What you should consider when making your decision
Mutual funds or ETFs? How do you determine which type of investment is right for your portfolio. Vanguard investing experts Rich Powers and Brian McCarthy break down what you should consider when making your decision.
TRANSCRIPTAmy Chain: Jessica says, “I’m starting at the beginning. Can you explain to me what ETFs are?”
Rich Powers: Okay, great question. Let’s unpack the acronym first. It’s really important. ETF stands for exchange-traded funds. So pooled investment vehicles comprised of stocks or bonds, meant to be used to meet some type of investment objective. Now most ETFs are index funds. That is a key differentiator relative to say mutual funds, which the majority of assets actually find their way into active strategies. One other thing as it relates to ETFs. Remember, ETFs, exchange-traded, that’s a key differentiator for these products relative to say a mutual fund. You buy this/sell this on the exchange.
Amy Chain: I’m going to toss another question out to you guys. This question is, it builds upon the question that you just touched on, Rich: What are some of the advantages and disadvantages? What are some of the differences between ETFs and traditional shares of mutual funds? You want to kick us off?
Rich Powers: Yes, I’ll start with the differences. Maybe, Brian, you’ll take the advantages and disadvantages, but I think one of the key differences is that with an ETF, you can actually purchase that throughout the day. Alright, so you can buy it between 9:30 and 4 when the markets are open, and with a mutual fund, what you’re generally finding is that you purchase that at 4 p.m. when the market closes. And so that’s a key differentiator in terms of funds and ETFs. Otherwise, the governing structure, the regulatory structure that cuts across both ETFs and funds is largely the same. The other point I’d make on ETFs and funds is that with ETFs you actually have the opportunity to buy as few as a single share of an ETF, where with most mutual funds they require some dollar investment minimum for you to meet. And so for an investor who’s maybe starting with fewer dollars to invest, an ETF might be a more accessible way to make an investment.
Brian McCarthy: Yes, thanks, Rich. I can just add on to the advantages/disadvantages, and I guess I would say two things that I would mention there. And I don’t know if it’s an advantage or disadvantage, more of a preference. So you may have some clients who value intra-day opportunities to invest in a mutual fund. And if that’s valuable to you, then an ETF may be the right vehicle for whatever your strategy may be. But the other thing to really consider is costs. So if you are investing in an ETF, be it throughout the day, there’s transaction costs involved, and we may get to this in a bit. I won’t go too deep on it, but there’s transaction costs in the form of commissions that you may pay. And there’s also transaction costs in the form of what’s called a bid-ask spread. On a fund, there is no bid-ask spread because you’re trading at the end of the day. So depending on your time duration or how long you’re looking to hold that particular investment, you may weigh one more than the other.
Rich Powers: And then it comes back to well, what are you trying to accomplish? Is your investment horizon shorter or longer? Do you value flexibility in buying throughout the day? Do you have enough capital to meet some investment minimum to acquire those shares? Those are kind of the key factors that’ll help an investor think about whether the ETF or say a conventional share class is right for them.
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This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
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