ETFs and mutual funds may seem like similar financial products. Both of these investment vehicles are made up of a pool of money from different investors, then money in the fund is used to buy stocks, bonds, or other investments.
They also share a common goal: to provide easy access to a wide range of investments and diversified strategies in a single product.
But the key differences between ETFs and mutual funds could have a major impact on your money. Here are the three main distinctions you should know:
Transparency
ETFs disclose their holdings on a daily basis, whereas mutual fund managers only have to disclose theirs 60 days after the end of a quarter.
This means with our ETFs you will always know exactly what your money is invested in. Whereas with a mutual fund, the holdings you own via the mutual fund could change within the quarter and you won’t know it. You’ll only know what you own when the current holdings are released periodically.
Tax Efficiency
Put simply, ETFs generally have less taxable events.
If a mutual fund manager needs to raise capital to pay shareholder redemptions or to rebalance the portfolio, they must sell holdings to do so, which could incur capital gains to the shareholders, and therefore capital gains taxes.
Because ETFs do this by creating or redeeming blocks called “creation units”, they can raise the capital without needing to sell holdings. Buying and selling creation units does not incur capital gains under the tax code. Therefore, you only incur capital gains and pay capital gains tax when you sell the ETF (if you sell it for a gain, of course).
Trading Accessibility
Mutual funds clock into work once per day. They can only be bought or sold – and thus are valued – at market close (4 PM ET).
With ETFs, you can buy or sell throughout the day and know the exact value of your investment at any given time.
You can typically buy ETFs with no minimum investment amount, unlike mutual funds, which generally have minimum investment amounts of $500 to $10,000 or more. ETFs also allow more advanced trading techniques in comparison.
These factors give you more choices when it comes to the amount, approach, and time to invest.
