By mapping out your financial goals, risks, and investment plan, you can choose a portfolio that will meet your investing style and expectations. The portfolio you eventually construct will hold investment vehicles that allow you to best reach your financial objectives. With that said, each investment vehicle has different characteristics for varying financial needs and investor personalities.
Most individual investors tend to lean towards investing in mutual funds and exchange-traded funds (ETFs). They cater to the fact that individuals have different goals and investment styles. As such, there are a variety of funds to invest in. Some to preserve wealth, others to grow it aggressively; with an asset allocation ranging from mostly bonds or mostly equities or to a balanced fund. While ETFs generally cost less and have generally performed better than mutual funds, choosing ETFs over mutual funds isn’t a simple decision. So what are the pros and cons of investing in either of them?
Advantages to Investing in ETFs over Mutual Funds:
Lower Fees – The vast majority of ETFs charge lower fees to manage their funds than do actively managed funds and portfolios.
Performance – You will always match the market’s performance. While you may never have the opportunity to beat the market, you will also never have the risk of significantly underperforming it.
Better Liquidity – ETFs can be bought and sold throughout the day at current market prices, compared to mutual funds where you are in effect stuck with the end of day closing price.
Better Transparency – ETFs typically disclose their holdings on a daily basis, while mutual fund holdings are typically disclosed only quarterly or semi-annually.
No Minimum Investments – Unlike most mutual funds and individually managed portfolios, there are generally no minimum investment amounts to buy an ETF.
Disadvantages to ETFs over Mutual Funds
ETFs Require A Trading Account – ETFs are bought and sold like stocks on stock exchanges. Therefore, you will need to have an account that allows stocks to be held in it to invest in ETFs. Buying and selling ETFs in this way may create additional work and costs for some investors.
ETFs Require Some Ongoing Monitoring – It is a must when investing in ETFs that monitoring is performed to ensure your asset allocation continues to be in line with your risk and return objectives as well as ensuring that the ETF continues to properly track its underlying benchmark index.