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What are the pros and cons of ETFs vs mutual funds? How should I think about researching these instruments?

February 8, 2013

Advisor answers

Lyman Howard

Lyman Howard

Certified Financial Planner, Chartered Financial Analyst
San Francisco, CA

We generally prefer to use exchange traded funds (ETFs), but there are still certain circumstances in which mutual funds are a better choice for our customer accounts. First, let’s talk about the plusses of exchange traded funds, index funds in particular:

1. Because exchanged traded funds are stocks and trade on an exchange, they can be purchased or sold with limit orders during the day, at known prices, rather than executed after hours at a net asset value to be determined as you with a mutual fund(open ended fund).

2. The ETF fu...

James Dowd

James Dowd

Certified Public Accountant, Chartered Financial Analyst
San Francisco, CA

As with all investment products, there are pros and cons to using ETFs. Here is my take:

The pros of ETFs:

ETFs generally employ an objective, systematic investment strategy that allows an investor to track an underlying benchmark.

ETFs typically have low management fees. For broad index ETFs, fees and expenses are generally less than 50bps.

ETFs require no minimum holding period. Some mutual funds impose fees on investors who hold fund investments for less than a designated time period, such as 60 or 90 da...

Ira Fateman

Ira Fateman

Certified Financial Planner
San Francisco, CA

James and Lyman do an excellent job of outlining the advantages and possible disadvantages of ETFs. Please read both responses. Some additional points:

1. Custodial broker dealers are now offering transaction free ETFs. TD Ameritrade our custodian offers about 100 ETF that trade with no transaction fee. Generally the transaction free trades need to be held for a period of time to remain transaction free when sold. This is done to discourage day trading with these ETFs. These no transaction fee ...

Jerome Deutsch

Jerome Deutsch

Decatur, GA

Before I answer the question, in the interest of full disclosure, Index Strategy Advisors is a Registered Investment Advisory firm that specializes in the design and management of Exchange Traded Fund (ETF) portfolios. Our pure index strategies provide opportunistic tactical investing by identifying asset classes where relative over- and under-valuation exist, with tactical sector investments that are expected to outperform over longer periods of time. Our active approach to risk management is based on a quantitative process that cont...

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