Feb

8

Ten Reasons You Should be Using ETFs Instead of Mutual Funds

Posted In: Investing Tips

Much like the enduring question, regular or diet in the soda world, stands the classic investor quandary: Mutual Fund or Exchange Traded Fund? Of course there are no easy answers to this new age question, but I do believe there are at least ten powerful reasons that you should be using Exchange Traded Funds or ETFs instead of Mutual Funds:

1) Manager experience or bias - The larger Mutual Funds are generally managed by experienced managers who have alliances and interests unknown outside their companies. Sector specific Mutual Funds are often managed by younger, inexperienced staff. These managers are looking to prove their worth to their fund family and your well-being may or may not serve that goal. ETFs, on the other hand, attempt to achieve a benchmark index return by holding all the positions in the index, no manager bias are involved.

2) End of Day Pricing and Trading – Mutual Funds are priced at the end of the trading day only and your buy or sell order is processed at this end of day price. ETFs allow for trading throughout the day, just like any other stock.

3) Transparency – Mutual Funds restrict their transparency of positions to the legal requirement of quarterly position reporting. Since this transparency is delayed and infrequent, it leads to a phenomenon known as “window dressing” whereby the fund buys all the quarter’s winners to appear to have held the winning stocks for the quarter. ETFs positions are known and do not change except when there are changes in the underlying index components. There is no ability to hide portfolio positions or dress up a bad portfolio.

4) Taxation – Mutual Funds buy and sell positions unrelated to the tax implications for individual share holders. They may sell to meet redemptions and buy to put new inflows to work. This often results in short-term gains that increase your tax burden. End of year capital gains distribution may also cause you to be “credited” with fathom gains related to a period of time you may not even have been a share holder or for positions that have large unrealized capital gains. Also capital losses do not pass through to share holders to the extent they exceed capital gains.

The timing of your ETF trades, and therefore the gain or loss, is strictly up to you. If waiting a few days or weeks to sell will shift your earnings into a lower tax bracket, you can choose to take the risk and wait. Unexpected capital gain distributions are far less likely with an exchange traded funds as redemptions are generally handled in-kind for larger investors and the lowest cost basis stock in transferred out first to these same in-kind investors.

5) Portfolio Turnover – We mentioned Mutual Fund turnover is generally very high. ETF turnover for redemptions, rebalancing or corporate actions is generally handled in-kind to the extent possible. Here again the ETF is generally much more tax efficient.

6) Options - No options exist for traditional Mutual Funds. The opportunity to control assets without owning them only exists for individual securities and the ETFs that own baskets of stocks. ETF investors can write option contracts on just about all ETFs with an established trading history.

7) Stop or Limit Orders – Mutual Funds do not allow you to set a stop loss or place a limit order at a particular price. If you want to sell you must wait until the end of the day and take whatever the closing price is for the fund’s holdings. ETFs can be bought or sold throughout the trading day, either in a direct purchase or sale or via a limit or stop order.

8) Shorting – Mutual Funds cannot be sold short, nor do most Mutual Funds have the ability to short equity positions. ETFs on the other hand can be margined, sold short or used to hedge risk in a portfolio.

9) Margin Purchases – ETFs can be purchased on margin; Mutual Funds cannot.

10) Fees – Mutual Fund fees are generally higher than passively managed ETFs fees. ETFs have extremely low fees because no manager needs to be making adjustments to the fund’s holdings on a frequent basis. Additionally, ETFs do not pay hidden expenses such as 12b-1 marketing fees.

So as you can see there are ten good reasons why you (or your advisor) should be using ETFs in your investment portfolios.

An author, registered investment advisor and Personal Financial Specialist, Jeff Diercks has helped investors grow and protect their investment portfolios in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist on ETF investing and trend following investment strategies.

His firm website is www.intrustadvisors.com. You can also check out his firm’s blog at www.intrustadvisors.blogspot.com.

Article Source: Ten Reasons You Should be Using ETFs Instead of Mutual Funds