What are the pros and cons of mutual funds and mutual fund ETFs?

ETFs, Mutual Funds
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February 2017
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They are very similar in that they both offer immediate diversification and management. Both can be based upon an index, sector, genre, or even strategy. The main difference is that an ETF can be traded during the day like a stock, whereas a mutual fund is sold at the end of the day and you receive the net asset value (NAV) of all of the investments within the mutual fund.

So if you are a long term investor, there really isn't too much difference. You should compare expenses between a mutual fund or ETF employing the same strategy. This would especially be true if you are using an index strategy.

If you are an active investor, an ETF offers more flexibility. Many/most active managers and individual investors use ETFs versus mutual funds for this very reason. Certain fund notable managers will specifically use a mutual fund so they cannot be mimicked or copied because a mutual fund only has to release its top 10 holdings at the end of the quarter. ETFs have to disclose holding daily. I know some fund managers that specifically structured their management as a mutual fund so large ETF players like BlackRock and others couldn't reverse engineer their strategy. The lack of transparency sometimes benefits very good managers.

So it really depends on your strategy and what you are trying to achieve. They are both a tool and not mutually exclusive. For instance, you could use a good mutual fund manager with a good strategy and then employ an index strategy using a low cost ETF.  This strategy would be a combination of alpha (active) and beta (passive).

I personally prefer ETFs usually for their flexibility, but I am an active manager. Hope this provides some insight.

Best of luck, Dan Stewart CFA®

February 2017
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