The most important component of successful investing is time. The longer your money is invested, the more it will grow. Which means you need to start investing right away – like the second you finish reading this article type of right away!
Because time is of the essence, you don’t have time right now to learn enough to successfully target individual
You need a quick and relatively foolproof method of investing, something any American can do with whatever amount of personal finance knowledge they have right this minute without hiring an investment advisor.
But is one better than the other? Is there any difference when it comes to an ETF vs. a mutual fund? We’ll break down all the details so you can stop wasting time and start investing.
Small Differences are Still Differences
We know that you’re chomping at the bit to start investing and in your hurry, you might think that
But there are some key differences, and when you understand those differences, you’ll be able to make a more informed decision when it comes to choosing the best kind of investment for you.
What is an ETF?
ETF stands for Exchange Traded Fund. It’s a fund that can be made up of
What is a Mutual Fund?
Mutual fund managers make decisions on buying and selling securities with the goal of beating its benchmark, an index like the ones mentioned above, Dow Jones, NASDAQ-100, S&P 500, etc.
Hands Off or Hands On? ETF vs. Mutual Fund
Often when you see a straight up, This vs. That, there is a clear answer, one thing is clearly better than the other. Is that true when it comes to an ETF vs. Mutal Fund? Let’s break it down.
Hands Off ETF’s
This is part of the reason
Not paying a fund manager to actively manage a fund means ETF investors will pay fewer fees than will mutual fund investors.
If someone’s job is investing other people’s money, they must be good at it, right? They wear a fancy suit and work out of a fancy office. They surely know better than us amateurs right?
Well, so what? If portfolio managers and getting mutual fund investors higher returns, it’s worth the cost.
But do actively managed funds outperform the market? No, they don’t.
For the 15-year period of April 1, 2001, through March 31, 2016, only 29% of actively-managed U.S. large company funds were able to beat the S&P 500 Index.
So far this has been pretty one-sided in favor of
Pick the right mutual fund though. Front-end or back-end load paid when buying or selling is about the same thing as paying commission. There are no-load funds you can buy and sell with no broker commissions.
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It’s the Taxes Dummy
Taxes and interest are two of the most significant expenses in life, so we want to (legally) avoid them both when we can. If you’re looking to avoid taxes, specifically capital gains taxes,
A person doesn't know how much they have to be thankful for they have to pay taxes on it.Tweet This
When you invest in an ETF, you only incur capital gains taxes when you sell the fund. Mutual fund investors will pay capital gains taxes when the shares within the fund are traded during the life of the investment.
Which is Best for You?
We always encourage everyone to invest, but some people don’t because they think you have to have a lot of money to do so. Not true! There are
I hate those kinds of answers. “Well, they’re both great in their own ways.” It’s like when you ask a parent who their favorite child is. They all have one but they won’t admit it and give some bs answer. (I know this is true because my parents told me I’m the favorite!). So here is the non-bs answer.
If any of these apply to you, you should consider an ETF:
- You’re an active trader
- You want exposure to niche markets
- You want tax efficient investments
If you’ve been with LMM for a while, you’re probably familiar with Vanguard. We talk about Vanguard
If any of these apply to you, you should consider a mutual fund:
- You want variety (there are countless types of
mutual fundsto choose from)
- You’d prefer automatic investment options (you can set recurring transfers into your mutual fund)
- You believe in the ability of a fund manager to beat the market
If you have a 401k through your employer, you may be familiar with Fidelity. Fidelity provides 401k retirement accounts for businesses and is one of the best known mutual fund companies as well.
If you want to invest in an ETF or mutual fund, Morningstar is a good place to research either. They rate both with an easy to understand one to five-star basis, one being poor and five being the best.
That’s the ETF vs. mutual fund smackdown. They have more similarities than differences and the important thing is that you’re investing so you can comfortably choose either. Both are easy, low-risk ways to invest your money and diversify your portfolio.