As the New Year is upon us, often we look for thing we can improve or change, I live by the age old adage; if it isn’t broken, don’t fix it. However, if you have a portfolio that is underperforming or just sitting in mutual funds not doing very well it may well be a time to make a change. Taking more control of your portfolio by investing in ETF securities may be a great place to start.
While Exchange Traded Funds are not new (they have actually been around for about 20 years,) they’re certainly getting a lot of attention lately. This is due to the ability for an individual investor to easily combine index investing with the convenience of the individual stock ownership, is a formula hard to resist. ETF’s are a collection of shares that follow a particular index, industry, or commodity, like a traditional mutual fund does, however, that is where the similarity ends.
There are several advantages ETF’s have over Mutual Funds for stock investors, because of the fundamental difference that ETF’s trade like individual exchange traded stocks.
The Differences vs. Mutual Funds:
- When a new investor buys shares in a mutual fund, he or she pays the end of day NAV (net asset value). Since ETF’s are traded on the exchange, they act just like any individual stock issue, and can be purchased any time at the current price during the market hours.
- When an investor purchases shares in ETS’s, unlike mutual funds, they may use pending limit orders, stop loss orders, and take profit limit orders just like stock trading. Also with ETF’s, you may go long or short, just like stocks.
- With exchange traded funds an investor can also buy or sell any and number of shares that, she would like, even down to one share, if desired. This is a real advantage for the investor with a small portfolio, as many mutual fund, have much higher minimum requirements.
- For investors with experience trading options, you can trade puts and calls on many ETF’s just like any other optionable stock.
- The management fees are generally smaller in the ETF world, as they just need to pick the basket of shares that follow their sector or specialty, and are much less likely to have highly paid fund managers (expensive stock picking gurus.)
These are the major differences between the two kinds of funds in a nutshell. So, with ETF investing you can take more control of you investing decisions, take advantage of more active trading methods and stop paying the mutual fund managers to lose your money for you.