One of the most common questions among household investors looking for high yield income with relatively low risk is whether to invest their money in a mutual fund or go with the option of an Exchange Traded Fund. Traditionally, household investors felt secure depositing their money with the management of a mutual fund rather than maintaining their own stock portfolio. Mutual funds offered a low cost solution for a diversified portfolio.
However, more and more exchange traded funds are becoming a popular choice among household investors.
One of the most common questions among household investors looking for high yield income with relatively low risk is whether to invest their money in a mutual fund or go with the option of an Exchange Traded Fund. Traditionally, household investors felt secure depositing their money with the management of a mutual fund rather than maintaining their own stock portfolio. Mutual funds offered a low cost solution for a diversified portfolio.
However, more and more exchange traded funds are becoming a popular choice among household investors. Exchange traded funds offer a lower expense ratio in comparison to mutual funds. Most exchange traded funds will charge less than 1% compared to up to 3% in many mutual funds. Some people won’t make much of this difference, however, take into account this difference is compounded over time. Over the long run, you may find a great difference in dollar value.
More advanced traders will enjoy the flexibility of trading the exchange traded fund as a stock, including selling short, placing limit orders, stop loss order, buying on margin etc. This of course is not available with mutual funds. Getting in and out is much easier too, as mutual funds allow entries and exits only once a day.
For smaller sums though, you should still stick with a mutual fund. Since exchange traded funds are traded on the stock market, every transaction is accompanied by a commission which does not exist with traditional mutual funds. If you put aside a small sum every month you do not want a large portion of that sum to go on commissions. On larger sums though, the lower long term fees should justify the one time commission.
Want to know more about exchange traded funds? Be sure to check out the FAQ page on etfguide.com
