Advantages of ETFs over Mutual Funds

Investing is one of the things that you should consider as an additional source of income. There are different kinds of investments that you can go into. Some of the investments you can consider are mutual funds, exchange traded funds, stocks, bonds, treasure bills, and others. These investments can help you make residual income, but out of all of these investments, the two most popular are exchange traded funds and mutual funds. You may have considered getting one or the other or even both, but getting exchange traded funds may be your best choice.

What are the advantages of getting exchange traded funds compared to mutual funds?

Exchange traded funds provide investors with a unique set of advantages. Exchange traded funds are increasing in popularity because they combine the best characteristics of other investments. ETFs integrate the best of mutual funds and stocks to create a flexible and dynamic investment vehicle. Here are some of the advantages that make exchange traded funds a more popular choice over mutual funds:

Tax-Friendliness

Exchange traded funds are more tax-efficient compared to mutual funds. Mutual funds have annual capital gains payouts at the end of the year, exchange traded funds minimize their payouts because of similar exchanges of stocks. This means that ETFs are protected from needing to sell stock to meet redemptions each year.

No Need for Investment Minimums

Unlike mutual funds, exchange traded funds do not require an investment minimum. Mutual funds normally have investment minimums that are between $2,500 to $5,000. Investors are allowed to even purchase just one share when they invest in an exchange traded fund.

Lower Cost Option

Mutual funds are more costly compared to exchange traded funds. Mutual funds on average have an internal cost that goes above 1%. Exchange traded funds on the other hand normally have an internal expense ratio of around 0.30% to 0.95%. Also, exchange traded funds do not have fees such as 12b-1 fees, sales charges, or advertising fees compared to mutual funds.

More Control

Mutual funds are normally traded on a daily basis at least once at the NAV closing price. Exchange traded funds are traded regularly throughout the trading day, very much like stocks. This enables you to have more control over the selling and purchasing price, and enables you to set protection features. One of the protection features you can set is stop-loss limits.

Transparency

A lot of mutual funds have overlap in terms of the stocks and policies that they offer. Do not be surprised to get mutual funds that have seemingly different policies, but if you look at them closely you are stuck with the same stocks but under different mutual funds. Exchange traded funds have different market indexes, meaning that investors do not have to worry about any overlap occurring. Overlap does not occur with ETFs because of their specific features.

Market Opportunities

Mutual funds have expanded to various markets to diversify its portfolio. This type of investment vehicle has markets in China, gold, and other emerging markets, thus making them a costlier choice for investors. Exchange traded funds on the other hand have no specific markets for its portfolio.

Simplicity

Exchange traded funds are simpler compared to mutual funds. ETFs are sold at one price in one transaction. Mutual funds on the other hand have shares in various markets which are constantly being traded, and because of this, mutual funds have multiple prices.

These are some of the advantages you can get when you choose exchange traded funds over mutual funds. It is up to you which investment vehicle you should choose to increase your income. Each investment vehicle has its own pros and cons. Consult with a financial consultant to make an informed choice.