For example: A DIA ETF beats a Dow Jones Index Fund because they have less fees and are easily tradeable... Which is better in general a ETF or a Mutual fund? Thanks 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.
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 (CNBC just reported the current # was 72%). 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).
Convinced 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, 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! That depends on the freqency of trading you plan to do and how much money you have to invest. For the majority of us, mutual funds are simpler to deal with at tax time, have the same growth (or loss) potential, and require less money to get started. You can buy a mutual fund with as little as $50/month direct debit to the brokerage you open the account with.
ETFs or Exchange Traded Funds act like stocks and their price fluctuates intraday. There are transaction fees each time you buy or sell an ETF so unless you have a lot of money $50k or more, and don't plan to trade frequently, then this may be a viable option. Otherwise, the transaction fees will erode your gains and it wouldn't be worth the hassle. I think it depends on your situation.
A ETF has more flexibility, lower fees and supposed tax advantages.
If you can find a good mutual fund manager, then probably your mutual fund would out-perform an ETF.
I currently have only mutual funds and no ETFs. I like etfs but - as there are brokerage commissions - that is an extra expense not found in a no load mf. ETF internal fees lower although Vanguard & Fidelity Spartan index funds about as low. Because managers do not have to deal with inflows/outflows with etf they should perform better. well for starters you cant trade directly in an index like DJIA. The diamonds ETF emulates it but too pricey for me.
I own both ETF and mutual. The ETF is subject to wilder swings and most ETFS have lower expenses than the comparable mutual. Despite the annoying transaction fees with the ETF (thus teh cheaper broker you find the better in most cases) I have made more money with ETFS than i can with mutuals.
Mutuals have been under the gun of Spitzer and company because of market timing. That is one advantage of ETF they trade like stock.
But it really depends on you how much risk are you willing to take? |
