versus mutual funds, etc....
thanks for your time!! ETF's are NOT mutual funds. Don't let them say they aren't.
First, Mutual funds:
A mutual fund is a managed fund. You are essentially paying a manager to buy and sell a portfolio within the framework of a set of rules. The manager has discretion to weight the fund in any stock more than others, to keep a certain amount of reserve cash, and to buy bonds. Usually the rules of the fund prescribe limits to these actions, but they are pretty broad. These rules are in the prospectus. For this reason, if the fund changes managers, it's time to get out, unless the new manager has a proven track record in other funds.
Mutual funds have to pay taxes on their earnings, like a company would. When you redeem your money, you pay capital gains tax. So you are taxed twice.
Mutual funds often have rules about when you can sell your interest. Often you may have to hold the fund for a minimum amount of time after you purchase, as much as 90-180 days.
Mutual funds may require a "load" which is a percentage payment off the top, when you buy or sell the fund.
You may not buy options on a mutual fund.
ETFs:
An ETF tracks a fixed index of selected stocks. If they go up, the ETF goes up. There is no discretion for the manager to "weight" the fund or to hold bonds or cash reserves. It just reflects the stock market universe of the funds it holds.
ETF's trade just like stocks. That means a brokerage fee to buy and sell, but these days with deep discount brokers, that's negligible.
Because ETF's trade like stocks, they are free of rules. You can enter and exit a position on the same day if you like.
The ETF does not have to pay taxes on it's holdings.
And the BIGGEST advantage of ETF's is that you can option them, i.e. buy calls and puts against them. ETF's have an advantage over stocks, in that their options strike prices are set in dollar increments, which means you can fine tune your position based on the current fund price, instead of placing option positions sometimes $2.5 or $5 in or out of the money. This gives you an investing ability to take advantage of broad market conditions without exposing yourself to the volatility of a single stock.
Say that you hear housing is tanking, and builders and lender are losing money hand over fist. You can buy puts in a real estate ETF and ride the market down, where if you did that with a stock, you might be unlucky enough to pick the one company that's not sinking. If you compare an ETF to a similar index mutual fund, the ETF will usually have slightly lower expenses each year. However the ETF will have commissions to buy and sell, the mutual fund won't. See the links.
http://mutualfunds.about.com/cs/etfs/a/e...
http://www.fool.com/etf/etf02.htm
http://www.diehards.org/forum/viewtopic.... You might be a little confused. Exchange traded funds are mutual funds. The confusion might be that there are two different varieties--one referred to by the name of closed end funds and another by the name index funds. There are two differences between the two.
Closed end funds are managed funds is one difference and they have only a relatively fixed number of shares is the other. Sometimes many sell at a large discount to net assets of as much as 20% but more normally about 10%.
Index funds are suedo unmanaged funds and they generally as a result have a lower expense ratio. Depending on the fund, from 0.20 to about 0.75%. Unlike closed end funds the number of shares outstanding varies with demand. Normally, they sell very close to net asset value.
Both can be bought and sold during market hours, but both are subject to brokerage commissions.
Open ended mutual funds which is what most people think of when they think of mutual funds, do not come with a brokerage commission. That is one pro of them. One con is that generally there is a minimum purchase amount of about $2000 to $3000 and sometimesmore, sometimes much more. You can buy just one share of an exchange traded fund if you desire. One of the disadvantages of open ended funds is that you do not know the price at which you are purchasing the fund, because the price is set only after the market is closed and all orders have already been taken. But an advantage is that they always trade at exactly net asset value. The expense ratio is normally higher than an index fund, the average being about 1.5% but there are some that have expenses that are very close to the index funds.
Some index funds have in my opinion one big disadvantage. They are capitalization weighted. That means that a great deal of your money is invested in about 20 stocks. What they do you do. If you like Exxon and MSFT that may not be a disadvantage to you, but it does not allow for diversity of investments. On the other hand some managed funds make really big bets on just a few stocks also.
Here is a link to most closed end and exchange traded index funds where you can research them.
http://www.etfconnect.com/ Advantages of Exchange Traded Funds
Being similar to stocks, exchange traded funds offer more flexibility than your typical mutual fund.
ETFs can be bought and sold throughout the trading day, allowing for intraday trading - which is rare with mutual funds.
Traders have the ability to short or buy ETFs on margin.
Low annual expenses rival the cheapest mutual funds.
Tax efficiency - due to SEC regulations, ETF tend to beat out mutual funds when it comes to tax efficiency (if it is a non-taxable account then they are equal).
Disadvantages of ETFs
Unfortunately, exchange traded funds do have some negatives:
Commissions - like stocks, trading exchange traded funds will cost you.
Only institutions and the extremely wealthy can deal directly with the ETF companies (must buy through a broker).
Unlike mutual funds, ETFs don't necessarily trade at the net asset values of their underlying holdings, meaning an ETF could potentially trade above or below the value of the underlying portfolios.
Slippage - as with stocks, there is a bid-ask spread, meaning you might buy the ETF for 15 1/8 but can only sell it for 15 (which is basically a hidden charge). |
