Mutual Fund Or ETF?
6 things that I find most people ask!
Fees
As a general rule of thumb investing in ETF's is less expensive than Mutual Funds for the "Do It Yourself" investor (although not always the case). If you are getting professional advice, ETF's may be less expensive as well but do not forget about your Advisor's fees. You may find that the total fee, including the fee for advice, is the same or more expensive than mutual funds.Liquidity
How easy is it to buy and sell an investment? ETF's are traded live on the stock market in real time, generally for a commission. Mutual Funds only let you trade once per day, and can come with short term trading penalties. The advantage here technically goes to the ETF as they can be traded more frequently and more easily without penalties.Complexity of trading, or how do I buy them?
This is one that almost no one talks about. I find it is one of the most common reasons people choose Mutual funds over ETF's. Mutual funds have been around forever, and most financial institutions/banks make it very easy for someone to open an account and invest in them. Also, because they trade only once per day it takes a lot of the complexities out of placing trades for both the advisor and investor.Bad publicity.
Mutual funds in Canada get a bad reputation for having high fees. Part of the reason the fees are so high is because the commissions many advisors receive are embedded in the mutual fund fees. Today the good advisors will not accept commissions from investment companies and will charge you directly for the advice you receive. Be sure to take note of the total costs of investing including advisor fees before making any decisions.Can my advisor recommend ETF's?
In Canada most financial advisors are only allowed to sell you a mutual fund. This is because the qualification for selling mutual funds is not very rigorous, I was personally shocked at how easy the course was when I first took it. So how qualified is this person actually making the recommendations? Is your advisor recommending investments that are run by the company they work for? How do you know they are giving you unbiased advice? These are many questions that Canadian Investors need to be able to answer when choosing an advisor (look for future blog post on how to choose a financial advisor).
So….which one should I choose?? ETF or Mutual Fund?
At the end of the day ETF's and mutual funds are structures used to hold portfolios of investments. The most important thing to consider when buying either a mutual fund or ETF is what investments are inside and what is the tax treatment of the fund.
Does the fund hold stocks, real estate, precious metals, bonds?
Is it structured as a corporation or a trust?
Consider investing in ETF’s or Mutual Funds that fit your investment strategy, timeline, tax situation and risk tolerance.
In our practice we have recommended both types of investments for a variety of investment, and tax minimization purposes, it really depends on the situation of the client and where we see the best opportunity for investment.
We’d love to hear about your investment journey. Are you invested in ETF’s or mutual funds? Share your thoughts and any questions in the comments below.
