Mutual Funds vs ETFs: The Ultimate Quick Guide
Are mutual funds and ETFs right for your portfolio?
Mutual Funds vs ETFs – a common topic of debate among investors.
Short answer: both are great ways to invest and diversify your money.
Long answer: it depends.
This is our ultimate quick guide for mutual funds vs ETFs. Let’s break down the main features of both investment products.
Mutual Fund Features:
A diversified pool of securities, most commonly stocks and bonds that is actively managed by a professional Portfolio Manager.
Higher fees than ETFs. This is because of active management – the Portfolio Manager seeks to preserve your capital as well generate returns that outperform the overall market.
The Portfolio Manager will most often employ a fundamental investing strategy, which relies on rigorous investment analysis and research, and the Portfolio Manager’s own professional judgement in choosing which securities to buy and sell.
Traded and priced only once per day after market close.
ETF (Exchange-Traded Fund) Features:
A diversified pool of securities, most commonly stocks and bonds that is passively managed by a professional Portfolio Manager.
Lower fees than mutual funds. This is because of passive management – the Portfolio Manager seeks to replicate the return of the overall market.
The Portfolio Manager will most often employ a buy-and-hold investing strategy, with regular rebalancing.
Traded and priced throughout the day like a stock.
Comparing Mutual Funds vs ETFs
Before investing in a mutual fund or ETF, it’s important to take a look at the historical after-fee performance of the funds, as well as the MER (management expense ratio) of the fund, which is essentially the fee that you’re paying for holding the fund.
For example, Dynamic Power American Growth (Series F) is a mutual fund with an MER of 4.25%, whereas iShares Core S&P 500 ETF is an ETF with an MER of 0.10%. The Dynamic fund invests in a concentrated portfolio of handpicked American stocks, while the iShares ETF replicates the S&P 500 Index, which is an index that tracks the top 500 largest American stocks.
By comparing just the fees, we may come to the conclusion that it may be more cost-effective to invest in the iShares ETF. However, let’s compare these two funds’ returns.
An investment in Dynamic Power American Growth (Series F) would have returned you 28.06% annually over the past five years, as compared to 13.49% with iShares Core S&P 500 ETF. These returns are as of January 30th, 2021.
Before choosing mutual funds or ETFs to invest in, conduct your own research and cost-benefit analysis to figure out what factors are more important to you.
Also, remember that the underlying holdings vary between all mutual funds and ETFs. For example, a mutual fund that invests in American stocks will have different holdings than another mutual fund that also invests in American stocks.
Even if two mutual funds invest in the same geographic region, they may still employ different strategies to investing and have different sets of criteria as to which holdings are allowed in their portfolios.
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Major Takeaways
Both mutual funds and ETFs are great assets to invest in.
There are thousands of mutual funds and ETFs that you can choose from.
Before picking a mutual fund or an ETF, make sure you research the performance, fees, investment strategies and underlying holdings of the funds.
We hope this helps you become more financially independent.
As always, feel free to reach out to us if you have any questions. We are more than happy to help.
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