ETFs vs. Mutual Funds
Unless you’re new to investing, you have probably heard about the existence of ETFs and mutual funds. They are two funding types that help investors add some diversity to their portfolio. However, beginner investors often find themselves in the middle of a hard choice-making process: which one of the two is worth investing in? What are the advantages and drawbacks of the two? Read this article to find out exactly that.
What Are ETFs and Mutual Funds?
Before we break them down into pros and cons, let’s see what each of them is.
ETF is short for “exchange-traded fund”, and these funds are basically securities that you can either sell or purchase through stock exchanges or brokerage firms. They include a wide range of investing options, such as bonds, commodities, and many others. In addition, they come in multiple types, including industry ETFs, inverse ETFs, bond ETFs, commodity ETFs, and currency ETFs.
Meanwhile, mutual funds refer to an investment vehicle. Basically, it’s something that collects cash from investors, after which money is invested in bonds, stocks and others.
What Are the Pros and Cons of ETFs?
Our Opinion – ETFs are Much Better
In our opinion, ETF’s are much better than mutual funds. If you are on this page, you’re already an investor who is seeking above average returns. You are an active investor that has an interest in what you own and want to be able to buy and sell whenever you please. Mutual funds are more costly and under perform the market most of the time. Why would you pay a fund manager all those fees to give you below average returns?
With an ETF, you can have broad exposure to the market by buying an ETF such as the SPY that tracks the S&P 500 which will give you exposure to 500 companies. If that is not enough exposure for you, add a bond ETF to the mix. If those 2 aren’t enough, add commodity ETFs to the list! There are many types of ETFs to suit everyone’s needs.
If you are willing to take the risk, ETFs can also allow you to leverage. For example, there are leveraged versions of the SPY ETF. An example of a leveraged ETF is SPXL. This tracks the S&P 500 but exaggerates its moves by 3x. Meaning if the SPY is up 1%, SPXL will be up 3%, and vice versa. Investors definitely need to be careful with leveraged ETFs, but at least the option is there and one buy and sell it as many times as he wants during the trading day.
If you can’t stand the volatility of the market, there are also low volatility versions of certain ETFs. An example of one is SPLV. This is a low volatility version of the SPY ETF. You will have exposure to the stock market while keeping volatility relatively low. The great thing about these types of ETFs is that they don’t usually underperform the index that they track. In fact, lots of times they outperform it. Below is a chart of SPY’s performance compared to SPLV.