Complete Guide To Investment Companies, Funds And REITs


Mutual Funds Versus ETFs - Shortcomings

Depending upon the investor, exchange-traded funds may have possible drawbacks. No-load mutual fund investors would need to open a brokerage account and pay commissions to trade. Frequent, small investments that are part of a dollar-cost averaging strategy could prove to be more expensive. Additionally, investors need to understand that passive ETFs are subject to tracking errors, some to a greater degree than others, where the manager may not be able to purchase some illiquid securities in the index and must attempt index replication through sampling the liquid securities in it. Product complexity is always a consideration.

Investors must also understand differences in settlement procedures. Whereas mutual funds settle next-day, ETFs settle in three business days. The investor must have cash on hand to pay for purchases. Retail investors would be more likely to find these differences a challenge than institutional ones. Below is a table that better illustrates the differences between the two financial instruments.

Mutual Fund
Daily and continuous pricing
Forward pricing
Exchange traded Fund redemption at day\'s end
No tax effect of trading on shareholders Large redemptions may cause capital gains distributions for non-redeeming fund shareholders
In-kind redemption reduces shareholder tax liability
Fund managers limited in their ability to manage taxes due to cash redemptions
Limit, stop limit orders, short selling allowed No limit order pricing or short selling permitted
May be purchased and sold on margin No margin trades allowed
Lower expense ratios as client services born by brokerage firms Expenses tend to be higher due to sales loads
May be purchased in any brokerage account Fund availability depends on existence of selling agreements with the broker/dealer
Brokerage commissions applicable transaction costs, load funds through a broker often have sales charge or commission

Whatever choice investors make, they need to have a clear picture of their objectives and constraints, either through simple data gathering or more elaborate work with an investment advisor who can put together an Investment Policy Statement. Additionally, as with any investment, investors need to understand the risk and return profile of the asset classes in which they plan to invest and how the instruments work. Once they do, the choice of mutual fund or exchange-traded fund is simply a matter of implementation.

Unit Investment Trusts
Related Articles
  1. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  2. Investing Basics

    The Lipper Rating System Explained

    Take a closer look at how Lipper Inc., a subsidiary of Thomson Reuters, determines the ratings for mutual funds in its Lipper Rating System.
  3. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  4. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  5. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  6. Investing

    6 High Value and High Dividend Stocks

    Are you looking for stocks that offer regular dividends payments and will appreciate? Here are the top stocks that offer the best of both.
  7. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  8. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  9. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  10. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Benchmark

    A standard against which the performance of a security, mutual ...
  3. Private Equity Real Estate

    A Definition of "Private Equity Real Estate" and how it applies ...
  4. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based ...
  6. Equity

    Equity is the value of an asset less the value of all liabilities ...
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  3. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center