How to Pick Between a Mutual Fund or ETF

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Here at Ally Wealth Management, we know that investing and developing strategies can be difficult, puzzling, and downright frustrating. There seem to be a million secrets to investing. Whether it’s as investment advisors, retirement planners, or simply as your wealth manager, we want to help simplify that process by providing more information and wealth management news. Today, we want to focus on mutual funds and ETF’s (Exchange Traded Funds), two concepts that are very similar, and highlight the significant differences between the two, and how your investment and risk management strategy should reflect your choices between the two. Most importantly, we’re going to look at why these two types of investments matter over the course of constructing your portfolio.

Mutual Funds:

To start things off, let’s take a look at mutual funds. Mutual funds are an investment method that collectively compiles funds from a large group of investors. From there, the money is split up and largely invested in stocks, bonds, and money markets (which are essentially extremely safe, but low-return, investments on loans between financial institutions). This ensures a level of diversification that is not feasible for the average investor. Mutual funds can be actively managed; this can drive up fees, but also helps to reduce the risk they present when looking at the return on investment. As a whole, mutual funds are an extremely popular investment method because they put the money in the hands of those who study financial markets and look at the companies being invested in on a daily basis.  They enable individuals with expertise to make decisions with the management of money that often results in safe, steady, long-term returns.

Exchange-Traded Funds or ETF:

On the other hands, ETF’s, or exchange-traded funds, are securities that trade like a stock on an exchange but follows the value of indexes, commodities, or bonds. Think of them like “mutual fund stocks.” ETF’s are not as carefully managed as mutual funds, and this results in lower fees for them. ETF’s also have a more efficient tax structure than mutual funds. When mutual funds buy and sell stocks and bonds, the holders of the Fund are responsible for the fees incurred by these sales and purchases. However, with ETF’s the individual is reinvesting money with the buying and selling of stocks and bonds, so the result is a better tax structure. And while mutual funds are usually purchased through a financial management company, ETF’s are something that individual can purchase on their own, like a stock. Because of these factors, ETF’s are often bought by people who spend a lot of time handling their personal investments and feel highly confident in their abilities to predict the marketplace.

With these basics in mind, both mutual funds and ETF’s present a variety of benefits and drawbacks. There is no right or wrong choice when looking at mutual funds and ETF’s. What is more important is viewing how they fit with you and your investment strategy. Because ETF’s have a more tax-efficient structure and have low operating expenses, they tend to be sought after by people who are active traders, who want to invest in a particular niche of the market, or are specifically looking for more tax-efficient trading options. And while investors can directly purchase ETF’s, they must go through a brokerage or company such as Ally Investment Management to purchase registered mutual funds. Mutual funds do not carry trading commissions like ETF’s, but they will incur some fees, which are also known as loads.

Many mutual funds will charge commissions for fees when trading and these are known as load mutual funds. However, there is another option: no load funds.  At this point, you are probably wondering, “What are no load mutual funds”? No load mutual funds are funds where shares are sold without commissions or sales fees. You can find these types of funds with many different brokerages, and Ally Wealth Management is one of them.

There are also two main strategies within mutual funds. Some funds will try to beat benchmarks and earn very high returns on investments while others will just try to mirror index funds and provide safer steady returns. Again, there are so many different choices that are in the marketplace. What is most important is to invest in your strategy and make your decisions accordingly.

Ultimately, with the variety of options that both ETF’s and mutual funds offer, there is not going to be a right or wrong answer as to which one to pick. The trick to investing is designing a strategy that works to benefit your specific needs as an individual. Certain mutual funds may present greater risk and greater reward while other ETF’s might try to track the S&P500, an index fund with modest but steady gains. Ally Financial, in Little Rock AR, works to develop investment strategies that suit your wants and needs, backed by years of experience successfully helping clients turn their investment, retirement, and savings dreams into reality. We can help you avoid retirement planning mistakes, and explain the tough questions in-depth and in person such as what is index fund investing, how do I buy mutual funds, and what is a mutual fund initial investment? Ally Wealth Management prides itself on its dedication to solving the needs of our customers and centering our strategy on them. Our recommendation: determine your wants, your needs, and your level of knowledge about investing options and the investing marketplace. And if, from there, you need advice, just know that Ally is always there to provide strategies, explore options, and help you find the path to reaching your financial goals.

 

 

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