Why the heck do you own mutual funds?

You've often heard "Know what you own and why you own it"... But if your why is because you didn't know what questions to ask, let me enlighten you.

 ETF's vs. Mutual Funds - What's the Difference?

Exchange Traded Funds, or ETFs, and Mutual Funds have overlapping qualities, because they pool securities to provide diversification. However, there are significant differences worth noting.

Exchange Traded Funds trade like stocks any time during the trading day. Mutual Funds trade at the end of the day Net Asset Value, or NAV, price. ETFs are typically designed to track  a specific Index, such as the S&P 500, Russell 2000, EAFE, Corporate Bonds, Government Bonds, etc. They typically have a lower operating expenses (rent/equipment/inventory costs/ marketing/ payroll/ insurance/ R & D) than actively managed mutual funds. Consequently, ETFs may help improve your rate of return. There are also no minimums or sales loads. Loaded shares of Mutual Funds can have a tremendous effect on your retirement outcome. A Shares of mutual funds are front loaded, meaning a commission comes out of your investment AND you have ongoing expenses. Holding ETFs does not trigger taxable events, whereas buying & selling of securities within a mutual fund creates taxable events in taxable accounts. Due to the structuring of ETFs, they have greater tax efficiencies, allowing them to decrease or avoid capital gains distributions that would otherwise be paid on mutual funds. Consequently, even if an ETF and passive Mutual Fund both track the same index, the effect on the overall rate of return may be substantially impacted.

It's worth noting that there have been huge outflows from mutual funds to ETFs. It's not all about the fees. It is actually very difficult to control the asset allocation and sector diversification when a portfolio is invested across multiple mutual funds, especially if they are actively traded.

Depending on your strategy, your personal abilities, and the abilities or limitations of your investment professional's knowledge or license restraints, mutual funds may be your best or only option.

That just does not tend to be my approach or strategy.

If you have a 401k or 403b, your choices may be limited to mutual funds... So, the focus then becomes looking at expenses, loads, performance, and diversification - to see what makes the most sense. It is when people change jobs or retire (or already have an IRA from when the change was made), that I am then able to do an IRA rollover for that client and diversify the clients options.

If clients have taxable accounts, then we look at what tax consequences would exist in accounts rolled over, and sometimes that determines whether to buy or sell a mutual fund. There are cases in which holding existing funds but diversifying cash or other assets makes the most sense.

  • ETFs
    • Trade throughout the day during market hours
    • Low Operating Expenses (Avg. around 1/3 of Avg. Mutual Funds)
    • No Investment Minimums
    • Tax-Efficiency advantage
    • No Sales Load
  • Mutual Funds
    • Trade at market close NAV (Net Asset Value)
    • Higher Operating Expenses on Avg.
    • Less Tax-Efficient
    • May have Sales Load
    • Most have Investment Minimums

Using ETF's allows me to provide transparency, incredible control, diversification/ asset allocation, and numerous other advantages to my clients. It allows me to purchase and sell for rebalancing, often without any transaction cost.