With progress comes innovation. Exchange-traded funds (ETFs), barely 20 years old, are among the more recent innovation to come off the managed money assembly line. By contrast, the mutual fund dates back to the 1920s, surviving the Great Depression and numerous recessions, including the most recent and, arguably, most severe, of the past several years.

Which Is Better?
It depends upon the type of investor. The traditional, less sophisticated IRA investor who reallocates strategically, rather than tactically, keeps expenses low and is not a stock picker, may find the process of purchasing shares from a mutual fund company and redeeming them a simpler process. Additionally, plan sponsors' use of mutual funds is well entrenched. Indeed, the ICI reports in its 2011 Investment Company Fact Book that close to $5 trillion is invested in open-end mutual funds within IRAs and defined contribution plans.

Individual ETF investors, on the other hand, tend to be more sophisticated, owning individual securities in both their tax qualified and non-qualified accounts, alike. Institutional investors use them, as well. ETFs trade throughout the day, may be purchased on margin and sold short. ETFs also afford the investor exposure to myriad markets and asset classes. Most are passive investments (track an index), but some offer active and complex approaches.

Institutional managers (separate accounts, hedge funds) who use leverage, take directional bets, hedge (pairs trading and market neutral strategies) or tactically allocate asset classes, use ETFs that prove to be less expensive and more nimble. These vehicles are more transparent than their closed-end fund (CEF) forebears, which lack the authorized participant, a built in market making device. This feature of the ETF allows for daily creation and redemption of shares, which minimizes differences between the ETF price and its net asset value (NAV). CEFs issue a fixed number of shares, in contrast, which lead to continued differences between the share price and the NAV, creating an arbitrage opportunity.



Other Considerations

Related Articles
  1. Investing

    Mutual Fund Vs ETF: Which is Right For You?

    Want to invest but don't understand the difference between investment products? Here we explain ETFs vs. Mutual Funds and which is right for you.
  2. Investing

    5 Reasons to Pick ETFs Over Mutual Funds

    Discover five reasons why average investors and sophisticated hedge funds choose ETFs instead of mutual funds to meet their investment goals.
  3. Investing

    When Is the Right Time to Change From Mutual Funds to ETFs

    Find out how to determine when it's the right time for you to switch from mutual funds to ETFs, including the benefits of ETFs and who they are best for.
  4. Investing

    For More And More Investors, ETFs Are A Godsend

    Average and cautious investors can experience lower risk with ETFs - a safer alternative to swaps and derivatives.
  5. Investing

    Exchange-Traded Funds (ETFs)

    This vehicle combines the diversification of a mutual fund with the flexibility of a stock. Learn more about them here.
  6. Investing

    A Look At the Growth Of the ETF Industry

    Explore the phenomenal growth rate of the ETF industry, and learn some of the principal reasons why ETFs are projected to continue to grow at a rapid pace.
  7. Investing

    Right Fund For You: Closed End Or Open End Fund?

    Open-end and closed-end funds are vehicles that enable investors to invest in professionally-managed portfolios of securities. Although they have some features in common, there are some major ...
  8. Financial Advisor

    Index Mutual Funds Vs. Index ETFs

    When considering an index mutual fund versus the ETF variety, investors should consult an experienced professional.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center