Exchange Traded Funds - The Similarities and Differences Between EFT’s, Stocks and Mutual Funds
February 14th, 2010 |
An ETF, or Exchange Trade Fund, tracks an index and trades on the stock market. An ETF is a combination of many types of securities like stocks and bonds, among others. They allow for a more diversified portfolio than just one singular stock would.
ETFs have many similarities to stocks:
- They are an investment
- Bought and sold on a stock exchange
- Can be traded during trading hours
- Their prices can change throughout the day
- Are bought through brokerage accounts on and offline
They also have many differences from stocks:
- They have a basis in securities
- Already offer diversification to a portfolio
- You can buy a whole portfolio in just one ETF
- Most often have less volatility
ETFs: The Alternative to Mutual Funds
Timing: Mutual prices can change from the time you choose to buy to the time the price is calculated at the end of the day. This is not true with ETFs. When you see a price, it is the current market price.
Trading Flexibility: With ETFs you have many choices on how to invest. You can buy long or sale short, buy or sell ETF options, buy on margin or even consider arbitrage options.
Performance: Some ETFs will pay out regularly which helps to increase your overall earnings. On top of this, ETFs usually perform better over an extended period of time than mutual funds.
Transparency: Mutual Funds only disclose how much they are really worth quarterly or even semi-annually. ETFs are, in effect, transparent. They show you everything about the underlying index on a daily basis.
Cost Efficiency: Mutual Funds usually cost more in up-keep due to the excessive management and administrative fees. Therefore, ETFs are looked at as a more cost-efficient choice.</p>
Tax Efficiency: Mutual Funds have no cap on their capital gains. Therefore, in the end, they could cause more problems when it comes to tax time. On top of that, ETF shareholders decide when to sale or buy so they have more control over how much they make and have to claim for their taxes.
No Minimum Investment: Mutual Funds have minimum amount you must invest. This is not true with ETFs.
Looking for more wealth building strategies and tips? Visit us at Global Mutual Funds - Australia’s pre-eminent provider of global investment product alternatives and solutions. Find out what you need to know about equities, options trading, and how exchange traded funds can help build your long term wealth.
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