Asset Management

ETFs vs. mutual funds

Selecting the right vehicle for your investment needs
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Introduction

Any decision about how to invest is not complete without consideration of the type of investment vehicle to be used. While both exchange-traded funds (ETFs) and mutual funds offer access to professionally managed, diversified portfolios, the decision over which to use requires thoughtful deliberation because of the distinct differences between the two.

ETFs vs. mutual funds: A comparison

 ETFsMutual funds
Overview
  • All ETFs trade on an exchange and may require a brokerage account to buy and sell shares.
  • Investors must place a trade order each time they want to buy or sell shares, but can typically set up dividend reinvestment through their brokers.
  • Mutual fund investing may not require a brokerage account because investors can often transact directly with the mutual fund provider.
  • Investors can set up a regular purchase program as well as automatic reinvestment of capital gains and dividends
Investment approach
  • ETFs are continuously priced throughout the trading day.
  • Shares are purchased in whole.
  • Investors can short ETFs and buy shares on margin.1
  • Mutual fund shares are priced once a day after the markets close.
  • Partial shares may be purchased.
  • Investors cannot buy mutual funds on margin or set price limit orders.
Accessibility
  • Holdings are generally disclosed daily.
  • ETFs do not have an investment minimum; however, shares must be purchased in whole.
  • Holdings are generally disclosed quarterly with a 30-day lag. However, some funds disclose holdings more frequently.
  • Many have an initial purchase investment minimum.
  • Some funds have a back-end sales charge or a contingent redemption fee when exiting.
Tax considerations
  • Generally considered more tax efficient vehicles because of product structure and in-kind creation/redemption mechanism.2
  • May be less tax efficient because holdings are sold to meet redemptions and rebalance the portfolio, potentially resulting in taxable gains.
Associated costs
  • Trade with varying degree of spread.
  • Might trade above (premium) or below (discount) the net asset value (NAV).
  • Operating expenses and potential commissions.
  • Do not have a bid-ask spread as they’re not traded on exchanges throughout the day.
  • Typically transacts exactly at their stated NAV.
  • Operating expenses and potential transaction fees.

This is not an all-inclusive list of the differences between strategies. This is being presented for illustrative purposes only.

 

Summary

Investors should evaluate an investment based on its investment objectives, associated risks, and fit with their time horizons. They should also consider their tolerance of market volatility.

 

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