A few months ago, I talked about mutual funds and some of their drawbacks (the 2-3.5% yearly MER fee they charge for actively managing the fund), and how I personally prefer Exchange Traded Funds over mutual funds.
So what are Exchange Traded funds, you ask?
Exchange Traded Funds or ETF’s for short (The acronym ETF makes it sound sexy, doesn’t it?) are basically a mutual fund traded on the market… minus the hefty fees. ETF’s track the index.. but can be traded like a stock. They are a collection or basket of stocks (each ETF has a company such as Vanguard, iShares, Claymore, and SPDRs… ). On their websites, Vanguard, iShares, Claymore, and SPDR will show you which stocks are in the specific ETF you are looking at)– just like a mutual fund. The major difference between a mutual fund and an ETF is that a mutual fund is actively managed- you are paying someone who went to school for a bazillion years big bucks to actively manage the mutual fund. By big bucks, I mean the higher MER. By actively manage, I mean that the guy or girl with the cushy salary buys and sells equities within the mutual fund constantly.
You would think that active management is good, right? WRONG. Most mutual funds actually underperform the average return of the market. AND when you own a mutual fund, you’ll pay more in tax (like capital gains and income distrubution tax- you won’t get that in an ETF). A mutual fund passes its net gains to investors, not net losses.
Many people favour ETF’s compared to individual stocks because you are hedged against risk because an ETF tracks a number of stocks, not just one. For beginner investors, investing in ETF’s is the way to go.
I haven’t done a pros and cons list in a while, so here’s one for ETF’s. Just because.
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