ETF vs Mutual Funds Pros and Cons

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today i want to talk about something that can be confusing to new investors and that's etfs versus mutual funds as well as their pros and cons both have their uses and can be similar but they also have some differences that you should be aware of when picking what you want to have in your portfolio let's jump in [Music] so what is a mutual fund a mutual fund is an investment fund that allows you to pull your money together with other investors to purchase a collection of stocks bonds or other securities roughly 70 of mutual funds at this time are actively managed by an individual or group attempting to beat a market index typically and the rest are passive that follow an index of some kind okay well what is an etf then well an etf is an investment fund traded on the stock exchange similar to a stock unlike mutual funds the etfs can be bought and sold throughout the day and out of all of the etfs in the market only about two percent of them are actively managed meaning 98 are passive and follow some sort of index usually if you're looking for opinions on what funds to look at i encourage you to join the personify app down in the description and start getting involved with the investing community okay so mutual funds and etfs are both investment funds so how much different can they be well technically speaking there aren't any huge differences but like most things the devil is in the details so let's look at some of the pros and cons mutual funds are up first and the first pro is going to be diversification this is a fundamental principle for long-term investing and belongs in everyone's strategy in my opinion by buying a mutual fund you can be buying into hundreds of companies with just one click the second pro is the overwhelming amount of choice when it comes to what kinds of mutual funds are out there you can buy into certain sectors indices and anything else you can think of the third pro here is access to low-cost index funds these are really important especially if you're a new investor you shouldn't just be out there buying single stocks and getting overwhelmed on how to do your best dd or due diligence instead you should start dumping money into low-cost index funds while you learn all that other stuff and let it grow over time this might save some of you from buying hype stocks at their peak and losing 50 percent in a week when you could have just been spending that time learning while your money was safe and growing in an index fund the fourth pro is the ability to buy in increments mutual funds don't have to be bought in whole shares if you have 500 there's no need to figure out how much you can buy by looking at the cost of the fund you can just throw your money in and you're good kind of like fractional shares buying with some brokers this leads to my last pro the ability to automate your investing let's say you get paid every two weeks and are trying to be more consistent as a new investor well with a mutual fund you can set it up for every two weeks when you get paid a certain amount will be moved into a mutual fund without having to take the time to do it yourself and since they allow for basically fractional shares you don't have to calculate how much you're going to be able to buy it will just happen automatically for you this covers another principle of long-term investing and that's time in the market versus timing the market you auto pay your bills so they get done on time right why wouldn't you do the same for investing okay so let's look at some cons now the first con is required minimum investment to get into a mutual fund this isn't as big of a deal as it used to be and will vary from fund to fund for example fidelity doesn't have minimums on almost anything anymore due to market competition but vanguard still has a 3 000 initial investment to get into a bunch of their mutual funds like anything of this nature it's subject to change and i have a feeling as time goes on even more places will be dropping this minimum requirement to stay competitive in the marketplace the second con is that mutual funds aren't as tax efficient as etfs overall but only when talking about actively managed mutual funds this is because these managed funds will have a fund manager buying and selling throughout the year to try and beat the market and just like any investor buying and selling it creates a taxable event to see how much buying and selling is going on in any given mutual fund you can look at the fund's turnover rate this tells you what percentage of the mutual fund's holdings changed over the last year a high turnover rate might mean a slightly higher tax bill at the end of the year for someone holding it versus someone holding a passive fund that didn't change in terms of their holdings as much throughout the year the third con is trading fees just like with minimums this is starting to become a thing of the past but i felt like i should still mention it especially if the funds you're looking at are from a different investment firm from the broker that you're using some places will charge you 40 or even more to trade another broker's mutual fund so keep an eye out and don't ruin your day by losing 40 bucks to fees if you hate fees hold up if you hate anything go ahead and leave a like if you don't you're a liar we all hate something me personally i hate the sun there's no love for gingers on a sunny day the last con isn't much of a con in my opinion but it might be for some mutual funds are only traded at the end of the day this means that if there's a weird dip in the market you can't take advantage of it in the short term by buying that dip during the day since you can't buy and sell like a normal stock so let's take a look at etfs now and some of their pros a few of these are the same as mutual funds they're good for diversification there's a huge variety of choice to meet your investing needs and they offer low cost options for index funds the fourth pro is where we diverge a little and that's with no investment minimums etfs no matter what company they come from don't have required investment minimums to get into them which is great because fees suck what doesn't suck is getting free stocks so use my referral link in the description for weeble and get you some the fifth pro is there generally more tax efficient than mutual funds since almost all etfs are passively managed and there isn't a very high turnover rate creating taxable events for their holders remember though that passive mutual funds are just like this it's the actively managed mutual funds that tend to have higher turnover rates and are less tax efficient the last pro for etfs is the ability to buy and sell intraday just like a stock if an etf takes a dip in the morning you can buy that low spot unlike a mutual fund that won't be traded until the end of the day this is a plus for an investor who wants to take a more active role in trying to get the best price just don't end up waiting for the best price for eight months and end up forgetting to invest it all that's no bueno so on to the cons unlike mutual funds there isn't a way to set up automatic investing with etfs you have to remember to go in on payday every two weeks and buy your etf this doesn't sound like a big deal until you realize most people have the memory of a mouse and can't be trusted to even cancel the four extra streaming services they haven't used in the last five years con number two is some may still have trading fees but this is more of a broker thing and has rapidly disappeared over the last five years or so most reputable brokers don't charge any commissions on buying and selling etfs if your broker does i would recommend getting a new one almost all market competitors have zero commission based trading now especially on etfs check out my other video that goes over the differences in some major brokers if you need a new one the last con with etfs is that you can't buy in increments most of the time some brokers like fidelity will allow for buying a fractional shares of etfs but lots still don't allow this this means if your etf that you want to buy costs 400 and you only have 200 you're out of luck so go put some gas in your car and get driving to work or get a broker with fractional shares that's always a good option too last thing to consider with mutual funds and etfs is expense ratios so here's a chart i made overall when looking at all funds lumped together mutual funds have a higher median expense ratio at 0.88 percent compared to etf's median being at 0.50 percent but hold up when you look at mutual funds that just follow indices which are passively managed if you remember mutual funds come in at 0.33 and etfs are sitting at 0.47 percent this isn't a chart that just says one is better than the other regarding expense ratios this is meant to show you the importance of shopping around looking at averages and medians isn't always the best strategy competition has created very low expense ratios for both mutual funds and etfs fidelity has zero expense ratio mutual funds that follow indices now and vanguard has etfs that follow indices that come in around point zero six percent which is way lower than the numbers we're looking at right now start comparing funds from different institutions and find the mutual funds or etfs that are best for you if you're looking for info on some good funds that track and index we have a video on that also dividends are cool so watch that one too thanks for watching everyone take care
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Channel: PersonaFi
Views: 96
Rating: 5 out of 5
Keywords: Personafi, lets invest and trade together, mutual funds vs etf, etf vs mutual funds, etfs vs mutual funds, mutual funds vs etf's, index funds vs mutual funds, index funds vs mutual funds vs etf, exchange traded funds for beginners, what are etfs and mutual funds, mutual funds pros and cons, etf pros and cons, pros and cons etf or mutual fund, mutual fund vs etf pros and cons, pros and cons etf, mutual fund vs etf which is better, pros and cons mutual fund, pros and cons etfs
Id: GLw-6koXPzs
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Length: 8min 22sec (502 seconds)
Published: Tue Aug 24 2021
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