ETFs vs Mutual Funds

Terry Says

Exchange Traded Funds are like stocks — they are listed on an exchange and you pay a commission to purchase them.  The value of the shares depends on the value of stocks (or bonds) they own — but also on the desire of people to own that particular fund.  So you may pay a “premium” when you buy the shares (or sell at a “discount”) to the net asset value of the shares.  When you sell, you’ll get a capital gains basis if you hold your shares for at least one year.  Many ETFs have a fixed portfolio — no money manager deciding when to buy and sell the shares inside the fund.

And if you want to be aggressive you can buy listed ETFs in a margin account, creating your own leverage.

A mutual fund has a portfolio of stocks.  Unless it is an “index” fund, tied to a particular index of stocks, the fund is likely managed by one or more professionals, buying and selling shares throughout the year.  The fund may give you a tax obligation even if you don’t sell the fund shares — because of the gains and losses on stocks traded inside the fund.  At year end, they’ll send you a form listing these taxable amounts.

If you buy a commission-free mutual fund (like those at Vanguard and Fidelity, and T. Rowe Price) you won’t pay for every purchase.  So if you’re accumulating shares on regular basis, you’ll be better off with a traditional mutual fund.