When to Choose ETFs Over Mutual Funds
ETFs and mutual funds are very similar in that they track a specific index, such as the S&P 500, or a specific industry, such as healthcare. But which investment vehicle is best for you?
The main difference between ETFs and mutual funds is that you can buy and sell ETFs like stocks, which means you can buy or sell them at any time if you think the market is going to radically rise or fall during the day. (Active trading is n’t for most investors, though.) Even if you don’t care about this option for ETFs, ETFs have other advantages over mutual funds.
Wise Bread listed 8 such benefits. Perhaps the most important thing for novice investors is the lack of minimum investment:
You can buy or sell only one ETF share. Compare that to many mutual funds that have tens of thousands of dollars in minimum investment requirements.
With lower expense ratios and a variety of commission-free ETs available, low investment requirements make it easier to build a diversified portfolio at the lowest cost, as we mentioned in our guide to investing in the stock market . While a few mutual funds can also help you start investing from as little as $ 50 to $ 200 , it may be easier to buy small amounts of ETFs often – just make sure you choose a commission-free ETF, or else your earnings will be eaten away by those who trade. fees.
On the other hand, you have a lot more options for mutual funds, and many mutual funds like ETFs also have low expense ratios and no commissions. Mutual funds can also automatically reinvest dividends for you, which can be a plus for many investors unless you want the cash to rebalance your portfolio frequently.
In the end, as usual, your choice will depend on your investment needs and style, as well as what your broker has to offer. Investopedia compares the costs and benefits of each type of investment , concluding that passive investors may want to stick with index funds, but the tax benefits and flexibility of ETFs are preferred by active investors or those involved in capital gains taxes.
However, if you are just getting started, you can invest in ETFs to build a balanced, diversified portfolio with a tight budget, and then move on to index funds when you have the minimum accumulated.
8 Ways ETFs Can Put More Money In Your Pocket Than Mutual Funds | Wise bread
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