I don't understand financial jargon. Please explain in plain English, using math if possible. Actually, Exchange Traded Funds and Mutual funds are not that different. Both are investment companies organized under the Investment Co act of 1940. Actually many ETF are organized as Mutual Funds. Basically a mutal fund is a pool of assets with professional management. Many investors pool their smaller investments in order to take advatage of the professional management.
The real differance between "Mutual Funds" and ETFs are ETFs trade on an "Exchange" their price is determined by supply and demmand. In a "Mutual Fund" the day to day value is determined by adding up the value of all the investments and dividing that number by the number of shares outstanding.
Because ETFs are traded like stocks when an investor sells his/her shares they are vbought by another investor. So the fund does not have to pay $ out, there fore they are not required to keep a certain % of he fund in cash to cover liquidations. This may or may not make it possible for the fund manager to achieve better investment results. mutual funds let the professionals allocate the fund in different securities and investment securities depending on the risk profile of the fund's. in exchange traded funds, the fund is allocated to specific securities which tracks a certain index or benchmark, regardless of the risk profile. The definition for a Mutual Fund (MF) from Wikipedia:
A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors.
What sets any one mutual fund apart from all the others? Did it beat the Dow last year? No. If it can't beat the index it tracks, does that make it a "good" fund? No.
Let鈥檚 look at Investment Company of America (ICA), owned and operated by American Funds (AF). AF is an awesome fund company for a couple of reasons. There are several advantages and disadvantages:
1.AF is a private company which means they only answer to their MF holders. Fidelity is a good company also, but they are owned by stock holders. In the long run the company that only answers to you, the MF holder, is going to look out for your best interests.
2.AF also has some of the lowest annual fees to maintain an account of any MF company. All that being said, depending on your situation ICA may or may not be good for you. You need a competent advisor to help you with that.
3.I would be cautious with ICA as it is one of the largest MF in the world. They may seem like a good thing but it actually can be bad. It means it has much less flexibility to move its money around when conditions warrant it.
4.As far as EJ goes, they hire people on average who have very little experience in the industry, so at a minimum make sure your rep has a lot of experience and didn't just start last month at this. They also have agreements with companies like American Funds where their reps get a bigger commission to them then they do with other products. The concern being your advice from EJ might be tainted by the reps desire to get more commission. You need to work with an independent rep to assist you with you decisions; one who will give you all the information and doesn't have a hidden agenda.
Now let's look at MF's, in general, or the decision to use one at all.
If you invest in a MF, you have turned that responsibility over to someone else. To me, they are mostly the same, in general, in terms of results. Fewer than 10% can beat the Dow or other index it follows because of their fees. Why would you pay someone you don't know, whom will almost certainly underperform the market, an annual fee of 2.5% to do something you can do yourself, and do it better by buying an ETF, without any input from you after the initial purchase? An ETF is a publicly traded 鈥淓xchange Traded Fund, that trades just like a stock). Just buy the Diamonds (the DJIA ETF) if you want to let it ride on the Dow, or the Spyders (SPY - the S&P 500 ETF), or the Nasdaq (QQQQ), or diversify across the entire market by buying all three. The ETF's trade just like a stock or MF. If you want to diversify, and you want to Buy and Hold, buy an ETF.
A MF is always "in" the market, so you are at the mercy of the ups and downs of the Dow. You are unable to manage your risk with a MF, so you can't put a Protective Stop on a MF, at say 10%, to lock in your profits when the market goes down. You don't have a clue what's going to happen. That is not my idea of investing.
Actually, if done properly, it is more work to investigate all of the MF's and their advisors and their traders and their fees and their methods, than it is to investigate all the similar applicable info about stocks. To me, it's more like a conscious choice to be ignorant, to simply and blindly turn your money over to a stranger because they are "listed," like you do at a bank. Stocks are "listed," as are commodities and ETF's and everything else. With a mutual fund, you've just added a whole new set of unknowns to the equation.
The best you can do in any investment is try to increase your odds of success and reduce your risk. You can do these things yourself, but not in a mutual fund.
MF's are so 20th Century. Relics of the past. Unneccessary. Buy an ETF. Or sell an ETF short and bet on the downside. There are two sides to every market, not just the upside.
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Investing without worry 鈥?Mutual Funds?
Like when your teenage daughter fails to come home on time, you worry because you don't have enough information to "know" what will happen. You go through all of the possible outcomes, but because of a lack of information and being uninformed, they are all left up in the air and equally unpalatable except for the one outcome you "wish" and "hope" for.
But with investing, just a little foreknowldge and information can make all of the possible outcomes known. It takes some hard work and learning, but better than being the anxious parent, hoping and praying and wishing for your daughter to come home.
If you do your work, evaluate the risk, identify entry and exit at support and resistance levels or use whatever signal generator you are comfortable using, and apply good money management techniques, then you've done all you can do, and no amount of worrying or "hope" or "wishing" will change the outcome. You know what yours risks are and how much you can lose, and your profit is open-ended.
This is why mutual funds (mf) and investment advisors managing your money doesn't make any sense to me. You are the anxious parent, waiting for an unknown outcome without any control over your own future. You can do the same thing a MF can do by buying Index ETF's. But you can also take profits off the table, add Protective Stops to limit your risk, and stay out when risk becomes unpalatable. You can also bet on the downside of the market (short), whereas a MF cannot. A MF is always "in" the market (long), exposing you to enormous risk and "worry."
You cannot avoid or escape risk. You can put your money under your mattress, and inflation will eat at it, or the rats will, or there might be a fire, or a robber may take it. But you can manage risk, if you invest it properly. This presuposes you have foreknowledge. You don't understand financial jargon, but want it explained to you using the math jargon? Why not ballet jargon? :)
The difference is all about jargon, both financial and tax.
Investors buy shares of a mutual fund from the fund's management company at net asset value, which is established daily at the close of business. When investors want to sell their shares, they sell them back to the fund's management company, again, at net asset value established daily.
Exchange-traded funds are, as the name suggests, traded on exchanges; investors trade shares with each other, prices are available continuously and may differ from the net asset value. In addition, there may be options available on ETF shares. The extent to which the manager (or, in case of passively managed ETFs, administrator) interferes with trading depends on whether the fund is open-end or close-end. Most of passively managed (index) ETFs are open-end; the administrator can sell additional shares if demand exceeds supply and repurchase excess shares if supply exceeds demand. As a result, price stays close to the net asset value. Most of actively managed ETFs are close-end; the manager does not interfere with trading, so the price tends to differ from the net asset value.
Another important difference is taxation.
Mutual funds are treated as pass-through entities for tax purposes; income and capital gains a mutual fund made during a year are taxable at the investor level, not at the fund level. What it means is that you can hold the same fund for many years and pay capital gains taxes every year, because the fund made those gains on your behalf.
ETFs, conversely, are treated like stocks for tax purposes. Investors pay income tax on dividends received from ETFs (but not on interest and dividends received BY ETFs); there are no capital gains taxes during the holding period, either. |
