ETFs vs. Mutual Funds
So you've decided to invest in the stock market but you've decided youâ re more comfortable investing in funds as opposed to picking individual stocks. Generally a good call for new investors, but now you have to decide whether youÃƒÂ¢ re going to invest in ETFs or Mutual Funds. While very similar in nature, there are differences in terms of tax implications and how each is actually traded. Mutual Funds are a mainstay of the investment industry.
They are a useful way for investors to buy a small interest in many different companies as part of a pool of investors who all have an interest in that mutual fund. Mutual fund prices change at the end of each day, after the underlying stock prices are finalized for the day. You would invest in a mutual fund by stating how much you want to invest, say $5,000, and would get the number of units (to several decimal points) that represent that amount. ETFs
, while newer than mutual funds, are becoming increasingly popular. These funds are actively traded in the stock market and the price is not set by underlying assets but rather by the bid-ask price people are willing to pay for units of the ETF. So in this case you would purchase a set number of units, say 500, as opposed to setting a dollar amount, and you would pay the ask price on the market for those units. The reasons ETFs are becoming more popular are largely due to the tax treatment and lower management fees. Management fees in mutual funds are commonly quite a bit higher than those of ETFs, so right away you can save 1% or more on your investment. Next, you avoid paying capital gains on ETFs until you actually sell the units. This varies from mutual fund investments where each year you will have to pay capital gains on the shares sold by the mutual fund itself.
By Jeffrey Glen