* * * Similarities with funds and ETFs
Many investors who want to know about exchange traded funds (ETFs) try to find different information from the same fund. But before reviewing the differences between the two, there are actually some key similarities that are valuable.
They all diversify their investments: mutual funds and exchange traded funds allow investors to buy a basket of securities within a safe investment range. They usually invest in explicit or implicit goals, such as growth, value or income. They usually invest in specific types of stocks or bonds, such as large-cap stocks, foreign stocks or medium-term bonds.
Most ETFs work like index funds: most ETFs are passively managed, which makes them most similar to index funds. In this similarity, both index funds and ETFs reflect the performance of basic indexes, such as the Standard & Poor's 500 Index. Compared with actively managed funds, their expense ratio is very low; Can be a cautious investment type, diversification and portfolio construction.
Because of their similarity, investors use funds and ETFs for similar purposes. However, it is very important to know the difference between selling the same fund and buying an ETF.
* * * Differences between the same fund and ETF
* * * There are some differences between these two funds, and it is very important to understand these differences before choosing a fund for a specific investment strategy or goal. * * * Compared with funds and ETFs, ETFs have some advantages, and ETFs are smarter investment tools for certain goals. Some differences are significant, while others are subtle.
* * * The same fund is traded on the same day, and ETF is traded on the same day. ETF can be used for stock orders, but not the same fund. The expense ratio of ETFs is usually lower than that of mutual funds. The main difference between * * * and funds and ETFs lies in the transaction mode. What does this mean?
For example, suppose you want to buy or sell a mutual fund. The price you buy or sell is not the real price, but the net asset value or net asset value of the relevant securities. You will trade with the net asset value of the fund at the end of the trading day.
So, if the stock price goes up or down that day, you can't control the execution time of the transaction.
For better or worse, the same fund can finally get what it wants.
On the contrary, ETFs are intraday trading. This may be an advantage if you can take advantage of the price changes that occur during the day. For example, if you think the market is higher during the day and want to take advantage of this trend, you can buy ETFs earlier in the trading day and capture its positive trend. On some days, the market can go up or down 1.00% or more. This will bring risks and opportunities, depending on the accuracy of your forecast trend.
Part of the tradable part of ETF is the so-called spread, that is, the spread between the buying price and the selling price of securities. However, in short, the biggest risk here is that some ETFs are not widely traded and the spread may be wider, which is not good for individual investors. Therefore, look for widely traded index ETFs, such as SPDR Standard & Poor's 500 Index (SPY) or iShares Core Standard & Poor's 500 Index (IVV), and beware of niche areas, such as industry funds and state funds with narrow trading scope.
Another difference between ETF and similar stock trading is that it can place stock orders, which helps to overcome some behavioral and pricing risks in daytime trading. For example, through a limit order, investors can choose the price at which to execute the transaction. Through stop-loss orders, investors can choose a price lower than the current price and prevent losses below the selected price. Investors do not have flexible control over the same fund.
The expense ratio of ETF is usually lower than that of most mutual funds, and sometimes it may be lower than that of index mutual funds. In theory, this can provide investors with a slight advantage in the return of index funds. However, the transaction cost of ETF may be higher. For example, suppose you have a brokerage account with VanguardInvestments. If you want to trade iSharesETF, you can pay a transaction fee of about $7.00, while Vanguard index funds tracking the same index do not need transaction fees or commissions.
Index fund or ETF? Or both?
The argument between index funds and ETFs is actually not a problem. Investors should think wisely. When choosing between the two, the first consideration is the cost rate. Secondly, there may be some investment types, and one fund may have more advantages than another. For example, if an investor wants to buy an index closely related to the change of gold price, he can achieve his goal by using an ETF called SPDRGoldShares(GLD).
Although past performance does not guarantee future performance, historical returns can reveal the ability of index funds or ETFs to closely track the basic index, thus providing investors with greater potential returns. For example, the historical performance of the index fund Vanguard Total Market Index in V (VBMFX) is better than that of IshareScore American Bond Market Index ETF (AGG), although the expense ratio of VBMFX is 0.20% and that of AGG is 0.08%, and both of them track the same index, namely the Barclays Composite Bond Index.
In other words, the performance of AGG is historically lower than that of VBMFX.
Finally, in order to establish a diversified portfolio, funds and ETFs can be complementary or mutual. For example, some investors like to use ETFs as industry funds, and use * * * to bring funds to make active management choices. No matter which way you decide, as long as it is diversified and suitable for your risk tolerance and investment objectives, you can choose.