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ETFs vs Mutual Funds -- What's the Difference?

ETFs vs Mutual Funds -- What's the Difference?

The better choice might be different for each investor.

There is no clear-cut answer to this question, since it will depend on an investor’s unique situation and what’s being offered. If you intend to trade actively, ETFs might be a better choice since they have prices that update minute-to-minute during the day and their trades settle more quickly.

If you are just buying and holding an index (see ‘index investing’), an ETF will give you the cost effective means for doing so. You may be able to buy into an ETF with lower initial requirements than a mutual fund, since you can buy one share instead of possibly having to meet a $1,000 minimum initial investment requirement for a mutual fund.

But if you intend to keep investing in regular small increments, as in dollar cost averaging, you will generally avoid more transaction costs by using a mutual fund instead of an ETF.

ETFs have been touted for their tax-efficiency compared to mutual funds, as well as low expense ratios, but there are comparable mutual funds to most ETFs on both counts, since the tax efficiency is a largely a function of low turnover, and there are plenty of low-expense mutual funds.

It is true that mutual funds have in some ways become the old, slow, expensive trading vehicle that the trendy proponents of ETFs would have you believe, but that description is only representative of some of the expansive universe of mutual funds.

Plenty of them are still on their toes, and thankfully they’ll have to be more and more if they want to keep up with the increasing popularity of ETFs.

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Keywords: investments, mutual funds, Exchange Traded Funds (ETFs), transaction cost, Dollar Cost Averaging (DCA), fees & commissions, expense ratio, turnovers, turnover ratio,
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