1. Your Questions About Mutual Funds Vs Etf
Helen asks…
What is Exchange-Traded Funds (ETF)? What is differenc between
ETF & Mutual Fund. ETF Vs Mutual Fund?
Steve Winston answers:
ETFs are sold like stock through an exchange. There are currently two types--index funds and
closed end funds. They are both types of mutual funds.
Mutual funds meaning open end mutual funds specifically are sold directly by mutual fund
companies to investors. No load mutual funds are purchased directly from the companies. They
can also be purchased through stock brokers but stock brokers may charge to a fee to do so.
Front end load mutual funds are sold only through stock brokers. A commission is charged to
purchase them called a front end load. Those are referred to a A shares. There are also B
shares and C shares where the load is charged in a somewhat hidden manner.
Index funds are unmanaged mutual funds and generally have a low management fee of less
than 0.6% of assets. Some index funds are sold directly through fund companies just like open
end mutual funds. Others as I mentioned are sold like stocks. Index funds hold stocks that
mirror the holdings of stock market indexes such as the S&P 500 for example. They have during
the past 10 or so years become very popular with investors. There are now literally hundreds of
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2. them available. But then there are thousands of mutual funds.
Managed mutual funds generally have a higher management fee, sometimes much higher.
Open end mutual funds are always sold at net asset value after the market closes. ETFs are
sold at market prices which can very from the net asset value sometimes by a great deal. In
March of this year many were selling at 20% discounts and more to net assets
Daniel asks…
Mutual funds vs ETF for ROTH IRA?
I am 31 and going to open a Roth IRA...
What makes the most sense? Opening an account with Fidelity and investing in mutual funds
like the Contrafund or investing in exchange traded funds like SPY or QQQQ? I will be maxing
out my contribution each year. Please tell me the reasoning behind your answers
Steve Winston answers:
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3. Given the volatility in the markets I would go the ETF routes. My reasoning is the ETF merely
replicates an index while the Mutual Fund performance might be dependent on active
management (ie portfolio manager picking stocks).
But per your initial question = Contra has been a great fund and it wouldn't be a bad choice at
this point. I would also diversify into small caps and int'l/emerging market equity.
George asks…
Difference between ETF vs mutual funds?
what is the difference between etf's and mutual funds?
Steve Winston answers:
Good question.
In many cases they are practically the same.
ETFs trade just like a stock and I believe they are easier to trade because most are listed on the
Amex so you can just pull up the ticker like a stock. Also, there's some ETFs that just track
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4. certain commodities so you can play something like gold without getting involved in the futures
market. There's no mutual fund for that.
But then there's GDX which is the ETF for the top gold miners which would be identical to a
mutual fund.
Another difference is sometimes mutual funds are managed (load or no-load) whereas ETFs are
not (no fees ever).
ETFs are newer and offer more flexibilities into the market at greater ease but in many cases
the two are the same. I hope that explains it pretty clear.
Maria asks…
Mutual Fund vs ETF's?
I currently hold mutual funds in RBF 266 and RBF 263 (canadian dividend & US equity)
I am curious on how to tell what the management fees are associated with these funds?
and, What are some similar ETFs that would give me the same type of investment sectorwise
with a lower overhead?
I've been looking at Claymore's CLQ and CLU ETFs
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5. Steve Winston answers:
The MER of RBF266 is 1.7%, RBF263 is 2.04%.
The MER of CLU is 0.69%. Can't find anyhing called CLQ.
In order to choose, ask yourself whether you think RBC's active management can beat the
market by 1%. If so, stay with RBC. If not, switch to ETFs.
Lizzie asks…
Index Mutual Fund vs ETF?
which is better?
I know ETF have a less Expense ratio.
However the price of the Mutual fund is really the market? right?
Where the ETF could vary from the real market value? right?
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6. Steve Winston answers:
If you select carefully, the MF and ETF have about the same charges and tracking accuracy.
I find ETFs much more convenient to buy and sell because you can execute an order at the
click of the mouse you see the price you will get, while with MF you have forms to fill. However
MF send you better account statements and performance data. I guess there is no clear winner
and each will have its adherents.
Betty asks…
Exchange traded funds vs mutual funds, which is better for
investing?
I have some money just sitting in the bank. I would like to grow it some more, but not sure how.
I'm thinking about ETF's or Mutual funds. What is the difference between them?
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7. Steve Winston answers:
I think both will give benefits.
Joseph asks…
What are the pros/cons of buying an ETF that tracks a mutual
fund, vs buying the mutual fund itself?
As an example, for an REIT ETF/Fund, would it be better to purchase VNQ or VGSIX?
Steve Winston answers:
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8. You need to compare the performance. You also have to decide how you will be investing. Long
Term? Size of investment?
If you will trade small amounts the commissions on the ETF's will add up. You have the
advantage of being able to trade during the day with ETFs. If you are going to make regular
small investments then the fund might be a better idea. Crunch the numbers to see what works.
Carol asks…
ETF's VS. Mutual Funds. Which one is better?
Which one do you think is better? Please state the reasons for your opinion.
Steve Winston answers:
Mutual funds are appropriate for some and the wrong investment for a growing number of
people.
For me, I would NOT invest in mutual funds if it weren't for having a 401K.
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9. Overall, Mutual funds are not good (once you're educated in investing) and many people should
not invest in mutual funds unless you have to (like if it were a requirement in a 401K).
Here's why.
First of all, mutual funds exist to take average person's money.
Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's
often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of
the mutual funds out there can't even outperform the market. That's VERY SAD!
Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees
are 0.5% to 2% annually.
Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT
"losing" you lots of money. That way you stay with them and they continue to collect their fees.
Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush
talks in the morning and you call your broker to sell because the market is now tanking, the
broker will gladly take your order, but the order will not be executed until the day is over and the
negative impact is already priced into the fund.
Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of
time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from
the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of
your money as well.
Seventh, mutual funds have to be in the market. So if the market is crashing or going down like
it has between May and now, then the funds still have to be in the market and taking those
losses too. With some practice, you can time your monies to avoid some of those losses (it'll
take practice).
Convniced yet? Need more?
Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they
are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into
just the sectors you want, like metals, or housing, or energy, etc. Or right now, Brokers/Dealers,
Retail, and insurance!
Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund
with $10 billion in assets. 1% of that money is $100 million. How many companies are this big
where $100 million investment isn't the whole company? Do you want to limit yourself to just
those larger companies like Times Warner, Microsoft, home depot, cisco, ebay which have been
sideways for years? I think not.
A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks,
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10. so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell
them as you wish. They represent sectors or indexes, so buying them gives you the same
diversification as the sector/industry/index, but with much less overhead!
See Amex.com (american stock exchange) or ishares.com, holders.com for more info.
You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the
shortcomings (and as you can see, there are many).
Let me know if you have further questions.
Best of luck!
David asks…
ETF share prices vs mutual fund share prices?
If they are in same category, ETF share prices tend to about 6 or 7 times more expensive than
their seeming counterparts in mutual funds. I understand ETF's benefits over mutual funds
such as low turn over rate creating less capital gains tax, lower expense ratio, no min
investment, no short term redemption fee, intra day trading and etc.... However, index mutual
fund can come close to that also at much lower prices...... Anyone know why ETF share prices
tend to be noticeably higher than mutual fund share prices?
With ETF, it's much easier to take advantage of dollar cost averaging due to there being no min
initial investment nor min additional investment, but the share prices are expensive.
With ETF, there are companies that will waive commissions if you trade their ETFs which is my
intent.
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11. Steve Winston answers:
The costs of ETFs include not only management fees but also trading costs. The latter include
commissions, and markups and markdowns on the investments bought or sold. When you buy,
you purchase at the dealer's ask price, which tends to be on the high side of the market.
Conversely, when you sell, you sell at the dealer's bid price, which tends be on the low side of
the market. Commissions add to your expense.
Another problem is that there can be price changes in the stocks underlying an ETF between
the time you buy the ETF and the price of a comparable mutual fund, which is calculated at
daily closing prices. The result is that sometimes ETF prices may be higher than underlying
stock prices (and also mutual fund prices). This isn't always a problem, but it can be, depending
on how the market moves and when during the day you buy the ETF. Also, ETF price changes
sometimes lag behind price changes in the underlying stocks, so that your purchase may be
executed at an "inaccurate" price, in a manner of speaking.
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