 11, 2018 10:04 am

Silk McCue wrote:
Sat Aug 11, 2018 9:21 am
I link to the article would be helpful.
Could it be the same one in this thread?? WSJ: When to Pick Mutual Fund over ETF?
"Discipline matters more than allocation.” ─William Bernstein

yousha
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Re: Mutual Funds vs. ETF's

Post by yousha » Sat Aug 11, 2018 10:32 am

Well, since I am most comfortable with mutual funds over ETF's, I will stay with Mutual funds primarily because of the reinvestment and fractional issues. Too, I am a Vanguard Admiral investor only and do not buy other funds from other Companies.

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Re: Mutual Funds vs. ETF's

Post by neilpilot » Sat Aug 11, 2018 10:37 am

yousha wrote:
Sat Aug 11, 2018 10:32 am
Well, since I am most comfortable with mutual funds over ETF's, I will stay with Mutual funds primarily because of the reinvestment and fractional issues. Too, I am a Vanguard Admiral investor only and do not buy other funds from other Companies.
Over the past few years I moved to convert most of my VG funds to ETFs, primarily for their portability. I don't understand your preference regarding "reinvestment and fractional issues". In both my former Merrill Edge and current TD Ameritrade accounts, I have automatic dividend reinvestment setup for the ETFs and it works just fine.

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Re: Mutual Funds vs. ETF's

Post by ThriftyPhD » Sat Aug 11, 2018 11:24 am

neilpilot wrote:
Sat Aug 11, 2018 10:37 am
I don't understand your preference regarding "reinvestment and fractional issues". In both my former Merrill Edge and current TD Ameritrade accounts, I have automatic dividend reinvestment setup for the ETFs and it works just fine.
One concern often raised is that fractional shares can be penalized at some brokerages, with higher transaction costs when selling. If there aren't fractional shares, this might result in a chunk of cash left over; for example is VTI is $140 but you have a $130 dividend, it doesn't get reinvested.

Not something I've run into, and it may not be yousha's concern, but I've seen it brought up a few times by others.

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vineviz
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Re: Mutual Funds vs. ETF's

Post by vineviz » Sat Aug 11, 2018 12:17 pm

ThriftyPhD wrote:
Sat Aug 11, 2018 11:24 am
neilpilot wrote:
Sat Aug 11, 2018 10:37 am
I don't understand your preference regarding "reinvestment and fractional issues". In both my former Merrill Edge and current TD Ameritrade accounts, I have automatic dividend reinvestment setup for the ETFs and it works just fine.
One concern often raised is that fractional shares can be penalized at some brokerages, with higher transaction costs when selling. If there aren't fractional shares, this might result in a chunk of cash left over; for example is VTI is $140 but you have a $130 dividend, it doesn't get reinvested.

Not something I've run into, and it may not be yousha's concern, but I've seen it brought up a few times by others.
My experience is that people bring up lots of issues that lack a basis in reality, and this is one of them,

I’ve never found a brokerage that either wouldn’t automatically reinvest ETF dividends or one that charged an extra fee to dispose of fractional shares. Transferring fractional shares from one broker to another is sometimes inhibited, but this is a minor annoyance in the rare cases it occurs.

Most brokerages will not allow automatic monthly purchases of ETFs but will allow that with mutual funds. This is, AFAIK, the only substantive difference.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Mutual Funds vs. ETF's

Post by ThriftyPhD » Sat Aug 11, 2018 12:49 pm

vineviz wrote:
Sat Aug 11, 2018 12:17 pm
I’ve never found a brokerage that either wouldn’t automatically reinvest ETF dividends or one that charged an extra fee to dispose of fractional shares.
On Merrill Edge:
Your stock or ETF commissions sell orders may also be subject to a fractional share liquidation fee of 10% of proceeds.

mega317
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Re: Mutual Funds vs. ETF's

Post by mega317 » Sat Aug 11, 2018 1:07 pm

How about this:
After some amount of time, sure why not 4 months, you could have some gains in your funds that you don't want to pay taxes on. You can gift any number of shares of an ETF to a UTMA and tax-gain harvest it, but you can only gift shares of a mutual fund if the recipient already has the minimum investment amount for that fund.

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Re: Mutual Funds vs. ETF's

Post by livesoft » Sat Aug 11, 2018 1:09 pm

mega317 wrote:
Sat Aug 11, 2018 1:07 pm
..., but you can only gift shares of a mutual fund if the recipient already has the minimum investment amount for that fund.
That's not quite true. For instance, I gifted $3,000 worth of Admiral shares to my son. Vanguard demoted them to Investor class. He sold them all anyways.
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vineviz
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Re: Mutual Funds vs. ETF's

Post by vineviz » Sat Aug 11, 2018 1:12 pm

ThriftyPhD wrote:
Sat Aug 11, 2018 12:49 pm
vineviz wrote:
Sat Aug 11, 2018 12:17 pm
I’ve never found a brokerage that either wouldn’t automatically reinvest ETF dividends or one that charged an extra fee to dispose of fractional shares.
On Merrill Edge:
Your stock or ETF commissions sell orders may also be subject to a fractional share liquidation fee of 10% of proceeds.
Well that stinks. Thanks for pointing it out.

I didn't need another reason to avoid Merrill Lynch, but I guess you just gave me one. Honestly , I'm not sure the extra $3 or $4 in commissions it would cost me to liquidate an ETF position would end up mattering financially though it would definitely tick me off.
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mega317
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Re: Mutual Funds vs. ETF's

Post by mega317 » Sat Aug 11, 2018 1:17 pm

livesoft wrote:
Sat Aug 11, 2018 1:09 pm
mega317 wrote:
Sat Aug 11, 2018 1:07 pm
..., but you can only gift shares of a mutual fund if the recipient already has the minimum investment amount for that fund.
That's not quite true. For instance, I gifted $3,000 worth of Admiral shares to my son. Vanguard demoted them to Investor class. He sold them all anyways.
You can't gift, say, $100 or some other more common gift amount to someone who doesn't already have the fund.
Edited for clarity
Last edited by mega317 on Sat Aug 11, 2018 1:28 pm, edited 1 time in total.

mega317
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Re: Mutual Funds vs. ETF's

Post by mega317 » Sat Aug 11, 2018 1:21 pm

And I was just trying to stretch for a reason since the article wasn't linked and OP didn't clarify

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whodidntante
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Re: Mutual Funds vs. ETF's

Post by whodidntante » Sat Aug 11, 2018 1:24 pm

ETFs have advantages for buy and hold investors.

- ETFs can shed appreciated shares when authorized participants redeem. For some cases this means greater tax efficiency for the investor.
- ETFs do not need to trade internally in order to raise cash to meet redemptions, and they can usually avoid trading as the AUM expands, so it is potentially a more efficient fund. For the same reasons, ETFs don't need as much cash as mutual funds do.
- ETFs are portable to other brokers and can easily be transferred in kind. Some mutual funds don't travel well, so you're stuck with the broker you have, or you might have limited options. The target broker might also charge a large fee to trade the fund, or limit the kinds of trades you can do (e.g., sell and reinvest dividends only).
- In the event you buy or sell, you know exactly what price you'll get if you use a limit order (and it could even be better). Mutual funds trade at next NAV.
- Some ETFs publish their holdings daily. You won't find that kind of transparency with most mutual funds.
- If your broker doesn't offer every type of fund you need to meet your asset allocation, you can buy ETFs to fill the gaps.

yousha
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Re: Mutual Funds vs. ETF's

Post by yousha » Sat Aug 11, 2018 1:38 pm

Is there a charge for reinvesting distributions for ETF's?

livesoft
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Re: Mutual Funds vs. ETF's

Post by livesoft » Sat Aug 11, 2018 1:46 pm

yousha wrote:
Sat Aug 11, 2018 1:38 pm
Is there a charge for reinvesting distributions for ETF's?
Not at any of my brokers: Fidelity, Vanguard, WellsTrade, TDAmeritrade
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Re: Mutual Funds vs. ETF's

Post by TropikThunder » Sat Aug 11, 2018 1:47 pm

yousha wrote:
Sat Aug 11, 2018 1:38 pm
Is there a charge for reinvesting distributions for ETF's?
None of the major brokerages I have looked at charge to reinvest dividends or capital gains, even on ETF’s that have a commission for regular purchases. For example, TD Ameritrade charges a commission now to buy or sell Vanguard ETF’s but still doesn't charge for dividend reinvestment.

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jeffyscott
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Re: Mutual Funds vs. ETF's

Post by jeffyscott » Sat Aug 11, 2018 3:15 pm

The article purportedly said buy a mutual fund not an ETF, if you will hold for less than 4 months.

None of these posts about general advantages of ETFs become a disadvantage at less than 4 months.
press on, regardless - John C. Bogle

ThriftyPhD
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Re: Mutual Funds vs. ETF's

Post by ThriftyPhD » Sat Aug 11, 2018 5:07 pm

vineviz wrote:
Sat Aug 11, 2018 1:12 pm
ThriftyPhD wrote:
Sat Aug 11, 2018 12:49 pm
vineviz wrote:
Sat Aug 11, 2018 12:17 pm
I’ve never found a brokerage that either wouldn’t automatically reinvest ETF dividends or one that charged an extra fee to dispose of fractional shares.
On Merrill Edge:
Your stock or ETF commissions sell orders may also be subject to a fractional share liquidation fee of 10% of proceeds.
Well that stinks. Thanks for pointing it out.

I didn't need another reason to avoid Merrill Lynch, but I guess you just gave me one. Honestly , I'm not sure the extra $3 or $4 in commissions it would cost me to liquidate an ETF position would end up mattering financially though it would definitely tick me off.
Yeah, I wasn't trying to say this is a deal breaker for ETFs, just pointing out that it's an issue some have. I don't have a problem with ETFs.

And FYI, Merrill Edge is the low cost self directed brokerage owned by Bank of America. Many use it as part of getting Preferred Rewards at Bank of America, brokerage transfer bonuses, and $0 stock and ETF trades. Merrill Lynch is financial advisor/wealth management service, and is separate. As you point out, the liquidation fee may be annoying though usually it won't have a huge effect unless you're heavy in fractional shares. And it's easy enough to avoid fractional shares if it's a concern.

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Earl Lemongrab
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Re: Mutual Funds vs. ETF's

Post by Earl Lemongrab » Sun Aug 12, 2018 2:43 pm

Really the main way to get fractional shares with ETFs is through reinvesting distributions. I don't do that. For one thing, I don't want the fractionals because I move my assets around, and having the sale regardless of cost is annoying. But the main reason is that I direct new funds to lagging assets as a sort of continual rebalancing.

Merrill Edge is, to me, one of the top brokerages. If I had to choose one, Edge would be it.
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Re: Mutual Funds vs. ETF's

Post by krafty81 » Sat Aug 18, 2018 10:59 pm

I'm not sure why anyone would prefer mutual funds unless they were looking for some sort of managed fund. ETFs are all I buy now.

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jeffyscott
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Re: Mutual Funds vs. ETF's

Post by jeffyscott » Sun Aug 19, 2018 7:01 am

krafty81 wrote:
Sat Aug 18, 2018 10:59 pm
I'm not sure why anyone would prefer mutual funds unless they were looking for some sort of managed fund. ETFs are all I buy now.
Mutual funds are simpler, no spreads, discounts/premiums, or order execution issues to concern yourself with.

I have never bought an ETF and don't intend to. Since I am not frequently trading, the only real potential advantage that I see is tax management for taxable accounts and that is not an issue for me at all. So I see ETFs as marginally more complex to manage to no real benefit. In addition, if I die before my spouse, I know she would not know how or want to learn how to manage a portfolio of ETFs.
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Re: Mutual Funds vs. ETF's

Post by UpperNwGuy » Sun Aug 19, 2018 7:11 am

jeffyscott wrote:
Sun Aug 19, 2018 7:01 am
krafty81 wrote:
Sat Aug 18, 2018 10:59 pm
I'm not sure why anyone would prefer mutual funds unless they were looking for some sort of managed fund. ETFs are all I buy now.
Mutual funds are simpler, no spreads, discounts/premiums, or order execution issues to concern yourself with.

I have never bought an ETF and don't intend to. Since I am not frequently trading, the only real potential advantage that I see is tax management for taxable accounts and that is not an issue for me at all. So I see ETFs as marginally more complex to manage to no real benefit. In addition, if I die before my spouse, I know she would not know how or want to learn how to manage a portfolio of ETFs.
+1

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Re: Mutual Funds vs. ETF's

Post by ReformedSpender » Sun Aug 19, 2018 7:36 am

In more and more cases, expense ratios in ETF's are increasingly appealing with the decrease of trade commissions over the years. One can buy VTI with an ER of 0.04% without the $10k minimum required for VTSAX
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Re: Mutual Funds vs. ETF's

Post by gvsucavie03 » Sun Aug 19, 2018 7:44 am

jeffyscott wrote:
Sun Aug 19, 2018 7:01 am
krafty81 wrote:
Sat Aug 18, 2018 10:59 pm
I'm not sure why anyone would prefer mutual funds unless they were looking for some sort of managed fund. ETFs are all I buy now.
Mutual funds are simpler, no spreads, discounts/premiums, or order execution issues to concern yourself with.

I have never bought an ETF and don't intend to. Since I am not frequently trading, the only real potential advantage that I see is tax management for taxable accounts and that is not an issue for me at all. So I see ETFs as marginally more complex to manage to no real benefit. In addition, if I die before my spouse, I know she would not know how or want to learn how to manage a portfolio of ETFs.
Plus automatic investment straight into the MF versus having to login, and do about 12 or so mouse clicks just to buy monthly shares. My retirement is in MF's. My long-term savings is in ETF's because that is extra cash I push into my Vanguard account and manually buy shares.

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Earl Lemongrab
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Re: Mutual Funds vs. ETF's

Post by Earl Lemongrab » Sun Aug 19, 2018 2:58 pm

As ETFs become more important in the investing world, I wonder if any of the large brokerages will begin to offer automatic investing in them. I think if they had something close to the traditional MF process, buying at closing NAV with fractional shares possible, then I think many people would be quite interested. I don't know what the technical difficulties would be there.
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Re: Mutual Funds vs. ETF's

Post by clarkebarry » Sun Aug 19, 2018 11:49 pm

This is one ideal question that I wanted to answer, I write content for financial firms and I certainly feel that ETF's are a win-win here! Let me explain what I am trying to say:
  • ETFs are Lower in Cost
Take the example of Vanguard who has a lower annual expense ratio for ETFs than for mutual funds. Expense ratios are a good measure to calculate how much you have to pay annually in fees. An expense ratio of 0.5% means that you have to pay $5 for every $1000 invested. The fund deducts these fees from the account on the due date;
Vanguard does not charge fee for its own ETFs
Vanguard charges a minimal fee for non-Vanguard ETFs. S&P 500 index of Vanguard ETF has an expense ratio of around 0.04% only
Vanguard 500 investor share has an expense ratio of around 0.14%
The cost paid for buying and selling ETFs are a drawback but there are also many brokers in the US who offer free services on some ETFs.
  • No minimum investment limit for ETFs
There is a minimum investment required to invest in almost all mutual funds. Arranging this minimum amount is hard for some individuals and also refrains them from diversifying their portfolio which can be done only by investing in a variety of investments, not just one. Investment can be done in ETFs by buying just one share as ETF do not carry any minimum investment requirements making them more attractive.
  • ETFs are more Tax affable
ETFs are more tax efficient compared to mutual funds. Tax is incurred on the capital gain when ETFs are sold or bought. In mutual funds, tax is incurred on capital gains when shares are traded inside the fund. Frequent buying and selling of mutual funds abstain the fund from generating capital gains making them pay more tax on each transaction and proving ETFs more tax efficient than mutual funds.
  • ETFs are not time bounded
ETFs can be bought and sold in the stock exchange from the opening till the close of the business in the exchange. This way ETFs provide more liquidity to the traders. Settlement of transaction on mutual funds is done in mass volumes at the end of the trading day when the stock market is closed. Deals done after the cut off time are settled on the next trading day. Cut off times are different for each exchange. This way Mutual funds are less liquid
  • ETFs are more diversified
ETFs are a better asset allocation tool than Mutual funds to construct diversified portfolios that are risk efficient. ETF give more access to a variety of investment styles, industries, sectors and locations.
  • Short selling of ETFs
Short selling of a security is the sale not owned by the seller, but a borrowing of the security when the security’s price is expected to decline and profit can be made by buying back at the lower price. Short selling is easy and done frequently for ETFs.
  • ETFs are more volatile
ETFs are more volatile because they fluctuate very quickly with the tracked index throughout the day. Mutual funds, on the other hand, are priced at their prevailing asset value at the end of the day at the close of exchange.

Most of the differences discussed above are in favour of investing in ETFs. However, it’s not an easy decision to consider one better than the other. Both ETFs and index mutual funds carry their own importance and give their investors an opportunity to make profits in a variety of sectors. You can get a free guide to investing in ETFs here: Exchange-Traded Fund (ETF) - Investing Guide - SAMT AG

Generally, an investor with a buy-and-hold strategy will prefer ETFs over mutual funds. But a long-term investor who is getting some tax advantages by using 401(k) or IRA may consider investing in a mutual fund. But the preference of traders and investors keeps changing, it’s not a straightforward task to label index ETFs or index mutual funds better or worse than the other.

PFInterest
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Re: Mutual Funds vs. ETF's

Post by PFInterest » Mon Aug 20, 2018 7:02 am

clarkebarry wrote:
Sun Aug 19, 2018 11:49 pm
This is one ideal question that I wanted to answer, I write content for financial firms and I certainly feel that ETF's are a win-win here! Let me explain what I am trying to say:
  • ETFs are Lower in Cost
Take the example of Vanguard who has a lower annual expense ratio for ETFs than for mutual funds. Expense ratios are a good measure to calculate how much you have to pay annually in fees. An expense ratio of 0.5% means that you have to pay $5 for every $1000 invested. The fund deducts these fees from the account on the due date;
Vanguard does not charge fee for its own ETFs
Vanguard charges a minimal fee for non-Vanguard ETFs. S&P 500 index of Vanguard ETF has an expense ratio of around 0.04% only
Vanguard 500 investor share has an expense ratio of around 0.14%
The cost paid for buying and selling ETFs are a drawback but there are also many brokers in the US who offer free services on some ETFs.
--but they are the same cost as Admiral shares at Vanguard. there is no fee for MF. you didnt add in the bid/ask spread.
  • No minimum investment limit for ETFs
There is a minimum investment required to invest in almost all mutual funds. Arranging this minimum amount is hard for some individuals and also refrains them from diversifying their portfolio which can be done only by investing in a variety of investments, not just one. Investment can be done in ETFs by buying just one share as ETF do not carry any minimum investment requirements making them more attractive.
- true, the minimum is 1K for Vanguard.
  • ETFs are more Tax affable
ETFs are more tax efficient compared to mutual funds. Tax is incurred on the capital gain when ETFs are sold or bought. In mutual funds, tax is incurred on capital gains when shares are traded inside the fund. Frequent buying and selling of mutual funds abstain the fund from generating capital gains making them pay more tax on each transaction and proving ETFs more tax efficient than mutual funds.
- Except at Vanguard where the tax efficiency is the same.
  • ETFs are not time bounded
ETFs can be bought and sold in the stock exchange from the opening till the close of the business in the exchange. This way ETFs provide more liquidity to the traders. Settlement of transaction on mutual funds is done in mass volumes at the end of the trading day when the stock market is closed. Deals done after the cut off time are settled on the next trading day. Cut off times are different for each exchange. This way Mutual funds are less liquid
- I wouldn't call 1 day "less liquid" as a horrific event, but yes you cannot day trade MF.
  • ETFs are more diversified
ETFs are a better asset allocation tool than Mutual funds to construct diversified portfolios that are risk efficient. ETF give more access to a variety of investment styles, industries, sectors and locations.
- False. ETFs and MF can hold the same securities. How is VTI vs VTSAX more diversified?
  • Short selling of ETFs
Short selling of a security is the sale not owned by the seller, but a borrowing of the security when the security’s price is expected to decline and profit can be made by buying back at the lower price. Short selling is easy and done frequently for ETFs.
- why do the majority of buy/hold investors need this option?
  • ETFs are more volatile
ETFs are more volatile because they fluctuate very quickly with the tracked index throughout the day. Mutual funds, on the other hand, are priced at their prevailing asset value at the end of the day at the close of exchange.
- yes but only during the market. unless you trade at the end of the day. then they are the same.

Most of the differences discussed above are in favour of investing in ETFs. However, it’s not an easy decision to consider one better than the other. Both ETFs and index mutual funds carry their own importance and give their investors an opportunity to make profits in a variety of sectors. You can get a free guide to investing in ETFs here: Exchange-Traded Fund (ETF) - Investing Guide - SAMT AG

Generally, an investor with a buy-and-hold strategy will prefer ETFs over mutual funds. But a long-term investor who is getting some tax advantages by using 401(k) or IRA may consider investing in a mutual fund. But the preference of traders and investors keeps changing, it’s not a straightforward task to label index ETFs or index mutual funds better or worse than the other.- this is literally why you wrote this piece. you started with it is a "win-win". dont back out on me now barry!
- i didnt realize buy and hold and long term were different. thanks then for that...
a very sensational piece.
and i did not click on your free guide.

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