Mutual Funds vs ETF

Posted: December 29, 2011 in Uncategorized

As my business moves forward and grows I am always looking into ways to improve both my service and performance as an advisor. One of the most asked questions I get from my clients is what is the difference between Mutual Funds and ETF’S.

According to Investopedia a mutual fund is:

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectusd
 
ETF:

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

As ETF’S explode onto the scene I am faced daily with the decision of indexing vs the active management of the mutual fund industry. As 2011 comes to a close I am beginning to see many of the benefits of moving away from the mutual fund model. While performance is important for my clients, diversification and keeping the portfolio in line with the objectives is more important.

As the year is coming to a close I am having a hard time justifying the fees involved in the mutual fund model. Most equity managers trailed the benchmark or are in line with the benchmark. While there are some exceptions to this most funds have underperformed across the board.

ETF’S do provide a cheaper and more liquid access to many of the same things and frankly if the fund managers do not get there act together the industry will go out of business. While I am not quite ready to jump ship on the fund industry as a whole, incorporating ETF’S will be a part of my re balancing act going into 2012. As far as I am concerned the additional diversification and added liquidity will only enhance the portfolio’s I manage.

Hopefully many of the fund managers I have trusted for years will get back on track this year, many are calling 2012 a stock pickers market. If that is the case I suppose we can chalk it up to bad luck. If not the fund industry is going to have a hell of a time raising capital and keeping outflows at a minimum.

Comments
  1. Tricia says:

    Hi! Would you mind if I share your blog with my twitter group?
    There’s a lot of folks that I think would really appreciate your content. Please let me know. Thank you

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