I’ve already written about Why ETFs Beat Individual Stocks but did you know ETFs also beat mutual funds? Though Exchange Traded Funds (ETFs) and mutual funds both allow investors to own a group of investments by making just one purchase, ETFs have several distinct advantages over mutual funds:
ETFs vs mutual funds
- ETFs have Low Minimum Investment and Trading Flexibility
- ETFs typically have lower Expense Ratios
- ETFs offer trading flexibility
- ETFs also offer some tax advantages
- ETFs offer protection against possible fraud
- ETFs have opportunities for options and short selling
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ETFs offer tax advantages
Mutual funds incur a tax liability whenever their investments generate income or capital gains (profits from sales). Mutual fund shareholders pick up the tab for these taxes, which explains why an actively managed fund’s after-tax return is often several percentage points less than its pretax return.
ETFs have two advantages over mutual funds when it comes to taxes:
