Comparing the performance of ETFs vs Mutual Funds?There's more than just a few worthy advantages to ETF investments that will make you richer.
If you're a proactive investor who wants to participate in big picture trending, the ETF actually has serious advantages over the traditional Mutual Fund. ETFs are simply more transparent, efficient, flexible, and economical....and if you're a control freak, more control.
Who's really in control?
When you get right down to it, the only person who really cares about the health of your portfolio is you. Relying upon you mutual funds performance manager to increase your net worth is like asking the school cafeteria kitchen manager to improve your kids' diet. They act in their own self interests which are influenced by a number of political elements you'll never be privy to.
Sector specific Mutual Funds are often managed by youthful, inexperienced staff. They're aim is to prove their worth to the fund family and your financial health may or may not serve that end. The larger funds are managed by experienced managers who have alliances and shared interests unknown outside their company walls. Along with that, your buy and sell orders are extremely limited and can only be filled at the daily open price. Intraday fluctuations don't even show up in the fund's price.
By contrast sector specific ETF's are purely influenced by those stocks included in its holdings. And you're not worrying about a manager's extraneous motivations for trading or some other diversion. Barring some unforeseen event like a merger, bankruptcy, de-listing, etc. your ETF basket remains the same. Unlike MF's you retain control during the day to buy or sell an exchange traded fund as ETFs trade anytime the market is open. If you want in or out on the heels of breaking news effecting the markets -- no problem with ETFs.
As an active trading investor, you can follow the markets and stay alert to any new political and economic trends. Why would you want to relinquish your power to move on that information to some third party Mutual Fund manager?
These fund managers, so as to protect their turf, will restrict information they share with fund share holders to the legal requirements. The lag time between reporting periods may be used to move in and out of positions or even change the fund's primary focus. All done without your knowledge. Additionally, "window dressing" whereby managers create the illusion of a fund holding this quarter's winning stocks, is a time honored tradition i.e. 'sell low, buy high', and never a reliable means to make money.
The advantage with ETF's is first, you always know what you own. Second, you can clearly see the results of your decisions to buy or sell the fund as they're made public daily. There's no need to dress-up a quarterly statement for reporting.
Mutual Funds will buy and sell positions unrelated to the tax implications for individual share holders. They may sell to meet redemptions and buy to put new deposits to work. The problem here is that these short-term gains increase your tax burden. The infamous end of year capital gains distribution may also force you to be "credited" with fathom gains that you will in turn pay taxes on. However, an unexpected capital gain distribution is far less likely from ETF trading.
The flexibility with ETF trading is strictly up to you. If by waiting a few more days or weeks to sell will afford you the advantage of shifting your earnings into a lower tax bracket, you may opt to take that risk and wait. You have the flexibility to put new or recycled money to work when it serves you best, not because you're limited with the amount of cash you can hold. Consequently, you're not forced to wait to realize what your taxable earnings are. Right away you can see what your portfolio has generated at any point in time throughout the year. It just makes tax planning that much easier.
Unfortunately, no options are available when it comes to traditional Mutual Funds. The ability to control assets without owning them only exists within individual securities and the ETFs that own baskets of stocks. And, even if a Mutual Fund bills itself as "no-load" don't think you're not paying management's salary and bonuses.
The associated 12b-1 fees are just the ones you see. In addition, management and transaction costs and expenses are deducted from your earnings before they ever get to your account, further reducing your gains.
Fees do matter. Comparing ETFs vs Mutual Funds ETF's have historically lower fees since managers no don't have any need to make adjustments to the fund's holdings . Consequently, there's no wondering what went out the back end. For active traders who want to look at the overall big picture instead of betting on individual company's ability to produce returns, the ETF is far superior to the old fashioned Mutual Fund in just about every way.
The 'set it and forget it' pipe dream eventually breaks down within any life discipline. Those who let fund managers decide what to put their money into are simply going to have to pay for that privilege with their hard-earned money; working years longer than the investor who takes control of his own account via. a proven ETF trading system.
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