Mutual Fund Site

One of the most-common questions that investors ask themselves before deciding on where to invest is whether they should put their money in an ETF or in mutual funds. While both behave similarly and share many of the same characteristics as far as pooled investments go, they actually differ quite a bit. Ultimately, an ETF makes sense for investors who are able to dedicate some time to the management of their funds and a mutual fund investment makes sense for someone who wants as little involvement with their investments as possible.

Of course, the above statement should not be taken as gospel. In fact, mutual funds require some involvement as well, requiring something more like executive-level involvement whereas managing one’s ETF portfolio is more like a being a foreman, you will get your hands dirty pitching in but you don’t build the product from the ground up.

Mutual funds require executive-like, top-down management whereas ETFs require frequent, hands-on/foreman-style management on the part of the investor. Pick which works best for you.

Being a Foreman – ETF Investing

While managing an ETF portfolio will involve some hands-on involvement on the investor’s part, there are many benefits to investing in ETFs. Among these benefits include low management fees and extreme management styles. Whereas most mutual funds will hold straightforward, long investments (i.e. a buy and hold strategy with some derivative use), ETF’s can become increasingly complex, taking on short positions not only on stocks but currencies, commodities and so on.

For the most part, a foreman is in the trenches, putting in sweat and labor, getting the job done. Managing an ETF portfolio is very much like that. Know how to trade, know what to buy and what to sell, and know how to execute.

In fact, you can literally find an ETF to meet virtually any investment need you might have, including hedging your investments against currency volatility, hedging against potential downswings in a market where you are mostly holding for the long-term. In other words, ETF investments are a lot more exotic than mutual fund investments… in fact, they are often a lot more exotic than straightforward stock securities!

This does not necessarily make an ETF more dangerous or even risky than a straightforward mutual fund investment, but it certainly involves a lot more participation on the part of the investor. Itinvolves understanding the underlying securities and how they operate. A “bad” investment choice with an ETF will result in buying high and selling low (a common mistake we all make, even the professionals at times), incurring enough in brokerage fees to make the “discounted” management fees associated with ETFs make mutual fund management fees look like a giveaway.

Investors who do not pay attention to the way their ETF portfolio is behaving learn the hard way that they have gotten in over their head. This results in losses.

Of course, not all ETF portfolios need to have “the exotics” included in the plan. A buy-and-hold investor who might otherwise be a mutual fund investor can find an actively managed ETF that behaves like a tactical balanced fund (in fact, it is probably easier to find such an ETF than it is to find a mutual fund that behaves this way).

Executive Style Management – Mutual Funds

Contrary to the involvement needed to properly manage a profitable ETF portfolio, mutual funds require very little involvement on the investor’s part. Initially, of course, the investor needs to outline his investment plan and put together an investment management strategy, but beyond this the investor can review his or her mutual fund statements whenever they come in, make changes if needed, and move on with life, all within the span of half an hour.

An Executive studies the numbers and starts making calls when things don’t look right. For the mutual fund investor that can be a call to his or her financial planner. It can also mean firing people (like the planner) or filling a position with someone else (like switching from one fund company to another).

The downfall is that mutual funds come with higher management fees. As well, they are not traded on an exchange which makes them, for the most part, a lot less liquid than ETF investments. As well, due to the high level of regulations surrounding mutual funds, they are unable to properly hedge again risks, both real and perceived the way that an ETF can (and even if the actual ETF does not hedge against such risks, there is surely another ETF out there that, if purchase properly, will mitigate those risks).

So for investors who want to know where to invest — in an ETF or mutual fund? — the answer can be found in another question: What type of manager are you?