ETFs vs. Mutual Funds: A Comprehensive Guide for Investors

Many investors are presented with the ETF and mutual fund quandary. They see two very similar investment types and they have no idea where to put their money. Mutual funds have been around for a number of years and are well-known for the most part. However, ETFs are still relatively new in the market. Therefore, if you are trying to decide between them, you might have a tough time making a decision. Here are a few things that you should consider when trying to decide between ETFs and mutual funds. 

ETF

Investing in an ETF has a few advantages over most mutual funds. If you enjoy actively trading, an ETF will be your superior choice. With the ETF, you can trade them just like you would a stock. You can buy and sell them on the stock exchange at any point throughout the day. With a mutual fund, you are limited to buying them at the end of the trading day. With an ETF, you can even take out an option on them. 

With an ETF, you can also get involved in specific industries or niches that you cannot get with a mutual fund. Mutual funds tend to cover a very broad area of investments. With an ETF, for example, you could invest in the oil or healthcare industry specifically. This allows you to take advantage of an industry without taking out a very risky futures contract. 

The ETF is also very tax efficient. Therefore, if you do not want to have to worry about paying capital gains taxes throughout the year, you will not have to worry about it often with ETFs. You will also receive dividend payments with an ETF, unlike with a mutual fund.

Mutual Fund

The mutual fund also has a few things that make it superior to ETFs. For one thing, if you want to make regular contributions, the mutual fund is going to be better for you. If you are setting aside a portion of your paycheck towards investing then this can help you. You can get a mutual fund without transaction costs, where ETFs are going to generate commissions every time you buy one. 

Another potential advantage of some mutual funds is that they attempt to beat the market. Many index funds will simply stay at a particular index and grow with it. While that can be beneficial, you are also given the opportunity to beat the market with certain mutual funds. If you have a higher appetite for risk and desire for return, this could be for you.

When you trade an ETF, you could run across trading issues. For example, if you are trading in a very specialized area, you may run across a thinly traded market. This could make it very difficult to trade your ETF and result in large bid/ask spreads. With a mutual fund, you will not have to worry about this problem as it always trades at the net asset value of the fund.