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Question:


What is the better investment, mutual funds or ETFs?
-Hal


Answer:


It depends. There are several key differences between ETFs – exchange-traded funds – and mutual funds. ETFs can be bought and sold throughout the stock market trading session. Mutual funds are priced at the end of the day, and that’s it; everyone just buys and sells at the closing price. Another distinction is that nearly all ETFs follow an index of stocks, bonds or commodities, while most mutual funds are actively managed. Their aim – achieved with varying degrees of success – is to pick portfolio holdings that will beat a benchmark index in whatever market they focus on.
 
ETFs tend to have lower expenses than mutual funds – that active management doesn’t come cheap – and ETFs have tax advantages too. Investors in ETFs are only liable for capital gains tax when they sell their funds, even if that’s far in the future, while mutual funds are required to distribute gains annually, which are then taxable.
 
These differences make ETFs a better fit for many investors, whether they are short-term traders or long-term holders. Mutual funds are best for investors who have faith in the ability of active portfolio managers to add value. The higher costs that actively managed funds incur generally result in chronic underperformance, though, so that faith often proves misplaced. It’s vital to stick with managers that have been running their funds for many years and have solid records of generating superior returns. If you’re a novice investor, then unless you’re willing to put in the time to research funds and their managers, you’re probably better off sticking with ETFs or else mutual funds that are also passively managed index trackers.
-Conrad de Aenlle



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